I recently read an article about two individuals who started with nothing but eventually achieved success because they kept a positive attitude despite receiving a lot of criticism.
One day Jack Ma invited 24 of his friends to his house to discuss an online business idea that he had. After a 2 hour pitch 23 out of 24 people in the room told him to scrap the idea. They told Jack he didn’t know anything about the internet or how to raise any start-up money. However Jack managed to quickly grow his e-commerce business to become one of the largest in the world, and is even competing with Google, and Amazon. Earlier this year Alibaba became a publicly traded company on the New York Stock Exchange. Alibaba is currently valued at roughly $230 billion. Its founder and executive chairman, Jack, is now worth about $19 billion. This categorically makes him the wealthiest person in China.
Over the last several weeks investors saw a 10% correction in the Canadian stock market, and a 9% correction in the U.S. Someone with a $100,000 portfolio invested in index funds could have just lost $10,000. Ouch. Is this market sell off justified or is it simply an overreaction to some recent bad economic news? First, let’s review what those news are.
The Canadian dollar has dropped to a 5 year low
Germany’s economy is weaker than expected
The rest of Europe is still in a mess of unemployment and stagnation
Last week the Athens Stock Exchange in Greece tumbled more than 6% in one trading day.
ISIS is causing havoc in the Middle East
I currently own shares in the Bank of Nova Scotia (BNS.) It’s one of the largest companies in the country and has been around for over 180 years. Over the last month the price of this stock fell 8%. Instead of asking where the stock will go from here, we should instead be asking does all the recent bad news justify an 8% drop in value for one of the largest banks in Canada? My answer is absolutely not. It’s important to remember that when we buy a stock we are literally owning a part of that company. This means we, as stakeholders in Scotiabank, are still entitled to split the $6.5 billion profit that the company makes every year, regardless of how the price of BNS shares performs in the short term.
A lower loonie will likely spur economic growth and will not hurt Scotiabank’s profitability. Europe’s stalled economy is nothing new and Canadian banks don’t lend that much to Europeans anyway. The media has succeeded in sensationalizing the threat of Ebola in the U.S. Yes it’s a terrible disease, and there’s an outbreak in Africa. But Ebola will not hinder businesses in the U.S. and Canada from continuing to rake in profits. Literally more Americans have been married to Kim Kardashian than have died from Ebola – both a terrible fate.
For the intrinsic value of Scotiabank to actually fall by 8% substantial circumstances would need to be met, such as major accounting fraud or a 10% national unemployment rate, that would legitimately jeopardize the company’s ability to make money. The recent news is relatively trivial so an 8% correction of BNS shares seems like an overreaction. Imagine selling our stocks now only to see the markets rebound next month and regain all its losses.
What to do when the stock market goes on sale? A smart option would be to double up on some current positions. A couple months ago I bought 50 shares of Avigilon Corp for $25 each. However due to the negative sentiments in the overall financial markets recently AVO’s share price is down. But there’s no need to be alarmed because the company makes high definition security cameras and software. Now is the perfect opportunity for me to turn a current paper loss into a capital gain in the future! I noticed over the last week AVO has bounced around the $13 to $14 range but has never fallen below $13, which to me signals a strong support and a good time to average down. So earlier today I deposited $1,500 of savings into my brokerage account and picked up 100 more shares of AVO.TO.
It has been said that if we cut taxes for the rich and help profitable businesses make even more money then the economic benefits would trickle down from the top to the rest of us. But for many in the working class this has simply not been the case.
The top 1% have never been wealthier, but the rest of us still face many financial roadblocks. Both consumers and governments of all levels are still carrying a lot of debt. However real incomes in the U.S. have been slowly declining since 2008. Up here in Canada our debt-to-income ratio is near an all time high.
We often receive conflicting messages from policy makers. The Canadian Central Bank is keeping rates low to encourage consumers to spend and stimulate the economy. But at the same time it says that rising consumer debt is a major risk in this country. That’s right, patronize consumers for their debilitating debts when the Central Bank is responsible for creating the cheap money in the first place. Sound logic, Mr. Poloz.
In September 248,000 new jobs were created in the U.S. The national unemployment rate dropped from 6.1% to 5.9%, the lowest since 2008. This must mean we’re almost back at pre-recession, full employment right? Well if you ask people on the streets how they feel about the strong labor market recovery, many of them will not know what you’re talking about.
The Chicago PMI which is a confidence indicator for businesses dropped to 60.5 in September from 64.3 in the previous month. The Conference Board published its Consumer Confidence survey and they were expecting 92.5 in September. However the actual number was only 86 So why is there a disconnect between the employment data and how people really feel about their finances? To understand this we simply have to dig a little deeper into the numbers.
Read Between the Lines
Compared to Canada’s high unemployment rate of 6.8%, the U.S. appears to be quite smug sitting at just 5.9%. However the unemployment rate does not account for people who are no longer looking for a job. And in September 315,000 people in the U.S. dropped out of the labor market. The labor force participation rate is now at 62.7%. This is the lowest it has been in 36 years! The last time this many people was out of work relative to the population size was back in 1978. This is why so many people are still frustrated with the job market, and don’t believe that the U.S. economy has recovered. The number of jobless people rose to an all time high of 92.6 million last month. That’s 92.6 million people not paying any income tax. That’s more than 1/3rd of everyone who could be working, but aren’t.