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 Your Money Matters
August 2007 Issue
EQUITY MARKET VOLATILITY
It’s
been painfully volatile in the equity markets this last month. On
July 19, North American markets reached a new high, but by August
10, two-thirds of the year-to-date gains had been given back. As the
US housing market began to sink under the weight of unaffordable
prices and rising bond yields (which forced mortgage rates upward)
turmoil in the subprime market unfolded. This is the market where
“soft” mortgages were issued to “subprime” borrowers who were unable
for financial reasons or otherwise to obtain conventional
mortgages. The rise in North American stock markets in 2007 through
July 13 (the recent peak) was more than twice the normal rate
increase. Such high rates can occur for short periods of time, but
at some point the rate falls back to a more “sustainable” level.
The
good thing to be taken from the recent financial market turmoil is
that a number of excesses are quickly being purged from the system.
Risk is being re-priced to more sane levels as leverage gets
punished in the financial system. This process should slow economic
growth. However, if credit markets return to more normal operations,
the economic cycle should be weakened but intact. In other words,
the economic cycle is experiencing “short-term pain for long-term
gain.” Inflation expectations are being tempered and the tightening
cycle may be much closer to an end now. This is good news for
longer-term investors.
While
there is still uncertainty hanging over the markets and there are
many reasons being cited in the financial press for the drop, such
as concerns about higher borrowing costs, decelerating earnings
growth and U.S. subprime woes to name a few, it is important to note
that market corrections are normal and viewed by many as healthy for
equity markets. And, as unsettling as this volatility is, we've been
here before.
Because
no one can predict market declines with certainty, a diversified
portfolio is the best solution for a long-term investor who is
concerned about both return and risk.
If
you have any questions or would like to review your portfolio,
please do give us a call.
Theresa Wever and the Money
Concepts Team. |
