Investing 101

First half of ’09: The recession bites, but the market rallies

What a difference a year makes. On June 18, 2008, the S&P/TSX Composite Index soared to a record 15,073 and a few weeks later the price of oil reached an all-time high of $147.90 a barrel. While there were signs of weakness in the US, virtually no one saw the depth of the recession and market sell-off that lay just around the corner. In fact, in the first quarter of 2009 (one of the worst in Canadian history), the economy shrank by 5.4%. As we move into the midpoint of the year, while economists are divided, many expect the picture to brighten later this year as government stimulus measures kick in, markets stabilize and key commodities such as oil regain lost ground. Stock indexes, which often act as leading economic indicators, also seem to be signaling that the worst may be over, with the TSX rebounding from a low of 7,567 on March 9 to close at 10,604 on June 1 – a 40% rally.

The financial crisis was triggered by a number of factors that came together at the same time: too many mortgages issued to “subprime” borrowers in the US, the collapse of the US real estate bubble, too much debt carried by US financial institutions and the repackaging of subprime debt to foreign investors and institutions, which undermined global credit markets. To stop the decline and thaw the credit markets, a number of central banks around the world lowered interest rates to unprecedented levels, with the Bank of Canada rate sitting at 0.25% on June 1. Massive stimulus programs ($2 trillion in the US) were also launched, and governments took ownership stakes in failing banks and auto companies. The federal and Ontario governments alone injected $11 billion into General Motors of Canada in exchange for a 12% ownership position. While it remains to be seen how quickly the economy recovers, there are bright spots: US housing declines appear to be slowing, consumer confidence is edging up and credit is flowing again. The spring rally shows that in the short term, equity markets are unpredictable. No newsletter or market guru can tell you the day or week when declining markets will start to move up. In hindsight, the right move for Canadian investors was to hold diversified portfolios through the spring, and many, with the help of their financial advisors, did just that.

Bulls and bears

Since 1956 there have been 11 bull markets and 12 bear markets. The indexes climbed 127% on average in bull markets which tended to last for 47 months, while bear markets declined by 26% and lasted for 10 months.