Stick With the Market

If there were any lessons from last year's market correction in August, it was that those who sold in the summer lost out on massive gains in the winter. And those who have panicked and sold this summer will surely miss out on another fall and winter rally.

Historically, the summer is often the most volatile and least profitable months. It just happens to be for whatever reason. But those who stick with the market over the years have seen the resilience of stocks through optimistic eyes.

Short-term corrections like this often clean house. Investors and traders who are reactionary or lack discipline in their long-term strategies are weeded out of the market. It enables the major players, hedge funds and banks, to start adding to their portfolios. Those who generate income on a monthly or quarterly basis will now be able to put their cash into good use. The market has no reason to be negative this year and there are many good reasons why to get ready to start buying again.

Even if American debt gets a downgrade, it is expected to be AA (highest is AAA), which is still healthy. The rating on government bonds has no real correlation to American corporations and profitability. Yes, the government will have to pay more on their debt, but let's not forget that American corporations are not as connected to the government as they once were. And so far this year, 78 per cent of stocks on the S&P 500 have beaten estimates, suggesting that American corporations are still extremely healthy and have hired executives who know how to make money, unlike the lawmakers Americans voted in. Just look at today's big earnings. Proctor & Gamble [PG:NYSE] recorded profits that rose 18 per cent or 84 cents per share, beating estimates handily. Same goes with clothing retailer Abercrombie & Fitch [ANF:NYSE], construction giant Fluor [FLR:NYSE], and online travel company Priceline.com [PCLN:NSD], whose shares all rose significantly today.

Low interest rates won't attract many buyers. Bonds and treasuries aren't exactly paying you much money for borrowing your money and you'd be lucky to earn a penny on a thousand dollars in the bank. Investors should not be happy with returns that par inflation, so expect money to be injected into the healthiest and most efficient system, the stock market.

Many established companies have dividend yields that exceed most 5-year US notes and even Canadian bonds. Add hedging strategies like covered calls to top up your profits and you could be earning well over 15 per cent annually. Remember that as you age, your investment accounts should be geared toward income strategies and not overall growth.

Low interest rates have also allowed companies to borrow cheap money to purchase their shares back (often termed buyback programs), which lowers their float, and eventually increases share value. A company's profit is measured in two ways, net income, but more importantly, earnings per share (or EPS). The larger the float (or shares outstanding), the more profits must be divided evenly by shares. But if a company has fewer shares in the market, that $1 billion is divided into fewer shares, which increases EPS. And if you've ever read anything before about investing, the P/E ratio is the price of the stock divided by the EPS, so a higher EPS means a lower ratio, and a lower ratio means a better time to buy, all things being equal.

Another reason why it's time to buy, or even to argue, the time not to sell, is that even with all the fear that has appeared in the market over the last week, the economic reports that have been released have not differed much from what we've been seeing over the past three years. Factors that helped the market rally and create the bull market are still relevant today. Yes, growth is very stagnant and jobs are not being created fast enough, but this isn't something new. And until the market hears that unemployment has risen to 13 per cent, GDP is actually negative, and manufacturing data has consistently been below 50, I will not sell. Fear always subsides once rational thinking re-enters the market.

The governments know that their nations are in turmoil and they will do anything and everything to get their country back on track. Whether that country is America, Italy, Greece, Canada, Brazil, Russia, or Japan, governments have nearly total control on the supply of money, thus currency, interest rates, taxes, and many macroeconomic factors. And we're seeing an international battle for devaluing one's currency. This means inflation and an increase in asset values. They also want to stay in power for as long as they can so doing what's best for the nation isn't just their job, but it's how they keep their job.

Of course, it's hard to get out of the moment. There is so much negativity, but if you stick with the market, you will handsomely be rewarded.

In 2010, the market peaked in April then corrected in August. As referred to in the opening paragraph, after an autumn rally, the stock market gained roughly 15 per cent by the end of the year. In 2011, the market peaked in April then corrected in August. What autumn has in store for us this year has yet to be seen, but considering that the stock market is a gauge of the health of companies that comprise it, I'm confident that those who sold in the past week will regret their final decisions.