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PERSPECTIVES SEPTEMBER 2001, ISSUE 2 A M O N T H LY R E P O RT F O R C L I E N T S O F T D P R I VAT E C L I E N T G R O U P - P R I VAT E I N V E S T M E N T C O U N S E L T Attack on America he tragic events of September 11th evoked shock and revulsion among us all. Our task now is to provide dispassionate analysis and execute the proper strategies on your behalf. In our view, here are the short, medium and long-term implications for the financial markets and, most importantly, your portfolio. Attack on America - The Immediate Market Reaction While last week’s attacks were unprecedented, there is a pattern to the behaviour of financial markets in response to such shocks and that pattern has been repeated to date: l First, a sharp sell-off takes place as traders liquidate positions and move into liquid assets such as government bonds and T-Bills. While the New York Stock Exchange was closed on September 11th, we saw such a sell-off in Toronto where the TSE fell about 4% in the 70 minutes that the market was open. Similarly, European stock markets fell 7 - 9 %. l Second, markets in successive time zones fall in sympathy with those that experienced the initial sell-off. This happened in Japan and Hong Kong where indices fell about 6% and 8%, respectively. l Third, markets search for equilibrium in succeeding days. With the NYSE closed on September 12-14, global markets floundered over this time. When the New York market re-opened on September 17, stocks fell roughly 7% until equilibrium was found with other major markets. Central Banks Step Up To Bat Mindful of the adverse impact the attacks would have on investor and consumer sentiment, the U.S. Federal Reserve, the Bank of Canada and other central banks have injected over $100 billion into their financial systems to support capital markets and bolster their economies. In addition, the Fed, Bank of Canada and European central banks have all cut short-term interests rates by one-half percent. Perspectives Robert Gorman, CFA Vice President Private Investment Counsel The message is clear - central banks will do whatever it takes to prevent the world’s major economies from simultaneously sliding into a protracted recession and will support the capital markets in doing so. Putting Events in Perspective The prevailing gloom notwithstanding, there is good reason to be optimistic regarding the outlook for the equity markets and your portfolio over the coming year. The past week’s sell-off in the stock markets came at a time when markets around the world had already endured a deep, protracted downturn, or bear market. The major U.S. market indices have now lost about one quarter of their value since markets peaked in 2000 while the TSE has fallen over 35%. To put this in perspective, over the past fifty years, the average bear market in the U.S. has seen the S&P 500 fall 24% over a nine-month period. In Canada, the typical bear market’s decline has been 27% over a ten-month span. The point is that by all historical measures, we have already endured a bear market that has been longer and deeper than the norm. It is highly likely that the decline of the past week does not represent the beginning of a fresh bear market but rather the beginning of its end. The Lessons of History In the midst of a crisis, investors tend to overestimate the impact of the event on financial markets. To gain a better perspective, it is instructive to examine how the U.S. stock market, for example, fared in the years following comparable events. The accompanying table, compiled by U.S. based Ned Davis Research, illustrates how markets have historically recovered from crisis. In brief, after the emotional, negative reaction to the events, investors and markets regain their composure and recover accordingly. While the past is no guarantee of the future, we believe this time will prove no different. PAGE 1 SEPTEMBER 2001, ISSUE 2 The Road Ahead Private Investment Counsel clients’ stock portfolios have fared much better than the underlying markets during the downturn of the past year for two fundamental reasons. First your portfolio management team has been mindful of valuations, seeking out value. As a result, we have taken large positions in defensive sectors such as the financial, health care and energy stocks. Second, portfolios have typically been underweight in the TMT - technology, media and telecommunications - sectors that have endured much of the pain over the past year. Looking ahead, we are maintaining our current asset mix, with a slight overweight in equities. Overseas, our largest holdings are in Europe although we have recently increased our Japanese position in the wake of the Nikkei’s recent, sharp decline. With respect to individual holdings, we believe the coming recovery will be led by the companies now held in your portfolios, with solid earnings and earning growth, trading at reasonable prices. Having weathered a difficult storm effectively, you are well positioned for the year ahead. Perspectives is published by Private Investment Counsel a division of TD Asset Management Inc. as an exclusive information service for its clients. This publication is not intended to provide investment, tax or legal advice, and should not be construed as a solicitation to purchase securities or any other investments. The statements contained herein are based on materials believed to be reliable, but are not guaranteed to be accurate or complete. TD Asset Management Inc. is not liable for any errors or omissions in the information, or any loss or damage suffered. Contents copyright ©2001 TD Asset Management Inc., P.O. Box 1, TD Centre, Toronto, Ontario, Canada M5K 1A2. All rights reserved. Reproductions of brief excerpts without permission is permitted, provided that due acknowledgement is given to the publishers. TD Asset Management Inc. is a wholly-owned subsidiary of The Toronto-Dominion Bank. *Trade-mark of The Toronto Dominion Bank. TD Asset Management Inc. is a licensed user. PRIVATE INVESTMENT COUNSEL • ESTATES AND TRUSTS • PRIVATE BANKING • WEALTH PROTECTION • TD EVERGREEN The TD Private Client Group means The Toronto-Dominion Bank and its related companies that provide deposit, investment, loan, securities, trust, insurance and other products and services. Perspectives PAGE 2 SEPTEMBER 2001, ISSUE 2