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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.
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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.
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Perspectives
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SEPTEMBER 2001, ISSUE 2