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WEALTH Matters — SPRING 2009 |
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Recession recovery It seems the first 3 months of 2009 have delivered more and more negative economic news. Stock markets have lost further ground in 2009 compared with the December 2008 year-end values, but the Canadian TSX index is still above its November low. Historically, stock markets have begun to decline before it is clear we are in a recession, and they tend to recover long before there is evidence of a real economic recovery. That’s because it takes a long time for real economic data to be gathered and analyzed before they are reported, whereas a stock market index is published instantly, and is representative of people’s opinions about the future, rather than what actually happened in the past. Stock markets are ‘leading indicators’. |
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Other leading Indicators include building permits, capital goods orders, and money supply. Many other indicators are ‘lagging Indicators’ which can only tell us what happened long after they are measured and reported. It took until December for government agencies in both Canada and the US to confirm that we had been in a recession since partway through 2008! And it is for this reason that gloomy headlines will likely continue even once a recovery is already starting. Headlines may still say a measure is ‘down 20% compared with a year ago’ and may continue to say this for a whole year even while it’s improving
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Many government spending and central bank interest rate reduction measures have been announced around the world in recent months. Unfortunately these measures take time to impact the economy. Variable rate mortgages and secured lines of credit can now be had for as low as 2.5%, but it takes time for people to buy houses and cars based on these lower rates. There are signs these measures are starting to work. Real estate resale activity in Canada was up in February compared with January, though average prices were down about 9% compared with a year ago, largely impacted by the Vancouver, Regina and Calgary markets which had been booming the last few years. Canadian banks are beginning to decline government offers to repurchase mortgages because they have enough funding. The table below shows the size of S&P500 stock market declines in past recessions, as well as the size of the recovery in market values in the 12 months after the market bottom. |
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Also in this issue of Wealth matters: planning assessment report - with our compliments |
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Worldsource Financial Management Inc. sponsoring mutual fund dealer. All other services provided by Page and Associates Ltd. |
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The rightmost column shows the number of months that the market bottom occurred before the real economy began to improve. And since the statistics measuring the real economy are usually lagging by several months, markets will likely improve long before the headlines get better! |
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