It’s been a tough month for Canadian investors.
Since closing at 15,567 on September 3, the TSX Composite Index has been a sea of red ink. As I write this, the Index is hovering at 13,893, with no indication that the carnage will be stopping anytime soon. That’s a decline of 11%, which puts us officially into correction territory.
Seeing a loss of 11% in six weeks is difficult for investors to fathom. Stocks are still up since the beginning of the year, but gains have mostly evaporated. What was a 13% gain in early September is now just a 2% gain. A couple more negative days and the TSX could be down for the year.
What’s happening out there? Let’s take a look at why stocks have fallen so much lately.
One word… recession
In North America, our economies don’t look so bad. Unemployment has improved to levels not seen since 2007, GDP growth is solid, and central banks are starting to think about raising interest rates.
The rest of the world, unfortunately, doesn’t look quite so rosy.
Japan’s central bank tried using a massive quantitative easing program to jump start its economy, with disastrous results. The country’s most recent GDP numbers showed its economy shrank by an annualized rate of 7.1%, the worst showing since 2009.
Investors are also worried about Chinese growth. Speculation has been rampant for months that the economy in China is slowing down, and recent numbers are confirming suspicions. China has a lot of debt, and many pundits are saying it has a massive real estate bubble as well. Those don’t tend to end well.
And once again, Europe is looking weak. Germany, once considered the pillar keeping Europe from collapsing into even greater economic problems, is posting anemic economic growth numbers. Investors are concerned that it too may fall into a recession.
Three out of the four largest world economies are seeing some serious weakness. This is causing investors to rotate out of cyclical stocks into more secure assets, like government debt. Sectors getting hit particularly hard include technology, basic materials, and of particular interest to Canadian investors, energy.
Oil stocks are being hit with a double whammy. Thanks to the explosion of supply from U.S. shale plays (as well as continued expansion of Alberta’s oil sands), the United States isn’t importing much oil from overseas. Now that the rest of the world appears to be slowing down, investors are speculating demand for oil could plunge. This has led to a price decline of 25% for the commodity since June, even while there’s some serious turmoil going on in the Middle East, which normally supports prices.
Plus, ebola has ravaged Africa, and has started to spread. Put all these things together, and you get a bunch of nervous investors driving down markets.
What to do
It’s simple. Investors should be buying when markets are collapsing, not selling. Take advantage of these perilous times to pick up stocks on sale.
The Canadian energy sector is a good place to start. Not only is Cenovus Energy Inc. (TSX: CVE)(NYSE: CVE) in the middle of a huge oil sands expansion that will triple its production by 2023, but it also enjoys some of the lowest costs of any energy producer in the region. Costs are low enough that the company will still be profitable even if oil dips below $80 per barrel.
Another stock investors should look at is Telus Corporation (TSX: T)(NYSE: TU), which is perhaps Canada’s best run telecom. The company continues to steal wireless market share from competitors, pays a generous 4.04% dividend, and offers a recession-resistant business. It should outperform the market during any weakness.
It’s tough watching your savings collapse, but these are the times you should really be buying stocks. Cenovus and Telus are good choices, but we’ve got one that could turn out to be even better.
