Why the stock market is tanking right now, and what comes next

 It’s been one of the worst starts to the year ever for the world’s stock markets. All the more reason to keep your nerve

Look around the global market place and you’d be hard pressed to find anywhere in the green. Out of hundreds of major global indices fewer than 20 are positive; you have to look to Slovakia (up 5% year to date) to find one of the few bright spots.

Everywhere else, it’s red—blood red, if you ask anyone owning equities. Today alone, the S&P/TSX Composite at one point was down 4%, although it’s since eased back and finished the day down 1.33%. And it’s not just Canada that’s feeling the pain. The benchmark U.S. indices, likewise, aren’t far behind, with the Dow Jones Industrial Average down 1.56% and the broader S&P 500 down 1.17%.

Such single day losses are always tough to swallow, but these drops come after an almost continuous stream of losses since the start of the year, with barely a whiff of a positive market response to act as a buffer. It’s been like this since the opening bell on January 2, the first day of trading for the year. It’s as if the market turned the page on 2015 and entered an entirely new reality.

It’s not, of course. Here is what need to know about the selloff and what it’s going to take to stop it:

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TSX long-term value investor ideas for 2016

For the long-term value investor, here are some compelling stories to think about in 2016. Metro Inc.

Canada’s third-largest grocery retailer is also its most profitable. The Montreal-based Metro operates in Quebec and Ontario, gaining clout in the latter with its 2005 purchase of the Dominion and A&P banners (since rebranded Metro). With cost efficiencies and a comparatively lean workforce, Metro boasts a net profit margin of 4.3 per cent, while that of rivals Loblaw Cos. Ltd. and Sobey’s owner Empire Co. Ltd. are each less than 2 per cent. Even long-term, it’s difficult to identify significant risk potential at Metro given the recession-resistant character of grocery and drug retailing, and the sheer heft of Metro’s market coverage with its 800 or so supermarkets, drugstores and specialty food chains. The latter include corner store operator Marché Richelieu and Marché Adonis, a top Quebec ethnic food purveyor. What makes the value investor’s eyes pop is the Metro’s low stock-market valuation relative to its competitors. Metro stock trades at a price-earnings multiple of just 15.4 times its estimated 2016 profit per share, far below the industry average p/e of 27.2. Linamar Corp. Few companies in today’s market offer Linamar’s growth potential, with a stock affordably priced at less than 10 times’ forecast 2015 earnings. The Guelph-based auto-parts maker has the markings of a longterm outperformer, having emerged unscathed from the Great Recession’s collapse in vehicle sales, and posting a near quadrupling in profits since 2011. Linamar has mastered geographic expansion (48 plants on four continents), new product development (more than 150 product launches in 2014 alone), and fiscal discipline (revenues were up 45 per cent between 2011 and 2014, while costs increased just 35 per cent). Skilled balance-sheet management enables Linamar to finance continued expansion, including its recent $1.2-billion friendly bid for France’s Montupet S.A., a specialist in aluminum castings that will reinforce Linamar’s own prowess in aluminum components and further expand its global reach. Much larger peer Magna International Inc. is more diversified in products and capabilities, but the yawning revenue gap between the two firms (Linamar’s $4.2 billion to Magna’s $48.9 billion) suggests a great deal of room for Guelph-based growth. That goes for Linamar’s dividend yield, as well, which is currently just 0.59 per cent. Procter & Gamble Co.

P&G is in one of its periodic swoons, its stock having slipped by 26 per cent from its all-time peak just 12 months ago. P&G has been here before. Its stock plummeted 48 per cent in the late 1990s, and fell 38 per cent in the late 2000s, only to recover each time to set new all-time highs. Now as then, there are panicky calls on the Street to break up the company. Fair enough: P&G is a $102 billion (in sales) behemoth whose products are used about 4.6 billion times a day worldwide. But P&G is already shedding two-thirds of its brands. In the past year, oncecherished P&G brands like Cover Girl, Max Factor, Wella and Duracell have been shed at handsome prices in P&G’s largely completed campaign to downsize a product portfolio that had become bloated. That still leaves P&G with market-leading brands collectively worth about $120 a share in earnings power. And that’s before a leaner P&G boosts profits now that it’s able to focus on its highest-margin products, including Tide, Gillette, Olay, Pantene and Pampers. The stock also boasts an industry-leading dividend yield of close to 4 per cent. Honeywell International Inc.

Honeywell is not a contrarian play, its stock having outperformed the S&P 500 by a factor of three in the past decade. The company is best known for its thermostats and other control systems, though its monitoring systems actually control everything from household furnaces to liquefied natural gas (LNG) plants.

The New Jersey firm’s mastery of controls gives Honeywell a head start in its bid to become a dominant player in the emerging “Internet of Things” market. Honeywell is hedging its bets by establishing itself in dozens of IOT sectors, many still nascent. The $54 billion (2014 sales) Honeywell has the R&D heft to devise machine-tomachine IOT systems for building contractors, commercial property managers, factory and mining operators, and municipal supervisors aiming to create “smart” cities. Growth in IOT revenues will be measured in the tens of billions of dollars per decade, giving Honeywell stock unusually big upside potential for such a large and stable company.

The stock also yields a generous 2 per cent yield, above average for this sector.

Oil - Canada- TSX And 2016 Predictions

That’s the truth at the heart of the collapse in oil prices in 2015, a force that will shape our personal finances in the coming year. In the GTA, it’s good news. The commute is cheaper and so is the cost of heating our homes. It adds up to a tax cut as good as the one the Liberals are giving us.

In the west, where 40,000 industry-related jobs have disappeared, more pain is on the way because the energy rout may only be midstream. Even if it isn’t, more jobs will likely go. Until the price of oil stabilizes, the only thing companies can do is guess and keep cutting to ensure their costs remain below their falling revenues.

It’s hard to recall that 18 months ago, oil was at $110 (U.S.) a barrel. It traded Monday at a little under $37, two-thirds lower. The current price per barrel is enough to buy 24 bottles of Sleeman’s Original Draft at the Beer Store — but not the cans, which cost a few dollars more. If you think about that in terms of your household, how would you fare if your family income was cut by 67 per cent?

This is all about a fight for control of the world’s oil market, dominated by the Organization for Petroleum Exporting Countries (OPEC), of which Saudi Arabia is the lead. As China’s insatiable demand for energy drove up prices, a search for cheaper supplies made sense. New technologies made it easy to drill into shale formations and fracture the rock to release oil, creating a plentiful supply of energy in North America.

A sign of the times is that this month the U.S. lifted a 40-year ban on the export of domestically produced oil.

That is because fracking is making the U.S. virtually energy self-sufficient, just as China’s economy is slowing — and so is its need for oil. In the meantime, Iran is adding two million barrels to world markets as part of its nuclear deal.

The Saudis, seeing a long-term threat to their oil power, have ensured that OPEC continues to produce at the same pace to maintain market share. The Saudi goal is to drive the higher-cost fracking industry under. Our even more expensive oilsands are caught in the crossfire.

OPEC shows no signs of standing down. It reaffirmed its strategy at a December meeting, and last week its World Oil Outlook forecast that a barrel of oil would only cost (in real terms) around $70 by 2020.

So here’s what it means for us: The dollar

In June 2014, with $110 oil, the loonie sat at 92 cents (U.S.). It cost us $1.09 for an American dollar. On Monday, it was at 72 cents, a drop of 22 per cent. It was $1.40 to $1 at the consumer level.

If oil rebounds, so will the dollar; if not, it may fall further which is something readers care a lot about. How to get a better U. S. exchange rate deal was the most popular column of the year. Canadian stocks

Toronto share prices are down 9.8 per cent year to date. Energy stocks make up about 10 per cent of the TSX and have fared much worse. The TSX Energy Index is down 26 per cent.

If oil prices improve, these shares will too. Ditto for our banks, which are big lenders to the oilpatch and are another big part of the main TSX composite index. They’ve had a lousy year too, down 5 per cent. Inflation

We climbed out of our 61-centdollar hole in 2000, gradually getting to par in 2009 without much inflation. Our exports to the U.S. were cheaper and so more attractive, creating profits and jobs. By substituting Mexican avocados for California ones, we energized our economy without higher prices. Cross your fingers we can do that again. Interest rates

If we can’t and inflation starts picking up, rates may rise even though the Bank of Canada doesn’t want them to. If so, housing will cool, consumer spending will fall and we’ll all have a harder time.

There are a lot of ifs, ands and maybes here and, as always, beware of forecasts. In June, when I wrote about the dollar, the consensus was that it would be between 77 and 80 cents now. Between now and this time next year, anything can happen. Adam Mayers writes about investing and personal finance on Tuesdays and Thursdays.

Sell-offs always set the stage for recovery,

although it’s hard to think good times won’t return

Human nature tends to work against us when the stock markets turn.

Now is one of those times, particularly for readers who have turned to stocks reluctantly as the only way to stay ahead of inflation. As share prices have moved wildly and largely lower this year, concern has mounted. Some think they should sell now, which may be the worst time to do it.

Wednesday, the U.S. Federal Reserve raised interest rates for the first time in nearly a decade, and the news offered another example of a day of lurches. North American stocks sank before the announcement, then soared once the hike was official. Both Toronto and New York ended the day with triple-digit gains.

The last two trading days aside, it’s been a lousy year for investors. The main index on the Toronto Stock Exchange is down 10.7 per cent on the year as of Wednesday’s close, largely because of the commodity and energy rout, which hurts many areas of our economy. The Dow Jones has fared better, but is still down a little less than half of 1 per cent.

Toronto reader P.N. has had a small portfolio of stocks for 30 years. She wanted a higher return without too much more risk, so her adviser put her into a portfolio of dividend stocks.

She doesn’t need the quarterly dividends for day-to-day living, so instead of cash she opted for a dividend reinvestment plan (DRIP), which adds the equivalent of the dividends as shares. But as the face value of her holdings has fallen, she wonders whether it’s smarter to take the money.

“With the erosion of the stock market, I admit to feeling some anxiety,” she wrote. “I feel I should stop the DRIP method and receive the dividends in cash.”

After some to and fro, P.N. has decided to stand pat, reasoning that her DRIPs buy more shares as the stock price falls. And given the high quality of her holdings, the companies she owns will fall least and rebound first. They will also pay dividends along the way, so there’s no reason to sell.

Her thinking is similar to Brampton reader S.W., who has watched his portfolio shrink almost 10 per cent in the last few months, losing $107,000 on paper, he says.

His holdings are also top-quality. They include large real estate investment trusts and preferred shares of Canada’s banks. All pay monthly or quarterly dividends. S.W. wanted to know whether he should hang on. He uses the dividend income to live on, but does not need to touch his seven-figure capital. He has also decided there’s nothing to be gained by selling and believes his holdings will rebound.

Diversification and investment quality are the keys to long-run investment success and if you have both you’ll come out ahead. But we live in the short run, where emotions are always at play.

Bernard Baruch, a Wall St. financier and adviser to five U.S. presidents, once noted that emotions constantly set traps for our reasoning powers. We tend to react to the urgency of today’s news and lose sight of our goals. Here are a few things to keep in mind: Stocks can seem risk-free for long periods, but they aren’t. When they fall, it can be a rude shock for those who are in the markets as a last resort. If you need to preserve capital, you shouldn’t be there. If you can accept some risk, high-quality funds and shares offer a higher return.

Market sell-offs always set the stage for recovery, although as Baruch observed, it’s human nature during bad times to think the good times will never return.

On Black Monday in October 1987, U.S. shares fell 22 per cent in one day. They recovered all of that in a few months. Crashes in 2000 and 2008 were all followed by big rebounds.

Lower share prices mean a higher dividend yield. For example, shares of TransCanada Corp. tumbled following the U.S. rejection of its Keystone pipeline. A year ago, the shares were worth $52.83 with a dividend yield of 3.6 per cent. The shares closed at $48.30 Wednesday with the dividend yielding 4.3 per cent. On top of that, TransCanada raised its dividend this year, a sign of confidence in its outlook.

This is not to say that sell-offs don’t hurt. It’s just that if can look beyond them you often find that better things lie ahead. Adam Mayers writes about investing and personal finance