Expect The Unexpected

My 1st blog of 2015 suggested that the theme for the year was to expect the unexpected.

Let's look at what has transpired over the first month of the year:

• The Bank of Canada cut the bank rate to 0.75%, from 1.0%.
• The $C has fallen by close to 9%, from approx. $0.86 to $0.79.

• In my model portfolio of 60% equity / 40% fixed income, which has returned approx. 1.8%, there are some significant surprises:

• Bonds: total return to date of approx. 3%, led by the Real Return Bond Index and followed by The Government Bond Index.
• the Canadian Preferred Share Index has fallen by over 3.5%
• Canadian Equities as a whole are better by a little under 2%, but the higher dividend paying index is down by 4%. REIT's which are considered equity (but are more income driven and interest rate sensitive) are up over 10%.
• US Equities as an asset class are down by approx. 1.2%, led by the S&P 500 (large cap index). Mid-cap index is flat.
• International Equities allocation is up by over 5%, led by the Emerging Markets Index which is up over 11%.!

And all of this in only the first month of the year!

From here?

Can US economic growth continue? and with all the global central bank monetary stimulus get the global economy back on the road to recovery?

Will Oil test new lows or bounce back ?

And what of deflationary pressures, will they be curtailed by global economic improvements?

Let's not leave out the geo-political situation:

Is terrorism being contained?

What of Russia and the Ukraine?

Greece?

We certainly live in interesting times. Stay tuned.

The Technical Picture

But first, from the Fed's press release:

Information received since the Federal Open Market Committee met in December suggests that economic activity has been expanding at a solid pace.  Labor market conditions have improved further, with strong job gains and a lower unemployment rate.  On balance, a range of labor market indicators suggests that underutilization of labor resources continues to diminish.  Household spending is rising moderately; recent declines in energy prices have boosted household purchasing power.  Business fixed investment is advancing, while the recovery in the housing sector remains slow.  Inflation has declined further below the Committee’s longer-run objective, largely reflecting declines in energy prices.  Market-based measures of inflation compensation have declined substantially in recent months; survey-based measures of longer-term inflation expectations have remained stable.

Based on its current assessment, the Committee judges that it can be patient in beginning to normalize the stance of monetary policy.  However, if incoming information indicates faster progress toward the Committee’s employment and inflation objectives than the Committee now expects, then increases in the target range for the federal funds rate are likely to occur sooner than currently anticipated.  Conversely, if progress proves slower than expected, then increases in the target range are likely to occur later than currently anticipated.

No surprises.

S&P 500

Near-Term

• unable to move above 2065 to test the highs at 2093 (and move to higher highs), the market is looking for direction.
• a test of near-term support at 1990 is happening now.
• Fundamentally, with PE's at 17.3, well above average, the market needs a reason to remain expensive, otherwise in the short-term, traders will look for better value at cheaper prices.

Longer-term

• If support is broken at 1990, corrective forces may bring about of a test of the longer-term trend just between 1875-1900.

As I have discussed in previous blog posts, the strength of the $US and global economic weakness are forcing global companies to re-assess their outlooks for revenue and earnings growth.

Reduced expectations may also be a catalyst to drive prices to better value.

Volatility Watch

• The measure of volatility on the S&P 500 (VIX) hit multi-year lows back in June of 2014 just above 10.
• In October 2014, at the height of the Ebola scare, it rose to above 30.
• Earlier this month, the drop in oil prices and global economic certainty pushed the vix into the low 20's.
• The ECB helped to counter this with last week's QE measures.
• US corporate earnings surprises (to the downside) are pushing it back up.

Remember my theme: Central Banks do not like volatility because it  reduces confidence:

• Yesterday the Conference Board announced that the (US) Consumer Confidence Index reached 102.9 (the highest level since 2007).
• I would suspect that with today's post FOMC meeting statement, the FED does not want to undo the current level of confidence with any significant change in policy.
• Sometimes boring is good. In fact when it comes to investing, we like boring!!
• However, volatility levels have been rising to higher levels since last June and investors must not be complacent about this trend.
• Balance and diversification are the best protection to get reasonable growth and minimize the impact of volatility.
• How is your asset allocation?

Waiting for the FED

While we (and financial markets) wait on the results of the US Federal Reserve's Open Market Committee (FOMC) meeting which begins today and will culminate in the release of a statement at 2:15 pm (EST) tomorrow...

It is important to understand the key roles that central banks have played in trying to guide monetary policy since the financial crisis began in 2008.

• The FED's key role is to safeguard the stability of the US financial system:
• This mandate includes:

1. promoting maximum employment
2. promoting stable prices
3. promoting moderate long-term interest rates

Historically, in relatively normal circumstances, monetary policy was achieved with the raising and lowering of interest rates (in the US, the FED would determine the base rate).

However the extraordinary circumstances that were created by the "Great Recession" called for extraordinary monetary measures now commonly referred to as QE (Quantitative Easing).

This is where the FED made bond purchases for it's balance sheet from the bond market and in turn added significant liquidity (cash) to the economy to maintain the stability of the system.

Critics claim that this monetary stimulus did not all make its way back into the system (some institutions were hoarding cash for safety reasons) and was not as effective as a result, however strong equity markets and improved economic growth over the last couple of years have shown that it has been effective.

Economic growth is a function of psychological confidence held by the households and businesses which participate in the economy.

When households feel confident in the future they will consume at a higher level. When businesses feel confident, they will invest in future growth.

What the FED and other central banks around the world have been trying to do is instill confidence in consumers (they will have jobs in the future) and businesses (consumers will return) in an effort to change the psychology from the lack of confidence created by the financial crisis and the ensuing recession.

Fortunately the FED was proactive and realized early on that extraordinary measures were necessary.

Other central banks have followed their example.

For those that want instant gratification, they may be disappointed. The positive results will take time to achieve. It is no simple matter to change the negative psychology that has been built up.

Patience is required.

I am a cautious optimist. I can see the benefits of the central banks' efforts and know that in time they will prevail and that their methods will prove successful. It is why we must focus on the long-term. There will be short-term difficulties, but given time, we will all be better off.

Monday Morning Recap:

What is important?

1. Greek elections: not unexpected results, however there is some uncertainty going forward as to how Euro area and the Troika will deal with the new "anti-austerity" government.
2. Corporate Earnings: S&P500 Q4 results will continue to be announced. Q4 earning expectations have been lowered, but early on it appears that companies are beating these lowered expectations. The underlying fundamental for equity prices are corporate earnings. Strong earnings should be positive for equity prices, if earnings are above analyst expectations. Financial market participants focus on results each quarter. This is rather a short-term approach for our liking, but important for short-term volatility if expectations are missed.
3. $US: with many countries now trying to lower the value of their currencies to increase export demand and revive their respective economies (Euro area, Japan, Canada), the $US is significantly stronger. This may have negative earnings impact in the longer term for US based global companies and should be considered as a rational for closer scrutiny of US equity weighting allocations.
4. Oil Prices: all the experts, talking heads and wannabe's are trying to call "the bottom", however that is of little consequence. There is structural change happening to the global economy and there will be countries that benefit and those that don't. Remember that if you buy an ETF that is "country" specific, you own a basket of companies that reside in that country. In a global economy, many of those companies will depend on broader markets that range well beyond the borders in which that country is domiciled. Research is important.
5. Bond Prices (and Yields): in May of 2013 all the "experts" predicted US 10 year bond yields were headed to 4% (or thereabouts) and bond market volatility shot up. Investors in fixed income securities ( considered the "safe haven") were shocked by the change in value of their portfolios (to the negative). Bond markets and interest rate sensitive REIT's have been driving fixed income performance significantly so far this year. However, with yet again, record low interest rates with all the central bank stimulus over the last week, volatility in bond markets may be set to rise.

ECB Does Not Dissapoint

Over 1 Trillion Euros of QE

(only 550 million was expected).

• As I have been suggesting, Central Banks do not like volatility because it erodes confidence in investors.
• Yesterday, The European Central Bank surprised financial markets with a larger than expected dose of monetary stimulus.
• Equity markets rose significantly on this news.
• Volatility dropped.

• Volatility, as measured by the VIX moved to 16.4 from its recent highs above 23.
• The Euro/USD fell to lows not seen since 2003.

What Happens Next?

• As the Bank of Canada did on Wednesday, The ECB has used surprise to stimulate markets. This has been a positive in the short-run.
• However, the long-run impact is still to be determined.
• What is hoped for is a move to higher levels of inflation at 2%.
• This will be created on the back of stronger economic growth, but will likely take until 2016 to achieve, given the current global economic weakness.
• In the interim, interest rates will remain low for a longer than expected period, especially in Canada, the Euro area and Japan.
• An "unspoken" currency war has begun with all countries trying to lower the value of their respective currencies vs. the $US to enhance export growth.
• In turn this will likely have a mildly restrictive impact on the US economy and impact US corporate earnings negatively (especially for companies that have a global sales reach).
• It may, as a result impact the timing of any US Federal Reserve interest rate increases.
• All in, it should be positive for global growth, but it will take time and in the interim many questions will be asked.
• For now, volatility is down, but in the short-term as market participants lose patience (and we know that many focus on a far too short time horizon for results) volatility will return and challenge the Central Banks once again.
• Stay balanced, stay diversified.
• my 60/40 model is up more than 2% on the year, being led by Emerging Markets (especially India) and Canadian REIT's. Interestingly, US equity markets have been flat.

SURPRISE!!

BOC drops the Bank Rate to 0.75%

This is why we want to have diversification and balance in a portfolio!

• All of a sudden, some of the assets in my models (that were least expected to perform) are out-performing!
• Many of these are fixed income assets and some are Canadian Equity assets.
• this is why trying to "pick" investing themes or "time" specific asset trades does not work over the long run.
• Central Banks do not like financial market volatility because it erodes confidence so they will take actions to ensure that investors do not lose confidence: the BOC is no exception, they are staying "ahead of the curve" to try and offset the negative influence of lower oil and commodity prices.

The Theme for my Blog for 2015 

(go back to Jan 2):

"Expect The Unexpected"

• Now it is the ECB's turn to instill confidence

Bank of Canada Takes The Stage Today

Bank of Canada governor Stephen Poloz will release the bank's Quarterly Monetary Policy Report at 10am today.

• It is widely anticipated that he will cut Canada's 2015 GDP growth forecast to 2.0% (from 2.4%)
• While it is also widely anticipated that he will leave the Bank Rate at 1%, it is thought that he may pave the way to a cut in the Bank Rate down the road.
• and hence, the rationale for yesterdays $C tumble:

• Last week, BOC deputy governor Timothy Lane spoke about the impact of lower oil prices on the Canadian economy (blog of Jan,14: "Oil and Canada") and stated that the repercussions would be a net negative.
• However, there is more at play than just oil prices:
• Copper, a "bellweather" for the direction of the global economy continues its slide as well:

• currently at prices not see since 2009.
• Deflationary pressures are strong across the commodity indexes.
• Certainly the BOC is monitoring this as well, given that Canada is a major exporter of commodities.

The upside of a weaker C$: Canadian things are cheaper for those who desire to purchase them.

• Next on Center Stage: Tomorrow the European Central Bank:
• Will they live up to market expectations or will they disappoint? 
• stay tuned...........and hold on!

IMF Lowers Global Growth Projection

For 2015, Global GDP Growth Has been revised down to 3.5% (from 3.8%)

More here: http://www.imf.org/external/pubs/ft/survey/so/2015/NEW012015A.htm

“At the country level, the cross currents make for a complicated picture,” says Olivier Blanchard, IMF Economic Counsellor and Director of Research. “It means good news for oil importers, bad news for oil exporters. Good news for commodity importers, bad news for exporters. Continuing struggles for the countries which show scars of the crisis, and not so for others. Good news for countries more linked to the euro and the yen, bad news for those more linked to the dollar.”

In a nutshell:

This should favour US, Japan and Euro are economies.

Likely not good for Canada (see Jan.14 blog)

Definitely not good for Russia.

Interestingly:

the growth forecast for China, where investment growth has slowed and is expected to moderate further, has been marked down to below 7 percent. The authorities are now expected to put greater weight on reducing vulnerabilities from recent rapid credit and investment growth and hence the forecast assumes less of a policy response to the underlying moderation. This lower growth, however, is affecting the rest of Asia.

And:

Risks to recovery

The distribution of risks to global growth is more balanced than in October, notes the WEO Update. On the upside, lower oil prices could provide a greater boost than assumed. Other risks that could adversely affect the outlook involve the possible shifts in sentiment and volatility in global financial markets, especially in emerging market economies. The exposure to these risks, however, has shifted among emerging market economies with the sharp fall in oil prices. It has risen in oil exporters, where external and balance sheet vulnerabilities have increased, while it has declined in oil importers, for whom the windfall has provided increased buffers.

For 2015, my 60-40 and 40-60 models have been adjusted: adding Euro area and Japanese equities and lowering Canadian Small Cap and Emerging Markets exposure.

All Eyes On The ECB!

Deflationary Pressures continue to plague the European economic situation:

• Financial market prices are determined by the expectations of its participants: traders and investors.
• What is built in to current prices (equity market prices and fixed income market prices) is a considerable move toward substantial Quantitative Easing (QE) by the European Central Bank (ECB) led by President Mario Draghi.
• This new round of QE is anticipated to be announced on January 22 and is expected to include bond purchases totaling 550 Billion euro's.
• All of this is intended to add further stimulus to the European economy which continues to exhibit broad deflationary pressures.

Risks:

• certainly one of the major "risks" at the moment is that the ECB will not be able to offer as broad a QE as is anticipated.
• this would certainly be a negative for financial markets that have been waiting for some time for this to happen.
• there are opponents to QE in the European community and most of that opposition comes from Germany.
• as well, the ECB's powers differ from other central banks like the US Federal Reserve, where its 3 efforts at QE were successful in getting the US economy up on its feet over the last few years.
• Also any QE will have to pass the scrutiny of the European Court of Justice.
• Further complicating issues are the technical aspects of how the ECB will purchase the various European government bonds that have different credit ratings.

The implications for the Global Economy are far reaching:

• more recently the US economy has been "carrying" the global economy.
• however, it is unlikely that this is sustainable without considerable improvement in Europe.
• QE in Europe needs to happen and it needs to be successful for the long-term health of the Global economy.
• These are big risks with long-term implications and volatility levels on Thursday could soar.
• Are you protected?

What is going on in Switzerland?

In a nutshell:

• back in 2011, when there was a significant flight out of the Euro, the Swiss Natonal Bank (central bank, SNB), "pegged" the value of the Swiss Franc (CHF) at 1.20 Euro's in order to stem the rise in it's value and ward off the economic problems inherent with a rising currency value: tighter monetary policy in a declining economic growth environment.
• Yesterday, without warning and as a major surprise to financial markets, they ended the "peg".
• Remember that the CHF is considered a "safe haven" currency because of the perceived stability of the Swiss banking system.
• Crucial is the fact that any borrowers of Swiss Francs will have to pay almost 15% more to purchase them and pay down their loan. That is a huge new "penalty" and will have a significant impact on the already receding European Economy.

Throw in another batch of uncertainty

• into the already high and rising levels of volatility and as traders and emotional investors do: move out of riskier assets into safe assets.
• Bond prices up, equity prices down.

Bond Yields are back to record lows:

http://www.bloomberg.com/markets/rates-bonds/

(10 Year Government Bond yields):

US = 1.72%

Canada = 1.47%

Germany: 0.46%

UK = 1.47%

Spain = 1.58%

Italy = 1.74%

What does this tell us?

• Interest rates will rise when bond markets are concerned about inflation in the future.
• If target inflation for a central bank is 2% (at the low end)...
• to purchase a 10 year bond and hold it to maturity, a bond investor in Canada would get a negative real return (actual return- inflation) of approx. .5%, if inflation was at the 2% level.
• At the moment: either bonds are extremely expensive or deflationary forces are building significantly.
• for those expecting/counting on higher interest rates? 
• bond markets are sending you a message!

Hold On To Your Hats!

Volatility is up!

And what next for the S&P 500?

Technically: Key support for the up-trend from 2011 lies at or about 1900.

• a technical breach of this level will likely see continued weakness and a potential test of the longer term support (up-trend from 2009) at or about 1600.
• This is also close to the top registered in 2007 and (if it holds that level) will defend the theory that we are in a new secular bull market.
• that would also be approximately 20% lower than current levels.

Otherwise, the S&P 500 will have to re-test up-side resistance at 2100.

• and break-out to higher prices to keep the current up-trend (higher highs and higher lows) intact.
• current price activity suggests that this will be difficult to accomplish,

Fundamentally: it is earnings season:

• share prices have priced in continued positive earnings growth,
• Q3 earnings blew out expectations,
• Analysts have revised Q4 earnings expectations lower,
• We are now at the beginning of Q4 earnings announcements,
• time will tell,

Should you worry?

• not if you have a balanced and globally diversified portfolio,
• bond prices are rising and offsetting equity market volatility,
• and remember: Central Banks do not like volatility and they will use monetary policy to try to keep financial markets from disorder.

Oil and Canada (part 2)

When the Bank of Canada speaks, we should pay attention!

Further to my comments yesterday:

Bank of Canada deputy governor Timothy Lane (who happened to be at the University of Western Ontario when I was studying Economics) spoke to the Madison International Trade Association in Wisconsin yesterday.

Drilling Down - Understanding Oil Prices and Their Economic Impact

(full speech available here): http://www.bankofcanada.ca/2015/01/drilling-down-understanding-oil-prices/

Here are some salient points:

• In Canada, oil extraction now accounts for about 3 per cent of our GDP and crude oil about 14 per cent of our exports.
• The urbanization and industrialization of emerging economies and the growth of their middle classes is far from complete. China’s urban population has grown by about 300 million people since 2000 but, even now, only 55 per cent of its people live in urban areas, compared with more than 80 per cent for North America and advanced Asian economies such as Japan and Korea. According to some estimates, another half-billion people in China and India alone will move to cities and likely join a growing middle class over the next two decades. As long as these trends continue, they will add to world demand for oil.
• Oil sands production rose fivefold between 1993 and 2014, to 2.3 million barrels per day, and now accounts for more than 60 per cent of Canada’s crude production. Between 2006 and 2013, investment in the oil sands more than doubled to over $30 billion.
• Over time, these activities have delivered an outsized supply response, which has been driving prices down.
• In all, it may take quite some time before supply and demand are brought back into balance.
• prices can be subject to large overshoots in the short run, in either direction. The only true floor to prices in the short term is the short-run marginal cost, at which point producers would lose more money by continuing to pump oil from existing installations than by shutting it in.
• For the world as a whole, the decline in oil prices is beneficial. If it is caused by new sources of supply, the price drop spreads the benefits of a favourable shock; if it is partly the result of slower demand growth, it mitigates the effects of an unfavourable shock.
• The United States, as a net importer, will benefit from the drop in oil prices.
• Other economies that are large net importers of oil, such as China, Japan and Europe, will also get a boost to their economic growth.
• Canada, like other countries, has been trying to regain its economic footing since the global financial crisis. From the outset of the Great Recession, the Bank of Canada has been providing significant monetary stimulus. But we have yet to reach the point where growth is self-sustaining. For that to happen, the sources of growth will have to rotate away from consumption and toward increased exports, which are our traditional economic engine.
• Signs of a broadening recovery have been emerging during the past year. Stronger U.S. growth and a weaker Canadian dollar have boosted non-energy exports. Investment spending and job creation have also begun to pick up, although significant slack remains in the labour market.
• The most immediate impact will be positive: a boost to consumers’ disposable incomes and spending. Lower oil prices will also benefit many sectors, such as manufacturing, by reducing production costs. Our latest Business Outlook Survey, which was published yesterday, showed that more firms than in previous surveys are anticipating declines in their input costs, thanks in good part to cheaper oil and cheaper commodities in general.
• Despite the mitigating factors I enumerated, lower oil prices are likely, on the whole, to be bad for Canada.
•  The recent movements in oil prices have been dramatic, but they are not random. Once we sort through the different economic forces at play, we see that underlying the recent drop in oil prices is a surge in unconventional oil supply against the backdrop of slower growth of global demand. Over time, higher-cost oil is still likely to be needed to satisfy growing global demand, but prices could go lower, or remain low, for a significant period before those medium-term forces do their work.
• These developments are among the most important that the Bank of Canada takes into account in making monetary policy. We will continue to work to bring the Canadian economy back to its potential and return inflation sustainably to our 2 per cent target. However things play out, we have the tools to respond.

Scott's Comments:

This  is not far-off from my commentary from yesterday:

The key takeaway here is that, if necessary, The BOC will use monetary policy to help alleviate the negative impact on the Canadian economic situation.

In other words: if lower oil prices hurt the Canadian economy, lower interest rates are to be part of the conversation.

What is driving Financial Markets?

1) Oil

The debate being waged in financial markets: 

Is the lower price for oil good for the global economy? And what are the implications?

It is certainly good for some sectors: the consumer which is 70% of the US economy  (and 63% of the Canadian economy) will certainly benefit from "savings at the pump".

Any industry that relies on transportation will certainly benefit from lower costs.

Not so good for the Energy Sector.

Perhaps not so good for financial companies with too heavy exposure to the financial sector.

2) Canada

There is an "international" sentiment among financial market participants that Canada is highly dependent upon Energy as a major driver of its economy. In the short-term, this is a negative for the $C.

However, the lower $C is a major driver in making Canadian exports more affordable, so in the longer term, this is in fact a positive for the Canadian economy.

For the moment, however, short-term traders/speculators will have the upper hand, until the dust starts to settle.

3) Volatility

Financial Markets do not like uncertainty. Uncertainty forces investors to move away from riskier assets (an emotional decision, not necessarily a wise, thought-out decision) and this will increase volatility.

It is important to keep perspective, however. Even with the Volatility Index (VIX) close to 20 and well above last years lows near 10, it is nowhere near 40 level reached in 2011.

As difficult as it is to get "spooked" by volatility, the smart investor will not be fooled by the "noise" and keep a longer-term outlook.

Central Banks do not like volatility as it puts pressure on the consumer and business owner's confidence and makes sustaining economic growth that much more difficult.

Be rest assured, interest rates (as determined by bond markets and central bankers) will not be going up when financial market volatility is high.

We must always keep our long-term perspective.

THE "MAGIC" OF COMPOUNDING

Rule of 72

• In it's most simplified form: this basically means that by adding the growth of one year to the next and continuing to do so over a 10 year period, at a rate of return of 7% per year, you should be able to double the initial amount.
• This is indicated by the red line in the chart above.
• This does not include any additional amounts.

Add in some annual savings

• The blue line takes into consideration the addition of some savings each year (in this case $12,000 per year, $1,000 per month).
• Think about how that would look over 20 years (or longer!)
• Powerful !!

Parents:

As the great Crosby, Stills and Nash once wrote in a song:

Teach your children well!!

Fiduciary Duty

What is this and how does it impact an Advisor/Client relationship?

This is profoundly important and the debate continues as to what should govern a relationship between a client an advisor:

From:

CANADIAN SECURITIES ADMINISTRATORS
CONSULTATION PAPER 33-403:
THE STANDARD OF CONDUCT FOR ADVISERS AND DEALERS:
EXPLORING THE APPROPRIATENESS OF INTRODUCING
A STATUTORY BEST INTEREST DUTY WHEN ADVICE IS PROVIDED TO RETAIL CLIENTS

October 25, 2012

Fiduciary Duty -- An Overview

A fiduciary duty is a duty of a person to act in another person's best interests.{5} For our purposes, a fiduciary duty applicable to an adviser or dealer means that the adviser or dealer (the fiduciary) would have to act in the best interests of her client. In general, acting in your client's best interest means that the fiduciary must ensure that:

• Client interests are paramount,

• Conflicts of interest are avoided,

• Clients are not exploited,

• Clients are provided with full disclosure, and

• Services are performed reasonably prudently.

More here: http://www.osc.gov.on.ca/en/SecuritiesLaw_csa_20121025_33-403_fiduciary-duty.htm

I know, it is easy to have your eyes "glaze over" when it comes to regulatory issues.

But anyone who is a client of a financial advisor has to ask themselves a key question: 

Is the person looking after me putting my interests first, ahead of their own interests?

and as an extension of this:

Am I being treated as an individual or as just another client in a large group of "similar" clients?

Are my goals and objectives the first priority?

Advisors do need to get paid for what they do, and perhaps those who do it better can charge a little more.

But when you make your decision to work with an Advisor, ask the difficult question (and make certain that it is the truth):

Where do I stand in your list of priorities?

Tomorrow is Employment Data Day!

Usually, the first Friday of each month brings us the Employment Situation report from the US Bureau of Labor Statistics, affectionately known to traders and the media as "non-farm payrolls".

Why is this number so widely monitored?

1) The Federal Open Market Committee (the FOMC, affectionately referred to as "the Fed") has 2 mandates that it must focus on in determining the direction of monetary policy:

• Inflation
• Unemployment

Therefore, this represents the most recent data that the Fed will have for determining the direction of interest rates when it has its next meeting.

However, with each months new data come a whole host of revisions to the previous months' data (which can show some very large swings).

But traders ( with short-term views) will enter the market to trade based on what they think this data will represent for the future. This can cause an increase in trading volume on financial markets and an increase in volatility if they believe it might influence the Fed's decision.

Canada's Equivalent

At the same time (this month) Statistics Canada will report its latest data on Unemployment and Job Growth. 

http://www.statcan.gc.ca/daily-quotidien/141205/dq141205a-eng.htm

The Media will jump on this data and analyze it upside and down because, it can be market moving.

However over the last year this data has had some extremely wide swings and some reported errors and revisions that have eroded its credibility.

How Do We As Investors View This Data ?

We put into context with our long-term view of investing: that any market movement and volatility associated with this data is temporary and short-term in nature. It is data fraught with errors and revisions and should be monitored, but one month's data should not change our long-term perspective.

All data is important in helping us gage the state of the global economy. However, as portfolio managers our job is to be in front of these data releases, having a pro-active approach, rather than a re-active approach.

Our asset allocation decisions come with understanding of how the global economy is evolving and what the implications are for our clients portfolios over the next 5, 10 or 15 years depending on individual client goals and objectives.

It is all about having perspective and not over-reacting to any news or hype.

Here Come The "Experts"

Bill Gross, the former manager of the world's largest bond fund:

“When the year is done, there will be minus signs in front of returns for many asset classes,” Gross, 70, wrote in the outlook. “The good times are over.”

VIX

• He may be right (or not).
• But it is only one year and therefore this is a short-term perspective.
• The 60/40 balanced fund has enjoyed above average returns for 5 of the last 6 years (the historical long-term average, before fees has been approximately 7.5%).
• 2011 was a slightly negative year and volatility levels were high (see VIX chart above).
• So we are going to possibly get a year of lower returns at some point.
• As Investors we have to focus on the long-term. 
• Inevitably, over time, there will be economic forces that will have negative impact on global financial markets.
• What we do not want in these times of higher volatility are big losses, because the recovery to get back to average returns takes significantly longer.
• Anyone who is borrowing to invest is more susceptible because the downside will be magnified. 
• Low interest rates made this a viable strategy over the last few years.
• But as an investor you need to be very careful to impose discipline, wait for the negative markets to redeploy this strategy.
• And of course that brings up the issue of "Market Timing".
• Trying to time exit and entry points with certainty may work, from time to time, however the academic research suggests that it does not work over the long-term.
• It may be a good strategy for putting "new" cash to work, i.e. waiting for market "dips", but for your whole portfolio: one "miss" can be extremely costly.
• Of course, this is where an experienced portfolio manager can be extremely helpful.