What an autumn! For 3 months now, the world stock markets have made us dizzy! The Dow had its high on October 3 at 26,828.39. We closed on Friday, December 21st, at 22,859.60.

Many of you have been calling and writing for two weeks now and I can certainly understand why. The news is very negative and the journalists are not smiling. Trump, the trade war with China, the resignation of Mattis, interprovincial quarrel, pipelines, layoffs, rising interest rates ... and stock markets that are falling.

However, I think it is a normal correction and not the beginning of an economic depression. Why, you ask?

• Companies are still reporting growth in sales and profit.
• The unemployment rate in the US is very low, household debt is reasonable.
• At Friday's level, the multiple paid for a stock market investment has once again become very interesting for the future.
• I note in passing that even at the levels of January 2018 or October 2018, we were far from the financial bubbles of 2000 or 2008.
• In fact, the only asset class that is at a dangerous level relative to its historical average is residential real estate in Canada and a few other small countries / cities.
• Interest rates have risen but remain reasonable, relative to economic strength.
• 2% for 10 years, 2.15% for 30 years on a Canadian bond.
• 2.78% for 10 years and 3.01% for 30 years on a US bond. It's not completely crazy ...
• There has been a large increase in the shorter term rates, such as a term of 2 years. From 0.48% to 1.93% in Canada and from 1.05% to 2.66% in the US. However compared to the economic environment, this is still okay.
• What we have been doing over the past few months and weeks is review our stock and bond positions to assure that we really have high quality investments.
• I have sold those that might have difficulty in a financial storm (which will come, one day).
• We reinvested in companies that are stronger financially, with less leverage. In a bull market, they will be slower to rise but in a decline, they will protect us.
• One of these companies is Fortis. A company that distributes energy (mainly electricity)
• This company has been increasing its dividend every year since 1973. 45 years of increases.
• The origins of the company date back to 1885. Today it has operations in Canada, the United States and the Caribbean.
• 99% of its business activities are regulated and therefore very stable.
• 92% of the company's assets are electric wires and poles as well as natural gas pipes.
• With stable debt and a lot of predictability in their business, Fortis should be a profitable investment for us.
• Finally, a distinction must be made between the operational results and the valuation of a company.
• The companies we invest in have good operating results. They make profitable sales.
• The price the market is willing to pay for these operational results is another thing. When people are optimistic, they will be prepared to pay a higher price for an investment than if they are pessimistic. This is the multiple that the market gives to a company.
• On September 20th, in the US, the multiple granted was 18.2. Today it is 15.3, a decrease of 16%.
• So for the same company, the multiple given by the market is 16% less in just 3 months.
• This illustrates that in the short term, the stock market results are highly influenced by the psychology of investors.
• Fortunately, in the long term, the results are largely influenced by the profitability of a company and not by the psychology of investors (80% and +).

A stock market correction, defined as a drop of 20% or more, is normal and inevitable. As my last email showed, it's a waste of time trying to time the market. The important thing is to have an up-to-date and reasonable financial plan, a diversified and logical portfolio and to realize that +/- 80% of the time, the financial markets are favorable to us. So do not react with impulsiveness and emotion. None of our portfolios will be going to zero. Sooner or later, they will go back up.

In the meantime, remember Warren Buffet's old saying: “Be fearful when others are greedy and greedy when others are fearful”. In January, it will be time to make your TFSA contributions for 2019. Rest assured we will be greedy.

Have a happy holiday season and we look forward to seeing you in the New Year!