It’s time to buy into the U.S. market
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Word that the U.S. economy may finally be on the cusp of recovery has — predictably — created a dramatic new bout of turbulence in U.S. stock markets. Food trays are flying around the cabin, flight attendants have locked up the snack cart and white knuckles abound.
Investors are fretting that after five years of quantitative easing (aka market liquidity provided by the U.S. Federal Reserve) markets may eventually be cut loose and left to fend for themselves without $85 billion a month in stimulus.
All Ben Bernanke, chairman of the Fed, had to do is state the obvious — stimulus will wind down at some point as the economy gains momentum — and the Dow suffered its worst sell-off so far this year.
It’s not like the wrap-up of support and a gradual rise in rates has been sprung on anyone. It’s been gently foreshadowed for several months. Somehow, the attachment of a vague timeline for this shift appears to have launched a group anxiety attack.
The unfortunate thing is that this sudden loss of altitude is likely to carry a steep cost for Canadian investors.
They’ve shunned the U.S., holding an average of three per cent in U.S. stocks in their portfolios. U.S. stocks have never been a popular destination for Canadian cash, but since 2008 —understandably — it has declined even further.
The thing is, the Dow has been on a tear for at least a year, hitting a new record high in March. Valuations in dividend-yielding stocks that fall into the category of “defensive” (think utilities and pipelines) have climbed to the point where some pundits have referred to them as the new bonds.
Canadians have missed out on these impressive gains and now that U.S. stocks are more expensive and Canada’s latest resource-fuelled boom has faded (again), they’ve slowly started to pull their heads out of the sand. This latest round of jitters is likely to scare them off again.
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