Financial markets always face risks. Low-risk investments such as government bonds pay so little that you lose money to inflation. So it’s important to invest in stocks despite the risks in your market outlook. You can limit your risk by sticking to high-quality, dividend-paying, companies.
Due to inter-connected economies, problems in other parts of the world can quickly hurt Canadian stocks. At any given time, the stock market outlook always includes many risks.
One risk is a so-called ‘Grexit’. This refers to Greece leaving the Euro zone.
Greece’s economy shrank for six years in a row. Austerity only seemed to make matters worse. As a result, an anti-austerity party won the Greek election. But the International Monetary Fund, the European Commission and the European Central Bank are insisting that Greece stick to austerity. Many Europeans likely feel that the Euro zone would be better off without Greece and its endless bailouts. A deadlock could lead to a Grexit.
A second risk is a ‘Brexit’. British Prime Minister David Cameron says he’ll let Britons vote in a referendum about whether to stay in the European Union—if he wins the May elections. Britain matters. It recently overtook France as the second-largest European economy, behind only Germany. If Britain leaves, it will deal a blow to the European Union.
Rising U.S. interest rates pose a risk to Canadian stock market outlook
A third risk is higher interest rates in the United States. The U.S. economy has grown relatively quickly and put a lot of Americans back to work. This often leads the Federal Reserve (the U.S. central bank) to raise interest rates. The idea is to keep the economy from overheating and sparking inflation. Higher interest rates would likely send down the prices of income investments, including dividend-paying common stocks.
As we’ve written in the past, we believe that the Federal Reserve will keep its interest rate down for longer than is generally expected. Part of the decline in U.S. unemployment rate has come from a falling number of people looking for work. Contract workers would often prefer permanent work. Part-time workers would often prefer to work full time.
Then, too, if the ‘Fed’ raises its benchmark interest rate, the U.S. dollar would continue to climb. This would suck in imports and curtail American exports. It would risk stalling the U.S. economy. While the U.S. remains the world’s largest economy, it will need the help of other large economies to revive global economic growth.
Geo-politics also bring risk to market outlook
The market also faces geo-political risks, such as Russia’s invasion of the Ukraine; with low energy prices, Russia could default on repaying debt. A second geo-political risk is the war against ISIL (the Islamic State of Iraq and the Levant). A third is turmoil in the Middle East, such as civil wars in Syria, Libya and Yemen. A fourth is whether Iran will allow foreign inspectors to verify that it’s not developing atomic bombs. A fifth is rogue regimes, such as North Korea’s leaders.
Learning to live with risk
The world is a dangerous place. Investors always face risks, such at those outlined above, when assessing their stock market outlook.
But when was there a time without risk? In the Second World War, it wasn’t sure that the allies would prevail—especially before the Japanese forced the U.S. into it. During the Cold War, there was always the possibility of nuclear annihilation. In some ways, the world is safer today.
In the United States, stocks have delivered outstanding returns since at least 1802. So it’s best to learn to live with risk and buy stocks. There will be periods when stocks will suffer setbacks, of course. But if you own high-quality companies that pay dividends and raise them each year, then you’ll prosper. In fact, one of the best times to buy stocks is during such setbacks. Those who bought in March, 2009, have profited handsomely.
The Investment Reporter, MPL Communications Inc.
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