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U.S. Federal Reserve Board Chairman Ben Bernanke testifies before the Senate Banking, Housing and Urban Affairs Committee on the Dodd-Frank Wall Street Reform and Consumer Protection Act on Capitol Hill in Washington September 30, 2010. REUTERS/Richard Clement (UNITED STATES - Tags: POLITICS BUSINESS) (RICHARD CLEMENT/RICHARD CLEMENT/REUTERS)
U.S. Federal Reserve Board Chairman Ben Bernanke testifies before the Senate Banking, Housing and Urban Affairs Committee on the Dodd-Frank Wall Street Reform and Consumer Protection Act on Capitol Hill in Washington September 30, 2010. REUTERS/Richard Clement (UNITED STATES - Tags: POLITICS BUSINESS) (RICHARD CLEMENT/RICHARD CLEMENT/REUTERS)

The week ahead

Fixated on the Fed Add to ...

This week will shed light on an issue the market has fed on for days - speculation that the U.S. Federal Reserve will stimulate the economy for a second time.

On Tuesday, the Fed committee that sets monetary policy will release minutes of its September meeting, helping to clarify where members stand on the stimulus issue. Then on Friday, chairman Ben Bernanke gives a speech in Boston.

Fed action looks increasingly likely given repeated signs the recovery is staggering. Long-term interest rates and stock prices have already moved in anticipation of another round of so-called quantitative easing. The easing involves the central bank buying assets such as 10-year Treasuries to push long-term interest rates lower, thereby spurring the economy - or so the hope goes.

Other data to be released during the week will help provide a fuller picture of the state of the recovery. International trade data on Thursday could feed fears of a currency war with China. U.S. producer price index and consumer price index numbers are expected to show inflation remains far short of the Fed's desired level. U.S. retail sales are forecast to post a monthly gain of 0.4 per cent, aided by steep discounting and tax holidays. Meanwhile, third-quarter earnings season ramps up.

Many investors will be placing bets on the market based on the latest macroeconomic data, so it's a good time to weigh contrarian advice from a veteran fund manager. "There is a macro obsession, and it takes people's attention away from the fundamentals," says Jeffrey Tory, chairman of GBC Asset Management in Montreal, a division of Pembroke Management Ltd.

Investors are fixating too intensely on weekly economic data, impairing their ability to make wise choices, says Mr. Tory, who has seen numerous business cycles during almost 30 years in the profession.

Talking to clients, he finds many remain terrified they are going to lose 40 per cent of their assets in a market crash. "People are wondering today whether the process of investing actually works any more," he says. "If that's the case, we say, you've had your asset mix wrong, because investing does work."

Mr. Tory is a big believer in paying for growth. His firm's primary fund invests in small- to mid-cap Canadian businesses. Over the last 12 months it has almost doubled the 11 per cent average return of its peer group, although it still trails the S&P/TSX index's 27 per cent return.

The veteran money manager believes investors fail because they fear business cycles, wait too long for confirmation of developments and miss the key inflection points. For all the noise out of Washington and off Wall Street and Bay Street, the recovery is moving ahead, Mr. Tory says. "All these things that people are afraid of are repairing themselves under the surface all the time," he says. Well-capitalized firms that avoided inflated asset prices last cycle are investing in growth. "We aren't struggling to find good entrepreneurs who are growing their businesses."

Over the last 18 months, investors have rushed to find income-generating assets, but Mr. Tory argues that pursuing yield comes at the expense of the long-term benefits of growth. "Investors chase themes, and they get carried away on these themes and don't frame their portfolios properly," he warns.

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