Overreaction in a Market Correction

Overreaction leads to market turmoil

Over the last several weeks investors saw a 10% correction in the Canadian stock market, and a 9% correction in the U.S. Someone with a $100,000 portfolio invested in index funds could have just lost $10,000. Ouch. 😐 Is this market sell off justified or is it simply an overreaction to some recent bad economic news? First, let’s review what those news are.

• The Canadian dollar has dropped to a 5 year low
• Germany’s economy is weaker than expected
• The rest of Europe is still in a mess of unemployment and stagnation
• Last week the Athens Stock Exchange in Greece tumbled more than 6% in one trading day.
• ISIS is causing havoc in the Middle East
• Ebola fears

I currently own shares in the Bank of Nova Scotia (BNS.) It’s one of the largest companies in the country and has been around for over 180 years. Over the last month the price of this stock fell 8%. Instead of asking where the stock will go from here, we should instead be asking does all the recent bad news justify an 8% drop in value for one of the largest banks in Canada? My answer is absolutely not. 😛 It’s important to remember that when we buy a stock we are literally owning a part of that company. This means we, as stakeholders in Scotiabank, are still entitled to split the $6.5 billion profit that the company makes every year, regardless of how the price of BNS shares performs in the short term.

A lower loonie will likely spur economic growth and will not hurt Scotiabank’s profitability. Europe’s stalled economy is nothing new and Canadian banks don’t lend that much to Europeans anyway. The media has succeeded in sensationalizing the threat of Ebola in the U.S. Yes it’s a terrible disease, and there’s an outbreak in Africa. But Ebola will not hinder businesses in the U.S. and Canada from continuing to rake in profits. Literally more Americans have been married to Kim Kardashian than have died from Ebola – both a terrible fate. 🙁

For the intrinsic value of Scotiabank to actually fall by 8% substantial circumstances would need to be met, such as major accounting fraud or a 10% national unemployment rate, that would legitimately jeopardize the company’s ability to make money. The recent news is relatively trivial so an 8% correction of BNS shares seems like an overreaction. Imagine selling our stocks now only to see the markets rebound next month and regain all its losses. 😐

Emotions can destroy wealth

There are many things in this world that we can’t control such as terrorism, diseases, government spending, and general ignorance. But it’s never a terrorist attack, a bankrupt nation overseas, or an economic deflation that has ever financially ruined lives in North America. But what can destroy people’s investments, ironically, is their own temperament and emotions, which are things that people do have control over. Investors who sell their stocks in the middle of a correction are prone to panic. They become afraid, even though their fear isn’t based on any fact or reason. This is why it’s important to understand what we’re invested in at all times. 🙂 If we understand that when we buy a stock, we are actually buying a business, then we wont become susceptible to fear and panic when the stock price fluctuates in the short term.

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Random Useless Fact: