Stock markets have been jittery lately.

After improved sentiment towards the latter months of 2015 , investors now appear to have overly concerned of a stock market drop. Not only have fears around China resurfaced, fueled in part by downbeat economic data and circuit breaker sell-offs, but weak global commodity prices also continue to raise much concern with investors. Evident with the VIX index, a measure of volatility in the S&P 500, siting at an elevated level (approximately 29).

Much has gone on over the past few weeks in the global economy, and this  has some of the so-called "gurus" issuing dire warnings of the dark days ahead. But while recent events do appear negative—insofar as they represent some negative data that has come to light—they are not wholly surprising; the risks around China and weak commodity prices have been known for some time. Moreover, they warrant neither a kneejerk reaction nor panic.

Investor apprehension in this environment is both understandable and natural —and we must ensure that it does not hijack us and our well-built financial plans.

Times like this can be stressful. With so much general apprehension and dramatic media coverage, it can be difficult to detach from the media noise that makes everything feel like the world is ending. But the reality is that what we are experiencing now is not  unusual. A primary characteristic of the stock market is that it is volatile and unpredictable. The current situation is not especially abnormal in the context of stock market history, even though, yes, there are risks out there, and yes, the sentiment is anxious.

Here’s the important thing to remember: the stock markets’ tendency to be volatile is why we build long-term plans and resilient investment portfolios in the first place. It matters less that markets have become volatile, and more that portfolios are constructed to be resilient during periods of volatility. This is at the core of our investment philosophy: generate wealth for our clients by building diversified portfolios tailored to your specific risk level. 

Fear is normal when dealing with the ebb and flow of markets. It may be hard to ignore, but that doesn’t mean we need to internalize it. Keeping it at arms’ length may be easier when we remember the long-term investment strategy we already have in place.

As the famous Roman Emperor, Marcus Aurelius, once wrote in Meditations:

“Never let the future disturb you. You will meet it, if you have to, with the same weapons of reason which today arm you against the present.”

‘Ocean of fear’: Canadian investors sitting on record cash pile risk billions in lost returns

By Garry Marr Jan 26, 2016 Financial Post

A new report suggests fearful investors are sitting on a record $75-billion in excess cash in their portfolios, the biggest hoard in Canadian history

A new report suggests Canadians are sitting on a record $75-billion in excess cash in their portfolios, fearful of making a move in today's volatile markets.

The analysis from CIBC World Markets economists Benjamin Tal and Royce Mendes out Tuesday suggests if history holds true Canadians will jump back into the market too late and miss out on bull markets.

"With an ocean of fear dominating financial markets, Canadians have been swimming back to shore. Building on already elevated cash positions, investors are accumulating cash at a rate not seen in more than four years," say the economists, adding that will mean billions of dollars in lost returns.

The pair argue that the negative sentiment surrounding Canada has overshot fundamentals and says the 100 basis point difference between five-year government bonds in Canada and the United States is the widest on record - a suggestion that the difference in the current monetary policy will continue. (Canada's central bank cut rates last year while the U.S. Federal Reserve raised them in December.)

"Canada's stock market has been unjustly painted with the same brush as emerging markets," says the report.

Domestic investors have bought into the negativity and the pair estimate that as of January 2016, cash positions have risen by more than 11 per cent over the past year, he fastest pace since 2012.

"That trend isn't being driven by any particular age group. Both young and not so young are making cash a bigger part of their portfolios," the economists write.

The bigger problem may be that cash positions have been rising since the 2008 recessions, so the the recent increase comes on top of what Canadians were already sitting on in their portfolios. The result is the largest hoarding of cash in Canadian history.

Adjusting for impacts of inflation and demographic issues such as population growth and composition, the economists suggests Canadians are sitting on $75 billion more in cash than they should be. Cash positions are close to $350 billion but that's $75 billion more than normal because of "risk aversion" that is abnormally high.

"While holding cash can guard against short-term spikes in volatility, it's certainly a long-term drag on portfolio returns," the pair argue.

The cash positions are a case of history repeating itself. After the 1987 stock crash, cash positions of Canadian households jumped by 20 per cent. After the 2001 correction and the great recession in 2008, cash positions jumped by 30 per cent.

Tal and Mendes argue that in 1997 investors added to their cash positions for 18 months while the market gained 20 per cent. In 2001, the same thing happened as investors missed out on the 2003 bull market. This time out, the economists argue many investors will miss the boat again.

"What's more troubling than holding cash for long periods of time is that investors often move into it at precisely the wrong time," the pair maintain. "Over the past five years, the TSX Volatility Index has peaked over the 20 mark eight times and, in the 90 days following, the TSX returned an average of nine per cent."

The risk for investors moving in and out of cash is that they are "buying high and selling low," they conclude.

Why is Cheap Oil Slamming Stocks?Stocks are having their worst start to a year in history in part because of a rapid plunge in the price of oil. The price of crude is down approximately 28 percent this year already, which in turn has dragged down energy company shares all over the world. 

The low oil prices are wonderful for consumers and many corporations, as low oil means cheap gas and other fuels. "It seems ironic that in the run-up to the global financial crisis we were worried about oil prices being too high in 2007 and 2008. Now we're worried about them being too low," said Julian Jessop, head of commodities research with London-based researchers Capital Economics Ltd.

The drastic drop in oil and stock prices stands in contrast with a U.S. economy that, on the whole, is doing pretty well. U.S employers created 292,000 jobs in December, and few economists see the economy sliding into recession.

Here's what experts think is going on.

Why is Oil so Low?

Because there is so much of it.

A long run of high oil prices inspired drillers to develop new techniques and to go to new places to find more oil, and they succeeded. In the U.S. improved oil drilling technologies known generally as fracking have added more oil to the global market than the total production of any other nation in OPEC other than Saudi Arabia.

Producers in the U.S. and abroad haven't cut back production very much, despite the low prices, and now the lifting of international sanctions against Iran could send more oil flowing into markets that are already awash in crude.U.S. stockpiles are at their highest level in at least 80 years, and the International Energy Agency predicts that during the first half of this year global oil supply could outstrip demand by 1.5 million barrels per day.

Demand for crude has been growing steadily, but that may not last because economic growth in China, the world's second-largest oil consumer after the U.S., is slowing.

Why Do Low Oil Prices hurt the Stock Market

Oil company profits are plummeting, so oil company shares are plummeting, and that is dragging down the whole market.

Analysts estimate that profit for all S&P 500 companies in total are on track to be down a recession-like 5.8 percent for 2015 (US$). But if energy companies were removed from that figure, S&P 500 profits would be up a very healthy 5.7 percent for the full year (US$).

Investors are also selling shares of companies that may have exposure to the oil industry, like certain banks. And the price of oil has now fallen so low that investors are also worried that it could mean global economic growth is much weaker than expected, which could hurt all companies.

Are Low Oil Prices Good For the Economy?

It depends on why prices are lower.

If they fall because new supplies have been found, it usually helps the broader economy, and markets held up fairly well during oil's big slide from over $100 a barrel in 2014 to under $50 a barrel last year.

"In the long run, lower oil prices should be positive or at worst neutral for the world economy because all they're really doing is transferring income from oil producers to oil consumers," Jessop says.

But this latest plunge in prices to under $30 a barrel has investors worried that oil prices are falling because global growth is slowing, as businesses and consumers in many developing countries, particularly China, cut back on spending. Bruce Kasman, chief economist at JPMorgan Chase, says that steep drops in oil prices have historically been a sign of a weakening global economy.

Also, U.S. consumers have remained cautious about spending the money they aren't putting into their gas tanks, which limits the benefit to the broader economy. Americans saved 5.5 percent of their incomes in November, up nearly a full percentage point from a year earlier.

Kasman estimates that U.S. spending grew at a tepid pace of just 1.5 percent in the final three months of last year. "There's no doubt that the consumer spending growth figures for the U.S., Europe and Japan have disappointed," he said.

Some of that likely reflected a temporary drag from warm weather, as Americans spent less on winter clothing and utilities. That could turn around in the first quarter, giving the economy a lift, Kasman said.

Delta Air Lines told investors this week that bookings for this spring are ahead of last year's pace because cheaper gasoline means consumers have more money.

Could This Drop In Oil Lead to Broader Turmoil Similar To The Subprime Mortgage Crisis? 

It is already having some ripple effects, but the energy market isn't nearly as big or far-reaching as the housing market.

When oil prices were high, lots of banks, including some of the biggest on Wall Street, made loans to energy companies to finance drilling in North Dakota, Texas and elsewhere. Dealogic estimates that the oil and gas industry has roughly $500 billion in outstanding debt. According to the Federal Reserve, there is $11 trillion in outstanding residential mortgage debt.

Still, some are feeling it. Oil company cash flow is slowing, and companies are finding it harder to repay their loans. Oil and gas company bankruptcies are rising, and the entire market for so-called junk bonds has been shaken as a result of energy company defaults.

JPMorgan Chase, Wells Fargo, Citigroup and Bank of America all had to write down the value of energy loans or set aside more money to cover losses. BofA executives told investors this week that energy loans were roughly 2 percent of its total loans. Smaller regional banks could to be more exposed relatively than the big Wall Street banks.

Is There an Oil Price That Would be Good For The Market and Consumers?

Jessop thinks that a price of about $60 a barrel would do the trick. "High enough to keep the main producers in business but low enough to provide a real boost to the incomes of consumers," he says. He expects prices to return to that level by the end of next year as oil companies pare back exploration and the glut is worked off.

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