Why a Sustained Market Correction Is Due and How to Beat it

Beat the looming market correction by investing in the Bank of Nova Scotia (TSX:BNS)(NYSE:BNS), Toronto Dominion Bank (TSX:TD)(NYSE:TD), and the Royal Bank of Canada (TSX:RY)(NYSE:RY).

| More on:
The Motley Fool

You’re reading a free article with opinions that may differ from The Motley Fool’s premium investing services. Become a Motley Fool member today to get instant access to our top analyst recommendations, in-depth research, investing resources, and more. Learn More

There are growing fears of a sustained market correction with the TSX now on a five-day losing streak and signs of worse to come, with Canadian stocks still appearing overvalued as whole. Furthermore, there are a range of macroeconomic indicators, which portend poorly for the performance of the global economy with a number of major economies showing significant weakness.

Let’s take a closer look at why a sustained market correction is due and how investors can beat it.

Stocks are overvalued in the context of the overall economic outlook

Only last week the Dow Jones Industrial Average hit a new record high with investors continuing to plow their funds into stocks, despite signs of growing global macroeconomic instability. This instability has the potential to significantly disrupt global economic growth, highlighting the growing disconnect between stock valuations and economic reality.

China continues to be gripped by bad news, with August industrial activity slowing further, housing prices falling for the fourth consecutive month, and retail sales slipping to a four-month low. These facts clearly indicate that the government’s stimulus measures are failing to gain traction, causing many economists to revise their outlook for the world’s second largest economy. Many expect China’s 2014 GDP to come in well under the government’s 7.5% target.

The fragile economic recovery in the Eurozone has come to an end, with August 2014 industrial activity in its three largest economies, Germany, France, and Italy slowing, while for the second quarter, Germany and Italy’s economies contracted with France’s stagnating. This declining economic growth and increasing stagnation is creating a perfect storm for the emergence of deflation, with the August inflation rate hitting a five-year low and unemployment remaining worryingly high. While some would argue deflation is a good thing, it will lead to consumers delaying purchases as the real value of existing debt spirals and hard assets fall, causing further economic contraction.

Of even greater concern is the Eurozone is yet to feel the full impact of the broad-based sanctions taken against Russia as a result of that country’s intervention in the conflict in the Ukraine, pointing to further pain to come for its member states. The impact of these sanctions could be even more severe than originally thought, with the Kremlin now retaliating with its own, further sapping market confidence.

For these reasons, it is clear there has been a growing disconnect between stock prices, which are being driven by investor exuberance rather than solid economic fundamentals. It’s also likely there will be further economic bad news ahead, which can only drive stock prices lower increasing the severity of the correction, with miners, oil producers and consumer stocks among those most likely hardest hit.

How to beat a sustained market correction

Despite the doom and gloom surrounding the market and the likelihood of a deeper correction, investors can beat it by investing in quality stock that have wide economic moats, low debt, and limited earnings volatility.

One industry that stands out in this respect is Canada’s banks, with the Bank of Nova Scotia (TSX: BNS)(NYSE: BNS), Toronto Dominion Bank (TSX: TD)(NYSE: TD) and Royal Bank of Canada (TSX RY)(NYSE: RY), my preferred picks. All three operate in a heavily regulated industry and hold dominant market share, giving them a wide economic moat.

They also have a track record of strong earnings growth, relatively low levels of leverage and appear attractively priced with low forward PEs of 10, 10.6, and 11 respectively. Furthermore, all three will continue to reward patient investors while they wait for markets to recover, with juicy yet sustainable dividend yields in excess of 3%.

Just Released! 5 Stocks Under $50 (FREE REPORT)

Motley Fool Canada's market-beating team has just released a brand-new FREE report revealing 5 "dirt cheap" stocks that you can buy today for under $50 a share.

Our team thinks these 5 stocks are critically undervalued, but more importantly, could potentially make Canadian investors who act quickly a fortune.

Don't miss out! Simply click the link below to grab your free copy and discover all 5 of these stocks now.

Claim your FREE 5-stock report now!

This article represents the opinion of the writer, who may disagree with the “official” recommendation position of a Motley Fool premium service or advisor. We’re Motley! Questioning an investing thesis — even one of our own — helps us all think critically about investing and make decisions that help us become smarter, happier, and richer, so we sometimes publish articles that may not be in line with recommendations, rankings or other content.

Fool contributor Matt Smith has no position in any stocks mentioned.

Confidently Navigate Market Volatility: Claim Your Free Report!

Feeling uneasy about the ups and downs of the stock market lately? You’re not alone. At The Motley Fool Canada, we get it — and we’re here to help. We’ve crafted an essential guide designed to help you through these uncertain times: "5-Step Checklist: How to Prepare Your Portfolio for Volatility."

Don't miss out on this opportunity for peace of mind. Just click below to learn how to receive your complimentary report today!

Get Our Free Report Today

More on Bank Stocks

dividends can compound over time
Bank Stocks

Here’s How Many Shares of CIBC Stock You Should Own to Get $2,000 in Yearly Dividends

This dividend stock is a prime option for investors, and it's from more than dividends.

Read more »

shopper buys items in bulk
Bank Stocks

How I’d Allocate $1,000 in Domestic Stocks in Today’s Market

Got $1000? Here's how I'd play the tariff war with Canadian domestic stocks this April! Royal Bank of Canada (RBC)…

Read more »

man touches brain to show a good idea
Bank Stocks

How to Approach Royal Bank Stock in 2025

Royal Bank is down more than 10% in 2025. Is the stock now oversold?

Read more »

Investor wonders if it's safe to buy stocks now
Bank Stocks

Where Will Royal Bank of Canada Be in 2 Years?

Down 12% from all-time highs, RBC stock trades at a sizeable discount to consensus price target estimates in April 2025.

Read more »

open vault at bank
Bank Stocks

3 Canadian Bank Stocks to Shield Against Market Downturns

Canadian bank stocks are some of the best options on the market, and these three are probably the top ones.

Read more »

calculate and analyze stock
Bank Stocks

1 Canadian Stock Down 7% to Buy and Hold for a Long Haul

Now is the time to take advantage of this top-notch Canadian stock, buying it while it's still down.

Read more »

A worker drinks out of a mug in an office.
Bank Stocks

Royal Bank of Canada: Buy, Sell, or Hold in 2025?

Royal Bank is down 6% in 2025. Is it time to buy the dip?

Read more »

chart reflected in eyeglass lenses
Stocks for Beginners

Seize the Dip: Investment Opportunities Await This April

If you're looking for one and only one opportunity during a market dip, buy this top stock.

Read more »