CDA Essentials 2019 • Volume 6 • Issue 4

40 | 2019 | Issue 4 S upporting Y our P ractice Value Stocks are just like items you would buy in a store—some are overpriced and some are a bargain. The conventional way to determine a company’s value is its price/earnings ratio (P/E)—its current market price divided by its earnings per share, often expressed as a “multiple of earnings.” If the price is $45 and it’s earning $3 per share, that’s a multiple of 15. This equation can be applied to entire markets, such as Canadian, U.S. or international equities. Value investors favour a P/E ratio below 20. When it goes north of that, a market may be seen as expensive, which makes investors nervous. The economy The consumer price index (CPI), gross domestic product (GDP), unemployment rate, housing and retail sales are familiar terms. Since they gauge an economy’s overall health and future prospects, investors pay attention to them. Economies go in cycles of expansion and contraction, and although market prices don’t totally correlate with the economy, they do affect each other. A recession occurs when there are two successive quarters of negative GDP growth. Interestingly, a drop in market prices often precedes an official recession, as investors lose confidence Periods of market volatility are a fact of investment life, but one thing we know for certain is that the markets will always rebound over the long term . There are a number of factors that create volatility. Despite all of the expertise and algorithms available to keep the markets rational, they’re still largely driven by investor confidence and emotion. These are some of the main drivers of those emotions: You Can Predict the Market… Over the Long Term CDSPI is a not-for-profit organization whose mission is to provide a broad and meaningful range of customized financial solutions to the dental community, covering every facet of their lives. Volatility is a natural, and necessary, part of a free market.