When Stephen Harper said in October 2008, just when global markets were tanking, that Canadians should start looking for “buying opportunities,” he was ridiculed by nearly everyone. Yes, it was a silly thing to say amid all the panic, but he was, of course, right. Every investor knows to buy low and sell high. Indeed, those who bought into the market that day would have been handsomely rewarded – America’s S&P 500 is up 135% since that time, while our own S&P/TSX Composite Index has climbed by less, but still nearly 50%.
What we didn’t know at the time, though, was just how right Harper was. While the market fell for another few months –if you bought in at the very bottom, on March 9, 2009, you’d have made even more money– it turns out the recession was the last obvious buying opportunity for North Americans. Save for a few small declines, equities have gone up, and up and up some more since the market trough.
This kind of bull run is highly unusual. There’s only been one other time in history that market has gone this long without experiencing at least a 20% correction: 1990 to 2000, ending with the dot com crash. Investment firm Oppenheimer and Co. says this run could end up being the longest on record. Typically, markets fall by about 10% every 18 months, but even that’s only happened once in eight and a half years – in January 2016. While the Canadian market has seen more volatility over the last couple of years in large part due to falling energy prices, it’s still creating record highs. On October 30, it topped 16,000 for the first time ever.
Many investors are puzzled by these never-ending gains, especially considering what’s happening south of the border. There’s an enormous amount of political uncertainty —over Russian investigations, potential war with North Korea, the death of NAFTA and more —yet markets keeping marching head. The S&P 500 is at record high valuations, trading at 25 times earnings. As outlandish as Trump’s tweets are, not one has done damage to the markets. Yet.
Why not? If there’s anything investors hate, it’s uncertainty, or so we’ve been told. Norman Raschkowan, a veteran portfolio manager and now president of Toronto’s Ten Squared Investments, admits that it’s unusual for markets to do so well for so long, but then again, the recession was also unusual. Stocks were so beaten down that there was only one way for them to move. Interest rates also fell to record lows, which forced people to move out of bonds, where yields were next to nothing, into stocks, where they could find more attractive returns.
It’s also taken a lot longer than expected for global growth to pick up. Now, nearly every country is experiencing at least some GDP growth at the same time. The International Monetary Fund expects global GDP to expand by 3.6% in 2017, up from 3.1% in 2016 and that’s good for investor confidence and earnings growth, which is a main driver of stock market gains. (According to Thomson Reuters, earnings growth among S&P 500 companies is expected to rise by double digits in every quarter but one in 2017.)
Raschkowan also thinks that people still don’t know what to make of Trump. “It’s surprising,” he says about how politics is having so little impact on markets, “but it may simply be that people don’t know how to predict what the fallout will be from all the political uncertainty.” This weekend, Trump again took credit for the bull market, telling reporters “The reason our stock market is so successful is because of me. I’ve always been great with money,” If it is all about him, we might have a lot more to worry about than frothy valuations.
Some investors are starting to get nervous. For what it’s worth, type stock market into Google and it auto-completes with “crash,” “crash 2017,” and “correction.” These are the search terms regular folks are looking for. Many fund managers are holding more cash, too. A Bank of America Merrill Lynch survey found that in August the cash balance of global investors was at 4.9%, above the 10-year average of 4.5%. Still, though, people aren’t worried enough. The Vix, an index that measures volatility in the market, is near its all-time low.
A few things could cause markets to suddenly reverse. If interest rates continue to rise, and bond yields start looking more attractive, people could start selling their riskier equities to buy more fixed income. And Rashckowan does think it will be rising interest rates that will cause the market to reverse. One thing Oppenheimer keeping an eye is inflation – if U.S. and European inflation picks up in a meaningful way, and consumer prices increase, it could case a negative market reaction.
It’s also possible that the political situation gets much worse. If the FBI carts Trump away in handcuffs, if he can’t pass tax reform, which would benefit company earnings and therefore stock prices, if America does go to war with North Korea or if NAFTA gets discarded – Rashckowan says the deal’s failure isn’t fully priced into the market – then stocks could quickly drop.
It wouldn’t be MoneySense if we didn’t also sneak in some reason to relax and not try to time market swings. If the market does fall, don’t panic. Instead, heed Harper’s investment advice because corrections tend to be the best time to buy.