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December 13, 2016 | Get a Grip

A best-selling Canadian author of 14 books on economic trends, real estate, the financial crisis, personal finance strategies, taxation and politics. Nationally-known speaker and lecturer on macroeconomics, the housing market and investment techniques. He is a licensed Investment Advisor with a fee-based, no-commission Toronto-based practice serving clients across Canada.


Remember this week. One day your kids will stare into your wizened eyes, asking. “Where were you when the Dow crossed 20,000? While the Fed moved at the same time? Were you frightened, Daddy?”

Anything but. Investors should be feeling frisky, unless they’ve been sneaking into one of those doomer blogs telling them when stocks markets hit record highs, the next stop is crash, chaos and collapse. As usual, the pantywaists and milquetoasts are wrong. So are the people who’ve spent 2016 sitting in cash. Or “tactical” advisors whose clients just missed an historic recovery in Canada (the market’s up 18%) and the $1 trillion Trump Bump.

But wait. The Dow at 20,000? Isn’t that nosebleed stuff?

The actual index is kinda irrelevant, certainly when compared to the P/E ratio. That measures the relationship between the market value of stocks (price) and the performance of the underlying corporations (earnings). These days the Dow’s P/E is about 21 times. The historic average is around 17. That means stocks today are not cheap – overvalued by about 20%.

Doesn’t that mean it’s time to bail? Especially if you’ve just made a boatload of money riding the beast higher?

Sure, if this 2016 rally has screwed up the weightings in your portfolio, then by all means rebalance. Take some profits off the table, and use the gains to buy assets that have fallen, or are underweight, or with good potential (like preferreds). It’s an exercise you should be going through at least once a year, anyway. When the calendar runs out, it’s as good a time as any.

But it may be a mistake to bail just because of altitude.

Why? Well, the P/E ratio will likely be coming down as corporate profits go up, injecting more value into the market. In the last quarter US corporate earnings were forecast to be down once again (by 1-2%) but actually rebounded (ahead more than 4%). Now with Trumponomics – cutting corporate tax rates, slashing government regulation and investing in infrastructure – it’s assumed corps will be making more, not less. The prez-elect may be a wacky guy with seriously scary kids and a smokin’ Twitter account, but he’s also a committed capitalist and uber-businessman. Besides, he’s just built a cabinet of CEOs, bankers and billionaires. What’s not to get aroused about?

Second, look at bonds. Squished. Expectations of inflation and more economic growth have dropped debt prices fast, boosting yields and making predictions of widespread negative interest rates look just silly. The river of money exiting the bond market and flowing into equities is wide and deep, and will likely continue. And, hey, in Canada that now includes weed stocks as our country inches towards the noble status of the first western industrial democracy to encourage a generation of potheads.

So what are the risks?

POTUS could blow up. Or start a trade war with China. Or screw up the Middle East. But more realistically, it’s interest rates which threaten stocks. If the Fed decides the time has come to consistently and aggressively raise rates because Trumponomics has created a wildly inflated, deficit-infused economy in which a new wage-price spiral plus protectionism constitute a threat to the money supply, it’ll spank the commander-in-chief.

That seems like a long shot now, and will probably stay that way. But this week brings an arresting, memorable juxtaposition. The first time in a year for a rate hike. Only the second in an entire decade. Swelling inflation, throbbing markets. The moment the Dow initially pierces twenty grand – all mere days before the only completely inexperienced, untested leader in the history of the free world ascends to office.

We’re on the verge of something.

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December 13th, 2016

Posted In: The Greater Fool

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