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February 4, 2018 | Mark of the Beast

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.

On Friday the Dow shed 666 points. Mark of the Beast. Scary.

If the futures markets are right, there’s another one coming on Monday. So should you be worried?

Well, go right ahead if you think short-term movements foretell the future. But otherwise, this is all pretty predictable and routine. We’ve told you a few times to expect a correction. This might be it. That would peel 10-15% from the Big Board, or something like 3,000 points – taking it back to where it was in the middle of 2017. After all, a pullback’s overdue.

First, before anything else, let’s recap Friday. The stock markets lost 2.5%. Headline writers had a cow. And a balanced portfolio shed 0.8%. Yawn.

Now the context: In January the market gained close to 6%, the most in 21 years. In 2017 it soared 25%. Last year a boring balanced and diversified portfolio made about 11%. The S&P 500 (a broader measure of US equities) has risen for 15 months. It had been 404 days up to Friday before any significant (3% or more) selloff had occurred. That was the best showing in 90 years.

So is it all going to unwind?

That makes no sense. In fact the reason stocks are going down is because the American and global economies are going up. That growth brings inflation, higher incomes, wage demands, rising prices, swelling interest rates and popping bond yields. Stock investors dislike a lot of this because increased salaries and higher borrowing rates mean (a) corporations face increased costs and (b) suddenly the yield on bonds competes with the returns on stocks, so money flows there.

But at the same time, more expansion means companies can expect greater long-term growth; corporate profits remain extremely robust; and the giant US corporate tax cut has not even yet started to plumb bottom-line returns. In short, what happened Friday (and which seems likely to carry on a for a short while) is a classic risk-off thing. A technical correction. A healthy blowing-off of excess froth and investor euphoria. Deflating. Like the way guys feel when their prime minister says he “self-identifies as a feminist.”

Speaking of macho, testo-driven, suspender-snappers, here’s what portfolio manager and part-time Ryan had to say when I dragged him away from watching the Super Bowl on Sunday in the garage suite as he waxed his Lambo. No, the yellow one.

“We were way overdue for a pullback with the markets not experiencing even a 3% pullback since Brexit in mid-2016. The reason for the pullback is that investors are now pricing in more inflation and central bank tightening. This has caused the US 10-year to spike to nearly 3%. Bond yields are now very overbought and I see the 10-year being capped this year around 3.50%, so a good part of the run in bond yields is now priced in.” He paused to light another Havana with a crisp bill.

“But the reason this is happening is that the global economy and corporate profits remain very strong. We’re late in the cycle but I believe it can continue this year as the economy continues to accelerate. Nothing has changed over the last month with the economy and corporate profit outlook remaining bright so I think this is just a well overdue pullback.”

And what are the technical indicators telling my chartist buddy?

“They remain bullish” he said, texting his trophy wife to bring down more Swarovski. “Markets are still in clear uptrends and above the rising 200-day moving averages. Since we’re in the 9th year of this cycle and central banks are starting to tighten we need to remain vigilant and monitor conditions closely but for right now things still look good to me.”

There you go. Stocks got ahead of themselves. Inflation came back. Job creation surged. Wages expanded. Bond yields and rates jumped. Money moved. As one small Wall Street dude summarized on the weekend: “It’s kind of a strange time and we seem to be driven by a fear of what everyone wants, and that’s higher rates. Higher rates confirm a stronger economy, and the market was very afraid of that all week long. And that’s been a big reason for selling.”

Naturally, a stronger economy (global growth is expected to surge by 30% this year) inevitably means more wealth creation. Companies profit. Dividends increase. Investors gain. More people work. Incomes rise. Corporate revenues are expanding these days four times faster than at any time in the last six years. It all confirms the obvious – a continued bull trend.

That would suggest this is a healthy correction. No reason to sell. Perhaps reason to buy. If you have a properly balanced and diversified portfolio, just snooze right through it. Your investments will be just fine.

Wish I could say the same for your house.

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February 4th, 2018

Posted In: The Greater Fool

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