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January 11, 2019 | The Big Surprise

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.

Since Christmas Eve – just a couple of weeks ago – the stock market has gained 10%. Preferreds are up. So are REITs. Investors who ignored the noise are seeing their portfolios being reflated after the Trump-induced hissy-fit of late 2018. The portfolio managers I take hot yoga with (seriously) are unanimous. No crash. No bear. No recession. In fact 2019 is expected to deliver some big surprises.

Anyone who pumped money into financial assets in late December when the comments section was a sea of nausea and spittle was a genius. Just as the media was telling you it was the worst such month since – gasp! – 1932, and doomers said stock plops meant a big recession was approaching, equity values scraped bottom.

Hardest hit were those who sold, turning paper losses into real ones – especially inside an RRSP or TFSA where losses cannot be deducted from gains. The final weeks of 2018 proved yet again what this painfully prescient blog has said repeatedly. Never sell into a storm. Have confidence all downturns are temporary. Ignore the noise. Stay invested. Never exit an asset class. Suppress fear. Remember history. Go pet your dog.

Over the last two decades someone staying fully invested in US stocks for example – never selling and ignoring downturns, even 2008 – made almost 10% a year. An investor trying to time the market, or some cowboy ‘advisor’ seeking to add alpha, would see that drop to 6% just by missing the best ten days over the course of 20 years. That’s because more than 70% of the time markets go up – since stocks are a proxy for the growing economy. And it’s very unusual to have back-to-back years of falling markets.

More importantly, portfolios are unlikely to suffer when there’s no recession. Like now. Investors have been waking up to the fact the economy is robust, employment strong, inflation tame and corporate profits expected to jump 8% this year. So the sell-off we just went through made stocks, preferreds, REITs and other assets cheaper as P/E ratios (the price of a stock relative to company profits) tumbled. In other words, the carnage on Wall and Bay Streets wasn’t a precursor to recession. Overwhelmingly, it was Trump. His trade wars. His fight with the Fed. The Wall battle. Markets like certainty. He loves chaos.

So, I hope you didn’t sell. Once again you have hard evidence of why most people fail at do-it-yourself investing. They cannot overcome human nature. They crave what’s going up. They dump the losers. Buy high and sell low. It just never, ever ends. This is why the job of a financial advisor, at least half the time, is to save people from themselves.

Now, what’s next?

My yoga guys think this is the year the Canadian market struggles from its funk and actually outperforms Wall Street. Canadian crude oil prices have rebounded. The labour market is solid. Corporate profits are decent. The pipeline thing may even get resolved. And valuations are cheap. Once Trump does his trade deal with China (that’s a certainty as he prepares for 2020), global growth prospects will improve and commodity prices rise. All bullish for maple.

Did I mention no recession? The bond market says so. Now stocks are agreeing. Here’s what economists at Scotiabank state about the odds of a downturn in the US economy:

“It would be unusual to get a pronounced recession amidst evidence of very healthy household balance sheets. Consumer credit flows have been strengthening recently. The saving rate—out of disposable income—has not been depleted with wealth gains being spent; rather, it has held around a steady 6% rate for years now. Combined with the lowest share of income going toward debt payments on record and solid income and job growth, the signs of serious challenges that would affect about two-thirds of the economy represented by consumers are scant.”

Look at this chart depicting the debt service ratio of US families. You can see that in 2006 it was extreme, and today’s it’s comatose. No, 2008 is not coming back any time soon.


In fact, here are some predictions the bank is making that might startle you:

  • Three interest rate increases in 2019 by the US central bank.
  • No rate cuts. “Either no hikes or rate cuts are difficult to envisage and need a lot to go awfully wrong that at this point we are not prepared to assume.”
  • Three more rate hikes by the Bank of Canada this year, taking the prime rate to 4.7% and the mortgage stress test past 6%. So much for real estate.
  • “Our forecast for the Bank of Canada is relatively aggressive with three hikes predicted over the duration of this year and possibly one more in 2020 before the central bank calls it quits this cycle.”

Moral: never, ever read the comments section. If you do, like me, wear rubber.

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January 11th, 2019

Posted In: The Greater Fool

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