- the source for market opinions


January 8, 2020 | Faith

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.

Trump assassinates a senior official from another country on foreign soil. That nation vows revenges and attacks a US base with rockets. Concurrently a deal to eliminate new nukes falls apart. Meanwhile Trump’s impeachment trial approaches. Worried people buy gold, bonds and bitcoin. The world braces.

And Mr. Market? He goes up.

As dawn broke Wednesday morning the CBC Morning business dude was warning the nation of a ‘sea of red’ in futures markets, a scary ‘surge ‘ in oil prices and a ‘market meltdown’ coming after Iran fired a dozen missiles at American interests. He fibbed, of course. Let’s be kind. Maybe just incompetence. Another statement on the quality of news that we’re fed these days.

In any case, the futures were barley pink, before turning green. Oil had dropped (not increased) overnight and all that had spiked was hyperbole. Despite Iran, Kim, Brexit, Trump, Putin, Australia, Erdogan, Hong Kong and that funny guy running Ukraine, the reality is this: the Dow flirts with its all-time high and has gained 5,500 points, or 24%, in the last 52 weeks. Bay Street, too, has followed Wall Street. A boring, pedestrian, painfully uneventful balanced/diversified portfolio added 15% last year.  The small dip (3%) in 2018 looks utterly inconsequential beside the 8.5% return in 2017, the 10.8% growth in 2017 and last year’s 15.2%.

Despite that, the long faces continue. Too much CBC? An irrational fear of risk? Lack of faith in the future?

A new Bloomberg/Nanos poll tells it all: 55% of Canadians think a recession is likely this year. Only a third don’t. The rest are still looking for their keys. And this doomerism is not restricted to sad people who get their news from idiots. There are investment advisors who have kept their clients in cash or near-cash assets for most of the past four years (while collecting fees), in ‘super cautious mode’ because, ‘because things are just too expensive’.

Well, guess what? Things are worth a lot more than a year ago. We’re all a year older. Balanced portfolios are up 30-40% over the past 48 months. Fear has been a failed strategy. And now that Trump confirmed the obvious – Iran is a chicken and he’s got a way out – the rally continues.

But wait. What if 2020’s the year it all comes unglued? Are recession fears valid? Have markets, Icarus-like, flown too high? Is the potential of a downturn, even temporary, enough reason to stay huddled in cash?

If you want to, sure. But be prepared for substandard results. Again. Trump isn’t going to war ten months before a presidential election. He never intended it. Iran aimed its missiles at a parking lot. Intentionally. Figure it out. The market has. This is noise.

The first thing to realize is why Mr. Market is feeling so frisky. It’s a presidential election year, and that has almost always brought expansion and higher stock values. Second, inflation is low and economic growth is reasonable. Third, corporate profits have exceeded expectations and are on track for growth of maybe 5%. Just fine. Unemployment in the US is at a 50-year low. Consumer confidence and spending there are robust. Real estate is on a roll, but not in a bubble. The China trade deal is just days away. The central bank has dropped rates, adding stimulus, three times. And now if the White House and Tehran can stop being bellicose and pissy, Middle-East stability is closer. Meanwhile higher – but not extreme – oil prices help Canada without whacking consumers. And investors think the pro-growth, lower-tax, less-reg American president will be re-elected.

Oh yeah, I know – we’re pickled in debt. The Trump deficit will hit a trillion. The world is full of tribal tensions, whackjob leaders, dangerous populism, swine flu, wealth inequality, commies and incinerated koalas. There’s plenty to fret over.

But markets go up because corporations make money, economies expand and wealth’s created.  We’re in a long, long expansionary phase which coordinated central bank policies, technological advance and global trade have helped create. It’s not over yet. In the absence of a giant disaster or a completely unexpected shock, it will continue. Investors should have learned something from the 20% correction last December, instead of spending the year quivering. Trying to time this market, or this economy, has led to nothing but lost opportunity.

So here we’ve had another lesson. Trump. Soleimani. Iran. Drones. Rockets. ISIS. The Supreme Leader and the Tweetstorm guy.

Are markets valued highly? Yup. They are. As such they reflect not only current economic conditions, but what investors expect will happen. That makes corrections likely when sentiment changes. But this is exactly why smart people (a) invest for decades, not months or even years and (b) they have balanced and diversified portfolios. A 60/40 mix gives you decent growth and down side protection. For example, in 2018 the TSX shed 12% and the BD portfolio was off just 3%. Last year Bay Street made 18% and the BD gave 15%. It’s a strategy that protects against declines yet reaps advances.

Conservative yet aggressive. Works with anything.

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January 8th, 2020

Posted In: The Greater Fool

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