Despite mixed earnings, an ongoing pandemic and the threat of considerably higher taxes coming with Joe Biden’s administration, markets have continued to nudge higher over the past couple of months.
It would be normal, with signs of an overheated market to wonder, a) why things remain so buoyant and b) when we’ll see the next correction?
The truth is no one knows. It is worth noting however that it was 3 1/2 years after Allan Greenspan’s famous “Irrational Exuberance” comment before the market corrected in any serious manner.
That reality, that markets don’t necessarily respond to economics in the short term, is where we are today. (Cass points this out in her article this month).
Governments Recognize the Risk and Respond with Central Bank Support
Governments understand the risks. Not just from the economic downturn, but also from the massive changes being seen today from technology and all its ramifications. So Western central banks have declared that they will remain firm in their interest rate monetary policy. They’ve said they are committed to leaving rates close to zero until we see definitive signs of a longer-term economic recovery. So far this has acted as stabilization.
And while numerous analysts continue to point to valuations as historically very expensive, others argue that with interest rates at or near zero, there is really nowhere for investors to go. This in turn (they argue) justifies the historically high prices of securities.
The Opportunity Ahead
A correction will eventually no doubt come. It will likely be severe. So we’re looking at the situation as a good opportunity to add leverage – once we see a significant pullback. In the corrections of both 2000 and 2009, this proved an excellent strategy.
Here are some of the trends we’re watching…
- The unusually large number of companies rushing to go public through SPACS
- The surge of volatility introduced recently through rookie investors banding together to buy up shares such as GameStop.
- Forthcoming changes in the way Apple’s mobile operating system deals with tracking. The changes could severely impact the ad revenue landscape. Companies like Facebook have publicly stated that this may significantly impact earnings once the changes are fully rolled out.
- The potential for a double-dip recession. Here in Canada, our fiscal balance sheet continues to deteriorate as we continue to borrow more money per capita than any other western nation.
- Speculation in the cryptocurrency markets.
All of that could conclude investors into thinking that the end was near. But all is not doom and gloom.
- In the U.S. economic growth has improved while infection rates are down and inoculations up. Most in the medical field would consider it successful and encouraging.
- Despite a split Senate, it appears a stimulus bill is coming. With economic growth starting to recover, this financial bump will hopefully have the effect of holding over the economic gains we are seeing until a wide swath of the public is inoculated.
- Although corporate earnings were mixed this last quarter, there were some highlights. Technology earnings have been exceptional. Here in Canada financial stocks have outperformed expectations. The strong returns have had the effect of keeping the market indexes up as a whole.
So as usual, despite us watching things with great interest, we continue to focus our work with clients on the process of building wealth rather than short-term economics.
As always if you’re concerned with things, or think we should be reviewing your portfolio, or if your personal situation has changed, just give us a call.