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Bull or bear? Stock market maintains momentum

Q&A | Downturn not yet on the radar despite Canadian debt and economic uncertainty, says Raymond James Ltd. vice-president Lori Pinkowski
Lori Pinkowski, vice president Raymond James. | Submitted

Q: The current American bull market began in 2009, following the Great Recession, and is now officially the longest in American history. Should that worry investors, or is there still room for this bull to run?


A: I wouldn’t necessarily agree that this is the longest bull market in history and I have many reasons that back up my argument. The definition of a bull market is generally accepted to be a rally that exceeds 20% and continues until there is a 20% fall from the peak.

In my opinion, the S&P 500 experienced a bear market correction in 2011 as the European debt crisis caused the market to fall 21.6% intraday between the high in May and the low in October. It avoided the bear market classification simply because it closed above the 20% level.

I also believe that a new bull market cycle is formed only when the index breaches its previous high, which happened on February 19, 2013. Regardless of when you believe it started, the length of time is not as important as assessing the current economic fundamentals. Based on these facts, I feel there is still room left in this current bull market; however, investors should be cautiously optimistic.

Q: What factors are most likely to cause a market downturn, if one is to take place?

A: A market downturn is correlated to a recession. Every recession in the past 50 years has been preceded by an inverted yield curve, where the two-year yield exceeds the longer-term yields, so we are watching that closely. In addition, we are also closely monitoring for a contraction of the Leading Economic Index (LEI), a basket of indicators that includes unemployment, interest rates, building permits and manufacturing data. And finally, we are watching the tightening of monetary policy.

Together, these three indicators have predicted the last seven recessions without a single false positive. Currently, the yield curve is not inverted and the LEI is growing 5% year-over-year. This is a good sign.

Q: Canadian markets haven’t exactly mirrored American markets and have experienced a minor correction already. What are the implications for Canada if the U.S. markets experience a correction?

A: With Canadian markets already negative year-to-date, there is a high probability the weakness would worsen if the U.S. markets have a correction. Canada is closely tied with the United States; approximately 75% of our exports go to our southern neighbour. Canada also has a very concentrated market, with the TSX consisting almost three-quarters in financials, energy, industrials and materials. Those sectors are likely to pull back if there is a U.S. recession. We’ve focused our client portfolio allocations on a higher weight to U.S. and global stocks because the U.S. economy is much stronger than here in Canada, and the U.S. markets allow for better diversification in sectors.

Q: Investor and business confidence has not been as strong in Canada as in the U.S. How much of this is attributable to the uncertainty over the North American Free Trade Agreement (NAFTA)?

A: NAFTA uncertainty is likely the main reason for the lack of business confidence in this country and also has weighed heavily on investors’ minds this year. This was acknowledged by the Bank of Canada when they did not increase interest rates at their most recent policy meeting on September 5, noting that “uncertain trade outlook will hurt business investment.”

Q: It has now been a decade since the last American recession, which became global. Canada did not suffer as profoundly as the U.S. did, thanks to our banking system. Are we necessarily any more insulated now?

A: I feel Canada is more at risk today than in 2008 due to soaring household debt – currently sitting at 168% of income (higher than the levels seen in the U.S. in 2008). This is simply too high, and as interest rates increase, these debt levels make Canadians and Canadian banks much more vulnerable when inevitably there is a recession. 

Q: The Great Recession in the U.S. was triggered by a real estate asset bubble, and the one before that was triggered by a stock market bubble – the dot-com crash. What are the big risks today?

A: Tightening from central banks globally is likely the biggest risk – along with the escalating possibility of a global trade war, the state of the European Union, an inverted yield curve and increasing geopolitical risk.

I feel this bull market will continue at this point with normal volatility along the way. It is impossible to determine for how long and how high this market will run. This is why it is important to have an investment philosophy based on proactively managing portfolios and taking action when needed. I believe it is important to participate when markets are performing well but it is vital to protect clients’ portfolios in a market downturn. This helps clients sleep at night knowing we will protect them in all market conditions.

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