Tag Archives: stock market

The Bubble blowing contest

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Wellington-altus.ca/standupadvisors

By John De Goey, CFP, CIM

Special to the Financial Independence Hub

One element of Bullshift that I cannot help but notice is how the finance business has selective and self-serving definitions and explanations that abound when explaining the business to the public.

We’ve already discussed how a 10% move downward is called a “correction”,  but there is no term for a 10% move upward.  Is that an “incorrection”?  Who decides what is correct or not, anyway?

The related term that I often find a bit amusing is the word “bubble.”  Before reading further, take a moment to reflect on what you believe the word means when used in an economic context.  Have you got it?  Don’t read further until you have a firm definition and / or example of ‘bubble’ in your mind.

According to Wikipedia:

An economic bubble or asset bubble (sometimes also referred to as a speculative bubble, a market bubble, a price bubble, a financial bubble, a speculative mania, or a balloon) is a situation in which asset prices appear to be based on implausible or inconsistent views about the future.

Advisors usually acknowledge bubbles after they burst

In my experience, advisors generally only acknowledge bubbles after they burst.  Here’s a fictional story to illustrate that conditional acknowledgement.  Let’s pretend a pair of 12-year-old boys are in the world championships of bubblegum blowing.  The one with the biggest bubble wins, provided the bubble is generally accepted by judges without bursting first.

Three esteemed economists have been hired as judges in the contest. The boys get their gum, chew it and begin to blow their bubbles.  In short order, the bubbles become remarkably large.  Unbelievably large.  And identical in size …. there’s nothing to choose between them!  The judges can’t decide which of the bubbles is bigger … and yet they get bigger still.  Eventually, one of the identical bubbles bursts and the kid with the unburst bubble holds his position for a couple of seconds for the judges to acknowledge that his remains intact: and then inhales the gum back into his mouth, thinking he has won. Continue Reading…

The economy and stock markets making for strange bedfellows

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By Ian Riach and David Andrews, Franklin Templeton Canada

(Sponsor Content)

Equity markets that bear little resemblance to the wider economy has been one of the major investment stories of 2020. It has been an historic year, marked by some wild swings in stock valuations, and with the prospect of much more volatility to come. The U.S Presidential Election in November looms large on the horizon, not to mention the small matter of COVID-19.

The coronavirus has devastated the world economy; in its most recent forecast, the IMF predicted a global economic contraction of 4.9% for 2020. To put that number in perspective, such a downturn would represent the worst annual decline since the Great Depression of the 1930s.

Equity markets tell a different story, and stocks have rallied strongly since the bear market lows of March this year. In fact, U.S. equities reached record highs with the S&P 500 up more than 21% on a one-year basis at the end of August.

This disparity has brought the relationship between stocks and the overall economy into sharp focus in 2020. While both the U.S. and Canada posted some positive job numbers in August, unemployment remains high (10.2% in Canada; 8.4% in the U.S.) and the stimulus measures that kept the economy afloat during the lockdown will not continue indefinitely. Then there is the virus itself to consider, particularly the threat of a second wave that is even more devastating than the first, which is what happened with the Spanish Flu of 1918–1920.

The economy is precarious

The economy is clearly in a quite precarious position and some areas (tourism, hospitality, air travel) could take years to recover, if at all. It does seem logical to presume that stock market performance and economic conditions should go hand in hand — economic growth resulting in higher corporate profits and in turn, higher share prices.

Often that is not the case, with a low, and sometimes even negative, correlation between stock market returns and GDP throughout history. Despite Donald Trump’s assertion that everything is fine when the stock market goes up, the stock market is not the economy.

Stock markets, represented by indices such as the S&P 500, are comprised of a very select group of firms that are publicly traded. Most indices are market cap weighted, which means larger firms have more of an impact on overall index movements — think of the FAANG (Facebook, Amazon, Apple, Netflix and Google) stocks and their influence this year.

The chart above displays just how influential large stocks can be on an index. Year to date, the S&P 500 has a positive return but only because of strong returns by the FAANG stocks. The ‘other 495 stocks’ have not fared nearly as well as the index would imply. It is clear that a few companies have benefitted from the fallout of the COVID-19 pandemic, but most have not. Continue Reading…

Looking in the rear-view mirror to avoid hitting something that lies ahead

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By Noah Solomon

Special to the Financial Independence Hub

The vast majority of today’s portfolios represent a Pavlovian response to the obliging nature of markets over the past several decades. The unprecedented increase in the value of risk assets coupled with low volatility have lulled investors into a false sense of security accompanied by an “if it ain’t broke, don’t fix it” approach to portfolio construction and risk management.

Most portfolios are dependent on the next few decades mimicking the last few. Specifically, they are over-allocated towards assets that have performed well during the secular (yet unusual) goldilocks environment of the past 40 years. As is typical of human behaviour, investors are looking in a 40-year rear-view mirror to avoid hitting something that may be in front of them.

What is Normal?

The past four decades have been unusually kind to investors. Strong tailwinds of favourable demographics, low inflation, falling rates and globalization have fueled an unprecedented rise in stocks, bonds, real estate, and almost every other major asset class. While it would be nice if these conditions were the norm, the fact is that they are unique from a long-term historical perspective.

An astounding 91% of the total price appreciation of a classic 60/40 equity/bond portfolio over the past 90 years is attributable to 22 years between 1984 and 2007. This period was also an atypically strong period for real estate, representing 72% of total appreciation over the past 90 years.

Notwithstanding some painful bumps along the way, including the tech wreck of 2000-2002 and the global financial crisis of 2008, the investing experience of most people today has been a proverbial walk in the park. An entire generation of investors has never experienced anything like the 86% peak-trough decline in equities of the 1930s which resulted in two decades of lost performance. Nor has it faced anything remotely like the 25% decline in U.S. Treasury Bonds during the stagflation-plagued 1970s.

What If?

Nobody (including us) can know for sure what the future holds. However, there are strong reasons to suspect that the road ahead will be drastically different than the unusually smooth path we have been on for the past several decades. Historically high asset valuations, record corporate and sovereign debt levels, $17 trillion in negative yielding debt, the lowest capital gains taxes in U.S. history, historically high income disparity across the developed world, and a global rise in populism and protectionism all suggest that, as Dorothy stated in The Wizard of Oz, “We’re not in Kansas anymore.” Continue Reading…

How to get through a stock market crash – and benefit from it

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By Mark Seed

Special to the Financial Independence Hub

Unless you’ve been living under a rock, the stock markets have been a terrible mess.

On our Canadian side, we triggered market circuit breakers to halt trading in recent days.

In the U.S., the stock market dropped thousands of points in rapid successive trading days and remains well into bear-market territory within just a matter of weeks. It’s as almost if the market jumped out of a plane with a faulty parachute and spiraled out of control to earth; only some mild turbulence kept it from a total free fall.

Dow March 14, 2020

All havoc, no sanity

These market dives in very short order made me reflect on my own investing journey and how I might be able to survive this stock market crash. For today’s post, here are my ideas on how to get through a stock market crash – and benefit from it.

1.) Learn from history – reset your expectations

A sudden stock market crash is quite unnerving, but I don’t think it’s a sign of imminent full-on financial collapse. At least history tells us so. You’ll see from the chart above, recent weeks have been very messy to say the least. But over many years of investing in equities, the chart actually looks like this:

I’ve highlighted near the bottom of the 2008-2009 Great Recession for reference.

Although it’s very difficult to wrap your head around this fact and behave accordingly, stock market history consistently tells us the financial markets do eventually recover. And, after they recover, looking back through time, they continue to deliver rather predictable long-term returns. Here is what the U.S. stock market has returned by the decade and from what:

A Wealth of Common Sense - Returns by Decade

Source: https://awealthofcommonsense.com/2019/12/where-have-all-the-stock-market-returns-come-from-this-decade/

Even near-term, our Canadian and U.S. stock markets have been a very good place to be to build wealth:

Index Proxy Fund 5-year return 10-year return Since inception
S&P/TSX (Canada) XIC 6.27% 6.77% 6.53% (2001)
S&P 500 (U.S.) IVV 11.65% 13.50% 6.15% (2000)

Source: iShares site, up to December 2019.

I firmly believe this is why you need to stay invested throughout a stock market crash.

What goes down will (eventually) go back up in time.

2.) Learn from history – buy when stocks are on sale

The fact that equity markets have done well over the last decade, let alone generations (despite the occasional very scary bump) should be a reminder that stocks remain a great long-term investment to build wealth. But as we all know by now, scary bumps can and do happen. As in now.

Dow since 1985 to March 14, 2020

This means selling stocks in a panic (also as in now) is probably not a wise move. Ideally, successful investing is about buying something at a low to modest price and watching that asset accumulate in value. That means staying investing like I mentioned above but that also means buying low, selling high (if you need to sell at all). When you sell after a market crash or a major correction you do just the opposite.

You and I both know by now we cannot control market swings. We can control our investing behaviour. We have no idea of when the market will swing nor by how much. We only know that it will.

The best time to buy stocks is when you were going to buy them anyway.

So, I believe, you should consider stock market crashes as a buying opportunity. I mean, a market correction or crash simply signifies stocks are on sale per se. Consider the following and your behaviours associated with these statements:

  • Would you panic sell your house if it dropped 20% in value in a few days or weeks?
  • Would you buy more gas for your car if it dropped 20% at the pumps?
  • Would you buy more groceries and toilet paper if it was on sale during the impending viral apocalypse?

You know your answer and I know yours too.

So why is the stock market different? 

Much has been written about buying in lump sums being somewhat more favourable than any dollar-cost averaging (i.e., buying-in slowly) during a market correction. To be honest, I don’t care what you pick. Just invest. 

As Jonathan Clements, a former Wall Street Journal columnist once said:

“If you want to see the greatest threat to your financial future, go home and take a look in the mirror.”

This implies that successful long-term investing is directed tied to your emotional fortitude and behavioural discipline. While poor investing decisions can and may very well occur from time to time, it’s important to learn from them. It is therefore imperative that investors recognize their behavioural pitfalls before committing to any decisions which can affect their investment goals.

One of my favourite, easy-to-read books on the subject of building wealth is targeted to millennial investors but applies equally to investors of all ages is If You Can. This book is designed for modern attention spans. It’s only 15-minutes of reading and gives you information you need to be a successful investor in a few pages.

You can read an overview of this book and download a FREE copy of it (yes FREE) here. 

3.) Learn from history – continue to improve

How high your returns could be (for a long-term stock market investor) over the next 30+ years is not really up for too much debate – based on market history. A 100% equity portfolio in the broad U.S. stock market is probably going to deliver close to 7% annualized (plus or minus a bit) and likely 3-4% in real returns (after inflation is factored in) in the coming decades.

I can say with more confidence that I will not find myself wealthier if I do not learn from my own investing history and continue to improve upon it over time.

I got a few reader emails over the last few weeks and I thought I would share them before I share my next steps in this current market correction for context – what I’m doing to improve. Emails adapted only slightly for posting. Continue Reading…

Retired Money: the glut of books about Trump and prospects for Boomers’ retirements

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As the yellow highlights show, books about Donald Trump now dominate the New York Times’ non-fiction bestseller lists

As my latest MoneySense Retired Money column recaps in depth, roughly half of the top ten New York Times bestselling non-fiction books are about the Donald Trump presidency. You can access the full column by clicking on the highlighted headline here: How Trump’s policies are affecting my investment choices.

Soon after the 2016 election that brought Trump to power, my financial advisor and I would exchange emails about the latest books: initially biographies and warnings and then in the last year the current glut of books about the actual presidency and the administration.

I’m normally a fan of biographies and love him or hate him, it’s hard to ignore the life of Donald Trump, considering that everything he says or tweets can impact us all. Yes, he may or may not be a threat to the looming Retirement of the baby boom generation of which he is on the leading edge, but his hair-trigger temper and proximity to the nuclear codes gives us something more to fear than merely our financial survival.

Some of the books I mention do give some insights into the implications of this presidency for the global economy and stock markets. Others are mere political diatribes from the left or the right, while still others are more salacious tell-alls. Stormy Daniels, I’m looking at you! (The book is titled Full Disclosure.)

As the column mentions, there are a number of books written by rabid left-wingers who are convinced Trump is a serial liar and a treasonous sellout to Russia president Vladimir Putin, but there are also several written by conservatives and republicans who are more sanguine about it all. In the latter camp I’d include Conrad Black, Ann Coulter and David Frum, plus a few titles from FOX news personalities who are obviously sympathetic with “The President,” as they like to refer to him.

Crazy crazy or Crazy like a fox?  Continue Reading…