The knock on stocks right now is that everyone's so bullish.
A year ago, the markets were in virtual freefall. Today, they're unstoppable. Here are five reasons to be cautious about buying in:
1.) The economic argument: The latest market rally was triggered in part by news that Australia's economy has healed enough from the recession to prompt an increase in interest rates. Australia's economy looks a lot like ours in that it's resource-based, so there is some cause for optimism here. But the case for a global economic rebound would be far stronger if it were the United States or China raising rates.
2.) Those persistent, persuasive bears: Uber-bear David Rosenberg, chief economist and strategist at Gluskin Sheff, said in his daily commentary Tuesday that, “The stock market right now is so over-valued today…that it isn't even funny.” Economist Nouriel Roubini, who foresaw the global financial crisis, says the global recession is ending. However, he sees a “weak, anemic, sub-par recovery.” He also says stocks have risen too much, too soon.
3.) It's October: A guide to seasonal investing called Thackray's 2009 Investor's Guide says October is only the ninth worst month for the Canadian stock market, and that returns have been positive in 15 of the past 24 years. Still, October can be nasty. The crash of 1929 happened in October, and so did Black Monday in 1987. And then there was last year. Last Oct. 27, for example, the S&P/TSX composite fell 8.1 per cent in a single day.
4.) The bond market: Bond prices fell alongside the latest stock market rally, but they've generally held up better than you might expect during the past several months of soaring share prices. One way to read this is as a sign that some investors aren't convinced the economy has been repaired.
5.) Common sense: The Canadian stock market has surged 51 per cent from its low in March. Granted, the market fell an absurd amount, and there are reasons for the rebound in that the financial crisis seems to be easing. But given all the harsh surprises of the past year, it seems prudent to prepare for at least some sort of a pullback.
As October began, it looked like stocks were going to deliver the correction many had been waiting for. Now, it's onward and upward. Be cautious.
