Too much up, and not enough down.
That’s the problem with the stock market today, believe it or not. Investing pros are worried that after a five-year surge to new highs, the stock markets are going to fall.
They will fall, and it will be ugly. Expect screaming headlines and big play on TV newscasts. It’s really nice of investment people to warn us about this outcome, which would be as surprising as night following day and the Toronto Maple Leafs not delivering next season.
Investment types should be telling investors to chill out and not worry about market fluctuations. Instead, by fretting about a market decline and investor complacency, the experts are sending the wrong message.
What investors need to hear right now is that a correction would be normal, and maybe even welcome as a tension reliever. Prepare for it by looking at your portfolio and making small adjustments. (check this recent Portfolio Strategy column for ideas.)
Stock prices these days are above average – no bargain, but not stupidly expensive. What’s worrying the experts is the fact that the markets have put together an unusually long streak of drama-free gains. In other words, too much up and not enough down.
Especially irksome to stressed-out market watchers is that stocks have plodded higher despite friction between Russia and Ukraine, a flare-up of violence in Iraq and conflicting signals about whether the North American economy is gaining momentum or just barely growing.
One of these issues may well trigger the next stock market correction, or it could well be something as yet unforeseen. But what does it really matter? All financial assets give back some of their gains periodically – if you can’t accept that, stay home.
The sense of foreboding about stocks may be a hangover from the financial crisis that began about six years ago. The stock markets are one of the few segments of the global financial system to have bounced back completely from those days. But stock markets are supposed to be forward-looking, which means anticipating events and pricing them in before they actually happen.
Burned in 2008, market strategists wonder if stocks are propelled today by misplaced optimism. But that’s a feature of every mature bull market – investors always get ahead of themselves.
The subtext of a lot of commentary about individual investors is that they’re passive know-nothings – jellyfish riding alternating waves of fear and greed. With interest rates stuck near historic lows, Finance Minister Joe Oliver, an ex-Bay Streeter, warned last week that it appears yield-hungry investors are overlooking risk in their decision-making.
But if you use mutual fund sales as a proxy for investor behaviour, then you’ll see investors acting more or less rationally. Far and away the most popular category over the first five months of the year is balanced funds, with total net sales rising to $26-billion from $23.3-billion in the year-earlier period. A lot of these funds are overpriced and unworthy, but at least investors are taking a diversified approach that blends stocks and bonds. They’ll have bonds ready to prop up their portfolios when stocks tank.
Sales of equity funds have surged in 2014, which means investors are buying into a market where the best gains of this cycle are behind us. But if they hold on to their equity funds, they’ll be fine. Someone who bought an exchange-traded fund tracking the S&P 500 index in late June, 2008, just before the market crash, would be sitting on a cumulative gain of about 50 per cent right now, or better than 7.4 per cent on an annualized basis. Long term, that’s in line with what you might expect from stocks.
The best strategy for most investors, as ever, can be summed up in two points. One, buy and hold rather than guessing when to get in and out of the market. Two, don’t buy unless you can hold for at least five years, and preferably 10. The stock market is no place for the house down-payment fund you plan to tap in the next year or two.
Finally, let’s get real about complacency. If it’s a problem anywhere, it’s in the housing market, not the stock market. A lot of us have seen stocks tank, but not housing.
Globe app users click for chart showing the S&P/TSX Total Return Index.