Stock markets are giddy with the prospect of a new administration in Washington vowing to slash taxes, deregulate business and plow massive amounts of money into infrastructure projects.
Since Donald Trump was elected U.S. president in early November, the benchmark Dow Jones Industrial Average has advanced 16 per cent. The ripple effect has boosted stock markets around the world, including Canada's S&P/TSX, which has gained 7 per cent.
But the effects of the Trump administration's actions have yet to be seen. Money managers are telling their clients to buckle up for the ride.
"Now we're at the crossroads where reality has to match expectations" says Peter Hodson, CEO of Kitchener, Ont.-based 5I Research. "Certainly things will happen. It's just a question of whether the reality will match what investors have bid up on."
His advice to investors wondering how to ride the Trump bump is to maintain a time-tested strategy: cast your net far and limit risk by diversifying investments across sectors and geographic regions. For Canadians that means breaking away from Canadian equities. Publicly traded Canadian equities account for less than 3 per cent of global equities, and roughly two-thirds of TSX listed companies are financial or commodity related.
"We think that it [Canadian concentration] is kind of foolish in terms of a diversified portfolio, and that makes your risk in a downturn much worse because sectors tend to correct sharper than the market on average," he says.
His other piece of advice: invest often through regular pre-payments. "Don't try to predict what is going to happen. Just be a regular investor on an ongoing basis. There's going to be a correction, or there's going to be a crash every 20 years but if you're continually investing, it changes your psychology a bit and you actually don't care as much," he says.
Investing in the stock market always has risks, but Mr. Hodson says keeping cash on the sidelines waiting for a correction could be riskier for investors who need to increase their savings. "If you're wrong, what's your strategy? Do you buy back after it goes up another 5 per cent or do you buy back after it goes up another 10 per cent – or do you just not do anything and possibly miss a 10-year bull market," he says.
Ryan Bushell, vice-president and portfolio manager at Toronto-based Leon Frazer and Associates is looking beyond the Trump bump to explain what's driving equity markets. He says nearly 10 years of global central-bank stimulus in the wake of the 2008 global financial meltdown is boosting expectations for a strong economic recovery. "It [stimulus] has inflated financial assets, it's inflated real estate, it has inflated bonds and now it's inflating equities," he says.
He doesn't venture to forecast where stocks are heading. His investment objective is to generate consistent returns over the long-term in any market – and with bond yields at rock-bottom, Mr. Bushell says the only way to do that for now is through stocks. "You've got to stay invested and if you have a five-year time horizon, we've never had a negative five-year return. Going back 50 years in the Canadian market, only 3 per cent of five-year returns are negative."
Mr. Bushell generates income through stocks that pay regular dividends and have the potential to increase them. Companies in his portfolio include TransCanada Corp., BCE Inc. and Fortis Inc., which pay out annual dividend yields between 3.5 per cent and 5 per cent. He says even modest dividend growth will compound returns over the long term.
"If we're invested for the year, we're going to get 3 1/2 per cent whether the markets are up down or sideways," he says. "If the stock went nowhere, 10 years from now you would be getting an almost 7-per-cent yield."
Mr. Bushell's portfolio leans toward the defensive side of the market and tends to avoid the high-flying technology sector. But he says that's changing as cash-rich tech companies commit more of their earnings to dividends. One tech company that has already found a home with Leon Frazer is International Business Machines Corp., which pays an annual dividend yield of 3.1 per cent. One of the tech businesses on his radar screen is Apple Inc., which has increased its dividend, so far, to 1.7 per cent.
"Those [tech] businesses may be sustainable at some point but we're not going to buy them until they hit their sustainable level," he says. "At the end of the day, we view the dividend as the beacon of sustainability."
"We are full steam ahead," says Diana Avigdor, portfolio manager and head of trading at Barometer Capital Management Inc. Barometer forecasts the market through a method called quantitative analysis – complex mathematical and statistical models that factor in present data, such as the breadth of the market advance.
"For now, our internal indicators are positive. More and more stocks are participating in the market activity and are in good price patterns, economic data is not disappointing us, and we're coming from a very low bottom," she says.
Barometer sees the best opportunities right now in financials, industrials and technology. Ms. Avigdor sees specific promise in what are termed the "FANG" stocks that have changed the world and are becoming mature businesses – Facebook Inc., Apple Inc., Netflix Inc. and Google Inc. She says maturity for a business brings predictability. "It has broadened out into a more cyclical strength that we can understand better. It's all about businesses."
She says the best thing investors can hope for is a slow and steady stock market advance, fuelled by slow and steady earnings and dividend growth.
"It doesn't need to be a huge rally or blow the lights out. Just steady-eddie dividends," she says.