It was only a year ago, but it feels like a previous life.
June 18, 2008, was a cool, wet day outside the Toronto Stock Exchange, but inside the heat was cranked up to unprecedented (and, as it turned out, unsustainable) highs.
The S&P/TSX composite index closed at a record 15,073.13, fuelled by sky-high prices for oil and other key commodities.
Despite mounting credit market troubles and a U.S. economy that, as we now know, was already in recession, markets were riding an optimism hinged on "decoupling" - the notion that the mortgage-related woes would be largely isolated in the U.S. market and much of the rest of the world could maintain healthy growth.
They know better now, after a tumultuous, confusing and often painful year of crumbling worldwide markets, toxic financial system contagions, sweeping government policy interventions and a deep global economic slowdown.
During that time, we've been on a dizzying roller-coaster ride: Down 40 per cent (September-November), up 23 per cent (November-January), down 30 per cent (January-March), up 42 per cent (March-June).
The past year has rewritten some long-standing rules that many investors and market strategists had come to rely on, and humbled many who had previously thought they knew all the tricks to safely navigating dangerous market waters.
We asked three Canadian market veterans - Nick Majendie of Canaccord Capital Inc., Robert McWhirter of Selective Asset Management Inc. and John Johnston of Harbour Group at RBC Dominion Securities - to tell us what they learned from the past year, and how they're applying those lessons to their strategies.
Nick Majendie, senior vice-president and portfolio strategist, Canaccord Capital Inc.
Biggest lesson from the past year:
"Probably the biggest lesson is how the global economy is so intertwined with the financial system."
He said he had bought into the global decoupling argument, believing the U.S. banking crisis wouldn't infect the broader global growth story. "That was wishful thinking."
Best call:
"We were correct in worrying about excess leverage," he said, a worry that prompted him to go overweight gold stocks.
Worst call:
"Believing that the decoupling theory would work," which prompted him to stick with resource stocks too long.
How has your strategy changed?
"I certainly think you have to be more careful, more conservative and concentrate on quality."
He said that with the massive U.S. government deficit likely to pose a burden on growth for the next several years, his focus going forward will be on income-producing bonds to make up for the lack of growth, and on companies with healthy balance sheets.
Best bet in the next 12 months:
Golds (still), citing strong commodity prices and declining costs. "We see margin expansion there."
Worst bet in the next 12 months:
Financials. "It's a good sign that they've rebounded quickly. But I think valuations in that sector are presuming that the world will unfold pretty nicely from here. There's risk there."
Robert McWhirter, president and portfolio manager, Selective Asset Management Inc.
Biggest lesson from the past year:
That uncorrelated asset classes (ones that move up as others move down, and vice versa) are of little use when a credit freeze-up forces investors to liquidate holdings across the board, as happened last fall.
"Uncorrelated assets all moved the same way," he said. "Everybody wanted out at the same time. All assets went down."
Best call:
Moving as much as 70 per cent of his funds' assets into cash, which turned out to be about the only safe strategy. "When you look at last September-October, all the different strategies in the equity market were challenged."
Worst call:
Bombardier Inc. He bought the stock based on earnings estimates that, like many forecasts last fall, badly misread the severity of the economic slump.
How has your strategy changed?
It hasn't. He's been playing defence since the fourth quarter of 2007, when U.S. unemployment rose markedly, and hasn't yet seen sufficient reason to change. (He still has 21 per cent of his assets in cash.) "There are still lots of challenges," he said. "We prefer to be late, but correct."
Best bet in the next 12 months:
Gold stocks. "Continued concerns of a declining U.S. dollar and potential rising inflation might move gold through $1,000 [U.S. an ounce]and drive earnings higher."
Worst bet in the next 12 months:
Forest products, particularly building materials. "Commercial real estate is now slowing down, and we don't expect a dramatic increase in new U.S. home construction."
John Johnston, chief strategist, Harbour Group, RBC Dominion Securities
Biggest lesson from the past year:
"It's more a reminder of the relentless nature of the business cycle," he said. "We haven't solved the business cycle. You need a plan that is prudent - that protects you from the downside."
He added that the downturn also established that diversifying your portfolio geographically "is not really diversification. [Global equity markets]are correlated."
Best call:
Getting into corporate bonds early. "When you looked at the [yield]spread, it was getting very close to levels we hadn't seen since 1932. It didn't seem to be a fair comparison."
Worst call:
"Underestimating the fallout from Lehman Brothers." He said the "massive disruptions" caused by Lehman's collapse meant that his mild-recession defensive strategy wasn't nearly defensive enough.
How has your strategy changed?
"Twelve months ago, we were firmly in the recession camp. We were more defensive. Now, our strategy is becoming more offensive."
Best bet in the next 12 months:
A "gradual" return of cyclical stocks, such as energy, materials, techs and industrials. He also likes the Canadian stock market in general, as the global economy recovers and raw material demand returns. "The story I'm telling is very favourable for the Canadian dollar. So, you want to be overweight the Canadian market, simply due to currency risk."
Worst bet in the next 12 months:
Traditional defensive sectors. "I'm inclined to be underweight health and utilities."
David Parkinson