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Morningstar’s John Rekenthaler published a helpful column outlining the four signs of a stock market bubble. The good news is that the author does not believe investors have crossed over from confident to wildly speculative, so we’re not yet in a full-blown bubble. Unfortunately, however, we’re getting there.

The first bubble condition, low interest rates, is certainly a feature of current market conditions. The column mentions famed economist Hyman Minksy, who believed that low rates and easy money foreshadow asset bubbles.

Emerging technologies is the second characteristic historically associated with a market bubble. Mr. Rekenthaler makes specific reference to Tesla Inc., where he believes investors have ignored any traditional concepts of value. He writes, “Trading at 15 times revenues and 100 times its expected earnings, Tesla is the shiniest example of a stock that has benefited from confidence in the power of scientific advancements.”

“Investor amnesia” is the fourth sign of market excess. This is a condition where a new generation of investors, lured by rapidly climbing stock prices, ignore the market meltdowns of the recent past and become willing to pay any price (in terms of valuation levels like price to earnings ratios) to participate in rallies.

The final aspect of market bubbles is “new math.” The author describes this phenomenon as characterized by “unsustainable valuations, supported by arguments that changing economic conditions require a new form of investment math.”

For me, the most interesting form of new math concerns intangible assets – patents, intellectual property, proprietary software and brand value are a few examples. In the distant past, assets on corporate balance sheets were largely tangible - plants and equipment, for instance, that could be sold in the event of bankruptcy.

Intangible assets have come to dominate S&P 500 balance sheets. In 1985, intangible assets made up 32 per cent of U.S. balance sheets. This climbed to 68 per cent in 1995 and now stands at 84 per cent.

Unprecedented central bank intervention in major economies makes it very difficult to assess where we are in terms of the market cycle. As I’ve noted previously, extraordinarily low inflation-adjusted bond yields justify high price-to-earnings valuations to a great extent. This suggests that investors aren’t overpaying for equities even if valuations are elevated.

Mr. Rekenthaler’s column is worth reading in its entirety, not least because it reminds investors to reduce risk as signs of speculative fervour appear.

-- Scott Barlow, Globe and Mail market strategist

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Stocks to ponder

FirstService Corp. (FSV-T) The stock market loves companies that have been sailing through the pandemic with strong business activity and robust profits. Toronto-based FirstService has joined this elite group, but does the stock’s recent rally have staying power? David Berman shares his thoughts. (for subscribers)

Cargojet Inc. (CJT-T) Shares reached new heights on Tuesday after the overnight air cargo company reported earnings that beat expectations amid soaring growth in e-commerce sales and lofty expectations heading into the holiday shopping season. Analysts are forecasting more gains ahead, as Brenda Bouw reports. (for subscribers)

The Rundown

A six-pack of investing tips to mellow your mind if the U.S. election slams markets

There’s going to be a lot of analysis about the impact on stocks and bonds from the U.S. election. Stocks may bounce around amid continued uncertainty about a winner or future policies regarding things such as taxes and trade. But there are some investing truths that transcend political events and have a much bigger effect on your investing success than elections, even one as important as this. Rob Carrick provides a selection of six of these truths. (for subscribers)

TSX stocks that fell hard in the spring and came back again

COVID crashed into the market this spring and is returning for a second round. It’s only natural for investors to worry that the market may plumb its March lows again. While some concern is warranted, Norman Rothery flips the pessimistic view on its head and seek stocks that fell hard in the spring but came back again. (for subscribers)

Don’t be fooled by earnings ‘beats’ - the profit outlook remains precarious

U.S. finance television likes to tout earnings beats and misses during the quarterly reporting season because it makes corporate profit growth feel more like a sporting event, where every company is either a winner or a loser relative to forecasts. So far, with 371 out of 500 S&P 500 companies having reported, there seems to be a lot to get excited about – earnings are coming in an impressive 17.4 per cent above analyst estimates. But in actual fact, U.S. profits are still weak. Very few sectors have shown significant profit growth – some aren’t even halfway back to 2019 levels. At the same time, the second wave of COVID-19 cases in North America and Europe is threatening the expected 2021 profit recovery. Scott Barlow tells us more. (for subscribers)

Three ways for investors to load up on ETFs without paying any commissions

Recent developments in the world of investing apps have solved a cost problem experienced by ETF investors. Rob Carrick tells us about them. (for subscribers)

Three top stock picks from the CEO of $1.2-billion investment manager GFI

Daniel Goodman isn’t too worried about how the markets will behave after Tuesday’s U.S. presidential election, even if it’s contested for weeks to come. For Mr. Goodman, chief executive officer at GFI Investment Counsel Ltd., investors should buy companies they plan to own for years. Brenda Bouw tells us about three of his top stock picks. (for subscribers)

Others (for subscribers)

Number Cruncher: Seven growth stocks that are reasonably priced

Wednesday’s analyst upgrades and downgrades

Tuesday’s analyst upgrades and downgrade

Globe Advisor

A terrible, horrible, no-good year for quants

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Ask Globe Investor

Question: I started looking at dividend stocks because guaranteed investment certificates pay next to nothing. I understand that you hold stocks and reinvest the dividends, but do you ever sell them? For instance, I own Algonquin Power & Utilities Corp. (AQN) and Bank of Montreal (BMO), which are up about 28 per cent and 33 per cent, respectively, since I bought them. Given that much upswing, wouldn’t it be better to sell and take the large gain and then get back in again at a lower price (cross fingers) in four, six or eight months' time? It seems strange to not grab this big increase as it represents many years of dividend value.

Answer: I occasionally sell stocks, but only when the business has taken a fundamental turn for the worse. For the vast majority of stocks I own, I buy and hold and don’t try to sell at one price and get back in at a lower price, which is what you are suggesting.

If you knew that Algonquin Power was going to fall 10 per cent or 20 per cent over the next few months, then selling now and buying back later would make perfect sense. But you don’t know that. Nor do you know that Bank of Montreal – which is already down more than 20 per cent from its January high – will fall further. What if you’re wrong and both stocks rise?

You seem to be motivated by a desire to protect your unrealized gains, but the prices you paid for AQN and BMO are irrelevant. That’s history.

The only question you should be asking now is whether you like the future prospects of these companies enough to continue to hold them. Instead of trying to guess where AQN and BMO will be trading in five months, think about where they will be in five years. Both companies have a long history of growing their earnings and dividends and, while the coronavirus has created short-term uncertainty, as an owner of both stocks I suggest that you focus on the long term instead of engaging in a short-term trading strategy that may or may not work out.

--John Heinzl

What’s up in the days ahead

Check back frequently with for the latest on what markets are doing in the wake of the U.S. election - and for advice on how investors should react.

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Compiled by Globe Investor Staff

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