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Everyone would like the world to go back to normal. The problem is trying to figure out what normalcy looks like after two years of precedent-busting interventions by governments and central banks.

The one thing we know for sure is that normalcy doesn’t involve a massive land war in Europe or a still-mutating global pandemic. However, even if magical solutions were to solve both those horrors overnight, we would still be a long way from business as usual.

Near-zero interest rates and gushers of government stimulus have taken key parts of the economy on wild rides. Home prices and corporate profits have both shot skyward, shattering expectations in the process.

Investors should remember how abnormal all this is when bracing for what comes next. In the past, the smart bet has been to assume that central bankers will ride to investors’ rescue on any sign of market weakness by cutting interest rates. But right now, when central banks are focused on hiking rates to fight inflation, the usual rescue measures don’t apply. Getting back to normal is going to be a bumpy process.

Consider surging home prices. While Canadians naturally focus on the situation in their own neighbourhoods, the boom in property values has actually been a worldwide phenomenon. Since the start of the pandemic, home prices have risen in almost every country, according to the International Monetary Fund.

Look at four very different nations: Canada, the United States, Australia and South Korea. Between spring 2019 and the third quarter of last year, real residential property prices in each of these jurisdictions rocketed upward by anywhere from 15.7 per cent (South Korea) to 23.3 per cent (Australia), according to the Bank for International Settlements. (Remember, these are real prices, so the figures are after deducting inflation.)

The widespread nature of this sudden boom suggests it was not the result of anything specific to any single country. More likely, it reflected global factors such as tumbling interest rates, the sudden shift to remote working arrangements, as well as shortages of building materials.

So what would returning to normal look like for home prices? If interest rates rise as expected, people trickle back to the office and supply chains deliver more building materials, the property mania of the past two years could stop rather abruptly. Global home prices could stagnate for a while. Or they could even slump. Either scenario would be a dramatic change from the past two years.

Shareholders could be in for an equally rocky ride. Just as stimulus payments and rock-bottom interest rates helped create a house-buying boom in the middle of a pandemic, they also created a boom in corporate profits, which then fed into big stock market gains.

Earnings advanced by more than 50 per cent in 2021 for both the S&P/TSX Composite and the S&P 500, according to Refinitiv. Admittedly, part of this profit bonanza was simply a bounce-back from the early months of the pandemic. Still, the jump was remarkable – and unsustainable.

Analysts are forecasting only modest earnings growth for this year, probably in the high single digits. But don’t be shocked if reality comes up a bit short of even those restrained expectations. Citibank’s global earnings revision index, which measures the net upgrades and downgrades to corporate earnings forecasts, recently turned negative for the first time since September, 2020. That indicates more companies are cutting forecasts than raising them.

Jamie Fahy, a global macro strategist at Citibank, acknowledged in a note this week that supports for risky assets such as stocks are being eroded. As central banks raise interest rates, the outlook for stocks now depends completely on what companies can deliver in the way of healthy earnings growth. “Removing this support could leave some indices floating on air,” he wrote, rather ominously.

To be sure, not all is lost. The sturdiest reason for optimism is simply the widespread pessimism among most investors. So much bad news is already priced into the market that it would not take much to turn sentiment around. Mr. Fahy notes that when indicators of investor sentiment turn as uber-bearish as they are now, future returns are usually positive.

It could work out that way this time around. The latest numbers show Canada’s economy grew at a sizzling 6.7-per-cent annualized pace in the fourth quarter of last year. As Stephen Brown at Capital Economics noted this week, Canada has only tiny trade links to Russia and Ukraine – the two countries together account for a mere 0.3 per cent of our imports and an even more microscopic 0.1 per cent of our total goods exports. If anything, Canada stands to benefit from disruptions to oil and wheat exports from Russia and Ukraine.

But inflation remains a threat. Higher oil prices could keep Canada’s inflation rate above 4 per cent this year. If so, the Bank of Canada will have little choice but to keep raising interest rates. That would not be good news for stocks, bonds and home prices.

So how should investors conduct themselves in the middle of all this chaos? The most practical advice is to make sure that any investment you own is something you’re comfortable holding for the long haul, through any volatility that may lie ahead. However one defines normalcy these days, it is still a long way away.

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