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What a glum bunch we are. Ask consumers or mom-and-pop investors or professional money managers how they’re feeling and the answer sounds like a country and western lament.

Ordinarily, this level of pervasive economic dread would have some investors licking their chops. Contrarians always argue the best time to buy is when everyone else is miserable. The fearless bargain-hunters who bought stocks in early 2009, during the darkest days of the financial crisis, or in early 2020, as COVID-19 was ripping its way across the world, enjoyed spectacular returns.

Could the same thing be true now? Maybe, but it’s important to look a bit closer and distinguish between a market that has simply become a bit cheaper and a market that is worth embracing wholeheartedly.

On the first score, anyone can see that, yes, stocks are cheaper than they once were. The S&P/TSX Composite Index of Canadian stocks has lost 8.9 per cent since the start of the year, the S&P 500 Index of large U.S. stocks has slid 22.5 per cent. If you’re comparing stocks today with stocks a year ago, they offer better value.

This relative cheapness has sparked a flurry of deal-making in the United States. Johnson & Johnson JNJ-N, the pharmaceuticals titan, has agreed to buy cardiovascular-technology group Abiomed Inc. for US$16.6-billion. Blackstone Inc., the giant investment company, is snapping up a majority stake in Emerson Electric Co.’s climate-technologies division in a deal that values the unit at US$14-billion. Meanwhile, the grocer Kroger Co. is buying rival Albertsons Cos. Inc. for US$24.6-billion.

You can count these deals as encouraging evidence some smart people are seeing pockets of value in today’s market. The problem is that what giant companies are doing is often a bad guide to what you should do.

What is the stock market and how does it work?

The huge businesses behind today’s megadeals want to make strategic purchases to hold for many years to come. In many cases, they are counting on restructuring the companies they acquire or folding them into their existing operations.

For individual investors, the situation is different. Stocks as a whole are cheaper but not exactly cheap. While today’s share prices may seem reasonable in relation to corporate earnings, their apparent cheapness hides the fact that companies’ earnings soared over the pandemic.

Maybe these soaring pandemic earnings reflected a spontaneous outburst of managerial genius. More likely, they were the happy result of locked-down consumers spending wads of stimulus cash. If so, you have to wonder how much room corporate earnings have to grow over the next couple of years as the pandemic sugar-high wears off. If earnings were to revert to their prepandemic trend, the fall back to normality could hurt.

Yet another source of potential pain is interest rates. Stocks had a good October largely because central banks started hinting they were prepared to ease up on jumbo-sized hikes in rates. Many investors insisted on seeing this as a sign that policy makers were ready to pause or even reverse rate hikes.

That was a willful misreading. As Federal Reserve chair Jerome Powell made clear this week, central banks are simply at a point where they are moving more cautiously. The direction of interest rates is still up. The only change is that coming hikes will be a bit smaller in size. Maybe.

For now, we are stuck in an odd moment in economic time. On the one hand, jobs markets in Canada and the U.S. are red hot and many job seekers can take their choice of positions. On the other hand, inflation shows few signs of abating and interest rates are ticking relentlessly higher.

The overall mood is one of glum resignation. The Conference Board of Canada’s Index of Consumer Confidence is plummeting. The American Association of Individual Investors has been registering abnormally high levels of pessimism among its members (although there was a substantial drop in gloom this week). The most recent Bank of America survey of large money managers shows a record number of them expect a weaker economy over the next year.

To some investors, the dour mood may resemble the panicked pessimism that prevailed at market lows in 2008 and 2020. But there are a couple of key differences.

In both those past cases, policy makers rushed to the rescue by chopping interest rates and unleashing stimulus programs to jolt the economy back into action. These days, they are doing the exact opposite – they are raising rates and cutting back on government spending to slow an overheated jobs market and lower inflationary pressures.

Moreover, there are few signs of panic. For all their glumness, investors aren’t indiscriminately dumping their holdings. The total amount invested in mutual funds and exchange-traded funds has declined by less than 4 per cent over the past year, according to the most recent figures from the Investment Funds Institute of Canada. It is tough to argue securities are hugely cheap when no one has really started selling them yet.

When will the situation get more interesting for bargain hunters? When inflation starts sliding in earnest and central banks stop administering interest rate pain. Or, alternatively, when there is a whiff of panic in the air. Until then, patience is likely to be your most valuable asset.

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