Timing the markets

How high will it go before we see a correction?

March 9, 2017

The Dow Jones is at 21,000, and rising. It feels like yesterday that it hit 20,000… Wait a minute… It was January 25th, a little over one month ago. Over the last few months, I have entertained a lot of questions from clients asking if it is time to take profits with the markets sitting at record highs. I ask the question to them, how high will it go before we see a correction?

The market continues to soar

The answer is unknown and that is where the risk lies. Before the Dow Jones broke through 20,000, which was a psychological level more than a technical level, many experts suggested that the stock market was due for a correction. The North American markets have been on an upward trajectory since the Brexit vote last summer, with very little negativity. After the U.S. election, the market has continued to soar.

Brexit & the U.S. election

So let’s look at the events of Brexit and the U.S. election. If someone felt that the Brexit no vote was going to lead to a market collapse and sold the day after the vote, June 24th, the Dow Jones closed at 17,400, S&P500 – 2,037, and the TSX – 13,891. What about the U.S. election? The day before the election, the Dow Jones closed at 18,259, S&P 500 – 2,131, and the TSX – 14,652. As I write this, the Dow Jones is at 21,122, the S&P 500 – 2,396 and the TSX – 15,613. For those waiting for a pull back, where will the markets have to get to before they buy back in?

Market momentum

The dangers of trying to time the markets can be costly. Market momentum in either direction sometimes has a mind of its own and, no matter what the experts say, momentum will move a market in a certain direction much longer than most people anticipate. Another example of this in recent years was the collapse of oil prices. As oil moved from over $100 a barrel to below $40, many experts would say oil will bottom out at … No one knew. Some very well respected financial management firms said oil might go as low as $20 a barrel. Bottom line? When oil bottomed out and started moving back up again, there was no apparent reason. There was no magic bullet, or announcement. Momentum stopped on the downward spiral and began to move higher.

Preparing your portfolio

A very large topic of conversation in the financial world is the global bond market. An argument can be made that the bond market has been in a bull market since 1981 and that bull market ended last summer. Further evidence to the bond bull market ending has been the continual increase in government bond yields since the U.S. election.

That is over 35 years with a few reprieves of a market with interest rates continually moving lower, to where in the U.S. rates basically hit 0%. If we are now moving higher, this will change the investment landscape.

Your portfolio must be prepared for this new regime.

The trend is your friend

Many people have heard the term the trend is your friend. This has been very true in the past, is today, and I assume will be in the future. Guessing – and I do mean guessing – where market a will be in the short term is literally impossible, but the trend can give you a guide or at least a road map of where we have been and where we have come from.

The macroeconomic picture

When I am advising my clients, I like to look at the macroeconomic picture. What is macroeconomics? It is the economics concerned with large-scale or general economic factors, such as interest rates and national productivity. What is the economic environment in North America? The U.S. is the largest economy in the world and usually, as goes the U.S., so goes the rest of us. Today, the U.S. economy is continuing to strengthen and, with a Republican mandate, it should be pro-business. So, if and when there is a market correction, it should be looked at as an opportunity to buy.

Time for a conversation over a cup of coffee?

Eventually, the U.S. economy will begin to slow and eventually another recession will happen. It is inevitable, but at this time, there is no sign of that happening. So until momentum swings the other way and the trend line turns negative, I am favouring equities over other asset classes. So do you buy today with the market at all-time highs? Well, for that answer, you’ll have to take me out for coffee…

Geoff Funke, Senior Wealth Advisor, Scotia Wealth Management, 604.535.4721.