Why stock markets may be headed for a multi-year bull run.

Scenario playing out like end of 2009

Pundits often fail to see the forest for the trees when it comes to the markets, allowing fear to take root because of nearterm moves.

While acknowledging that there is always the potential for speed bumps, we think today’s scenario is playing out very much like it did at the end of 2009, with a very promising outlook for the next five to 10 years.

In both cases, there has been a full recovery from the lows. Then, despite many calls for another correction, U. S. equity markets went on to gain 17 per cent in 2010 and continued to rally at a compounded annual growth rate of 12.5 per cent over the next decade.

Now, things are a bit different, but we nevertheless think both the economy and markets are more coiled than ever before.

In particular, there is a record- setting amount of household savings that has yet to be deployed into the economy and massive fiscal programs still in the early stages of deployment.

Combine this with central banks intent on keeping interest rates at ultra- low levels after having learned their lessons from raising them too quickly in 2016 and you have the perfect scenario supporting a largescale reflation of global economies.

There is one big caveat and that is that the current crop of vaccines do the trick and help the economy return to pre- COVID levels.

If they do, we think there will be significant ramifications for those currently hiding out in cash or fixed- income securities, and more so for those who need to draw off of their portfolios to fund their lifestyle requirements. Let’s walk through an example why.

Recently, I came across a great chart from the CIO Office of National Bank Financial. In it, they showed the level of income earned by investing $ 100,000 in a one- year GIC compared to the income needed to beat inflation.

Interestingly, since 2002 the level of inflation surpassed the income generated by the GIC as much as $1,000 to $2,000 a year.

To add some further perspective, over the same aforementioned period, we calculate that a $100,000 investment in the U. S. equity market would have grown to nearly $ 300,000 net of inflation compared to approximately $ 87,000 net when placed in 1-year GICS.

Taking it a step further, assume you require $ 2,000 per year from this pool of capital to help fund your retirement lifestyle. Under the GIC allocation we calculate that the initial $ 100,000 investment would have been halved since then down to $ 49,000 compared to a doubling under the S&P 500 allocation to approximately $215,000.

Now ask yourself, what happens if interest rates remain at ultra- low levels due to extended quantitative easing while inflation levels are allowed to rise uninhibited thanks to record- setting fiscal spending combined with the deployment of pent- up household and corporate savings in a post- COVID-19 world?

As this net inflation gap widens it could destroy a person’s savings especially if they depend on them to fund their retirement simply by the compounding effect of this gap.

Perhaps this could even accelerate the rotation out of cash, short- term and long- term bonds into equities creating even more damage while providing further support for those who allocated to equities from the onset.

For those wondering where to reposition if such a scenario plays out, here is where it gets interesting.

Over the five- year period from 2002 to 2007, when inflation got as high as 4.1 per cent, the S& P 500 gained an annual six per cent ( three per cent inflation adjusted), while the S& P TSX 60 gained an annual 12.5 per cent ( 9.3 per cent inflation adjusted), MSCI EAFE gained an annual 14.2 per cent ( 10.9 per cent inflation adjusted) and the emerging markets gained an annual 33.6 per cent ( 29.8 per cent inflation adjusted).

Perhaps now the snapback in those inflationary segments of the market over the past three weeks makes some sense. This certainly doesn’t mean there won’t volatility ahead, but perhaps it is worth using such periods to inflation- proof your portfolio especially if you depend on it in your retirement. Martin Pelletier, CFA, is a portfolio manager at WellingtonAltus Private Counsel Inc. ( formerly Trivest Wealth Counsel Ltd.), a private client and institutional investment firm specializing in discretionary risk- managed portfolios, investment audit/oversight and advanced tax and estate planning.