New year promises prosperity
With the new year here, many are wondering what 2018 will bring for the investment markets. Is it time to sell your stocks and go to cash? Should you be buying gold? Or bitcoin? This current bull market is nearing the nine-year mark and is now the second longest bull market on record.
A bull market is defined as any period without a drop of at least 20 per cent.
But many valuation metrics show the hot streak could easily continue for at least a few more years.
Looking at the Standards & Poor 500, the current trailing 10-year annual return, which stretches back to before the 2008 crash, is roughly 7.5 per year.
At previous bull market peaks, this 10-year annual pace has routinely been about 15 per cent per year.
Although growth has been good, it hasn’t been too excessive.
And while the stock valuations are fair or full, most would agree that they are not yet overvalued.
The global economy is in a synchronized global growth phase right now which means we’re not dependent on any one country or region to carry global growth.
As well, being spread out means it’s more sustainable and this is why we’re seeing unusually low volatility right now.
Previous stragglers like Japan and Europe are growing at above average rates right now and developing countries are showing more stability.
In fact, there are very few economies struggling right now at all and globally we’re in a real sweet spot for economic growth. So, what does all of this mean for 2018? We are expecting the low inflationary pressure and synchronized global progress to produce continued economic growth for at least the next 12 months.
With that in mind, equities will likely continue to outperform fixed income holdings and those willing to take more risk will continue to be rewarded.
On the topic of risk, however, it’s important to remember the favourable economic environment we’re experiencing won’t last forever.
A major world event such as an escalation in Korea could easily derail things.
Investing in crypto-currencies such as bitcoin could provide quick returns but could also be a quick way to lose everything.
There is nothing backing these crypto-currencies, so their prices are based purely on speculation.
The Canadian markets carry particular risk due to the housing markets, NAFTA negotiations, a struggling economy and high consumer debt loads.
And as I’ve written about before, most Canadians are far too heavily weighted in domestic stocks which means they’re over-exposed to these risks.
Canada represents roughly three per cent of the global markets, so if you’re holding more than three per cent of your portfolio in Canadian stocks, make sure you understand why and feel strong in your conviction. So, what should you do? If your portfolio already holds a global and multi-sector, well-diversified mix of asset classes and meets your long-term risk tolerance and income needs, you probably shouldn’t change a thing.
2018 is looking to be another year of growth at this point and you should make sure that you’re along for the ride.
Happy New Year to all of you and I wish you all a healthy and prosperous 2018.