Ottawa Investment Advisor John Bruce

October 2017 Update

October 20, 2017

It’s been a good run for the U.S. stock markets. The S&P Index is up 11%, the NASDAQ is up 19% and the Dow Jones Industrial Average is up 14% since January, hitting new record highs daily. The advancement has been almost a straight line, with stock price volatility the lowest it has ever been.

I have seen this happen many times during the past 30 years, and eventually something comes along that knocks the wind out of the sails and then we see it crumple and collapse, leaving us wondering how it could happen so fast. In my business there is an expression that states, “Bulls get fed, bears get fed but pigs get slaughtered.” This bull is well fed and it is time to keep our profits out of harm’s way.

I don’t believe that the stock market is a bubble ready to burst. Bubbles are created by speculation, when investors buy a stock simply because its price has risen strongly in the recent past, and buy in, fearing that they will miss the run up.

I am not worried about the broader economy failing and earnings slumping leading to a selloff in all the markets. Every recession that we have seen followed a big downturn in the market.

The U.S. economy is in good shape. Companies have lowered debt and profits have increased in a broad range of industries.  The global economy is back on track and the U.S. dollar came down in value in from its recent highs in relationship to foreign currencies.

The stock market is overvalued. I am concerned about this despite the projections by the talking heads I listen to on business television. That is, stock prices are much too high despite the good outlook for corporate earnings. The only other time in the past 50 years that equity prices have been so highly priced was during the tech bubble. They are actually even more overpriced now than prior to the 1987 market crash.

Minimum wage is rising everywhere you look in  U.S. and Canada. This will result in a squeeze on corporate profits and slower growth for many companies as they pay existing employees more to keep them.  It may create an even more expensive hiring cost to increase employee head counts. Businesses will respond by raising prices more quickly, but they won’t be able to pass on all of their higher costs to customers. Margins will come under pressure.

Intensifying wage and price pressures means that the Governments will need to raise short-term interest rates and in time, longer-term rates to keep the economy from overheating. Higher rates will also attract fixed income investors like the growing ranks of seniors that are now retiring and  baby boomers.  They may very well sell high flying stocks to move to more safe bonds now that rates are starting to move higher and that would contribute to a flat or declining stock market.

No one can tell with total accuracy when or how bad a decline will be, but to operate in a euphoric state and ignore the possibility is a folly. It is not a matter of if it happens; it is a matter of when.

So what do we do?

We prepare! With our more liquid stocks that trade in high volumes daily we can effectively place orders to sell automatically if the price declines to a level or point that we decide is our “safe exit price”. Provided that there is not an enormous amount of selling going on, we should be able to get out close to-if not at-the price we want. For less liquid stocks we might wish to consider selling some now and keeping our powder dry, so to speak, for when prices come down we are prepared to move in and buy some bargains.

With our mutual funds, if you are on a systematic purchase plan for the longer run, this will work well for you. When prices come down you will be buying more of the funds that you want at a lower cost than when they were higher. If you are not contributing regularly to invest, you need to ask yourself why? You pay so many bills on time and regularly, why are you not including your retirement funding as a bill too? Call myself or my assistant Brian to set this up if you have not already done so. Don’t procrastinate, just do it.

Regardless, if the market as a whole is over heated, there is always some company that is doing better than others, has a better future, and is attracting attention. We will still seek out value and invest. When the market goes down it is like a tide that takes all ships. It takes the good and the bad. So be prepared, don’t be surprised. This is the stock market and we have seen it time after time.

The great news here is that one thing is truthful regarding the ups and downs of the equity markets…they always recover. and they always go higher in time. The key is to make the most of these moves and prosper over the long-term.

If you have any questions, call me directly at 613-491-3344 or toll free at 866-860-4190.

Hopefully you are enjoying this beautiful fall and I wish you continued prosperity.
John S. Bruce
Senior Investment Advisor

The information in this letter is derived from various sources, including CI Investments, Signature Global Asset Management, Cambridge Global Asset Management, Globe and Mail, National Post, Bloomberg, Yahoo Canada Finance, and Trading Economics. Index information was provided by TD Newcrest and PC Bond, and all quoted equity index returns are on a total return basis (including dividends). This material is provided for general information and is subject to change without notice. Every effort has been made to compile this material from reliable sources; however, no warranty can be made as to its accuracy or completeness. Before acting on any of the above, please contact me for individual financial advice based on your personal circumstances.

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