The bull

There’s new moaning over StatsCan data showing 60% of Canadians have more debt than savings. The level of disposable income is also a disaster.

Some folks blame this on inflation, interest rates, politicians or fate. But in Canada – where the home ownership rate is 66.5% (down from 69% in 2011) the reason is simple. It’s real estate. The majority of us little beavs believe reaching beyond our grasp for a house is the best possible financial choice.

But, wait. Is that so? Did that big Covid-era housing gush melt everyone’s brain? How has real estate stacked up against the stock market over the last 70 years? Or inflation?

Here are some stats. US, of course (we seem to be bad at counting), but they tell a distinct story (and remember Americans have the advantages of locking up mortgage rates for 30 years and enjoying tax-free gains along with deducting loan interest). In almost every decade, stocks beat houses. So while, yes, you get to live in real estate, from the standpoint of financial performance, equities rule.

This brings us to the last few days, and the bull market now raging on Wall Street. Hopefully in your B&D portfolio you have exposure to it.

Last Friday the S&P 500 crossed into record territory. Already it had achieved bull status (20% above its October ’22 low), so last week’s ascent was further evidence. The index is now 35% past its dankest moment when the Fed was jacking rates. Then, Monday, the Dow flew ovrer the 38,000 levels for the first time. Investors are stoked that 2024 will bring cheaper rates, no recession, more consumer spending, robust employment and higher corporate earnings. The soft landing.

So in 2023, as real estate in Canada (and the States) languished with realtors discovering food banks and learning to darn socks, the S&P roared ahead 24%. The tech-heavy Nasdaq exploded by fifty per cent. The Magnificent Seven stocks (Apple, Amazon, Alphabet, Microsoft, Meta, Nvidia, Tesla) levitated ever higher as it became clear AI will change human life, just as the Internet did.

The bull run is here. Investors who ignored all the doomer talk of the last couple of years and stuck with their portfolios, have done well. Canadians who mortgaged themselves to the gills and then watched home equity dissipate have paid a price. Now six in ten of us owe more than we have saved – by a huge margin. It may take these people decades to crawl out into the financial sunshine. Many will never make it.

But hold on. Why did stocks go up? And why can’t they crash just as fast?

More than anything – regional wars, Trump, the climate, Swifties – markets are impacted by monetary policy. What the Fed does is paramount. So post-Covid inflation that infected the industrialized world (no, Trudeau did not cause it) resulted in an historic tightening cycle, which sent investors fleeing for the exits fearing recession and tumbling earnings.

Now US inflation has gone from over 9% to just over 3%. That’s a win. Unemployment has not spiked. Another win. No recession (multiple quarters of negative growth). More winning. Meanwhile AI has exploded, consumer sentiment has improved and wage growth has outpaced the cost of living. The expectation is that the Fed (and our Bank of Canada) has ended rate hikes and the price of money will decline. Maybe in April. Maybe June. Maybe 1% by Christmas. Maybe 1.5%. Dunno exactly.But it will happen.

Corporate earnings will expand. The economy won’t tank. And US presidential election years have traditionally been strong ones for equities. So despite Gaza, Ukraine, Houthis, Putin and Trump, investors are stoked. Especially in the US, where 60% of Americans have direct exposure to stocks through their 401k plans (the equivalent of RRSPs, which we love to stuff with brain-dead GICs).

It’s worth noting more than $11 trillion is invested in American equities. What happens with that market pretty much dictates financial conditions across the western world. Every investor in Canada should have about a fifth of their portfolio’s growth assets in American equity funds, along with a quarter of their holdings denominated in US currency. It’s a policy we’ve suggested for years. Hopefully you followed it.

Now, could this all tumble down?

Sure. Nothing is guaranteed and volatility is a hallmark of the times we inhabit. That’s exactly why a one-asset strategy (one house, one asset class, one stock) doesn’t work. (Unlike the one-spouse strategy.)

Markets have shrugged off war, political turmoil, trade disruption, climate change and loonies running countries like North Korea. But they will probably not dismiss a reversal in inflation – which could bring a rate surprise, followed by an economic contraction just as President Haley begins her term.

So, calculate that.

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