The four-year itch

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.  By Guest Blogger Doug Rowat

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Strange things start to happen about four years into a bull market.

Client requests for more aggressive portfolios become more frequent. Cash on the sidelines (which should have been put to work four years ago) moves more steadily into accounts. More questions arise about borrowing to invest. And, occasionally, there are even requests to abandon bonds entirely. In short, clients start to believe that the good times will never end.

There are two main types of overconfidence. The first is overconfidence that comes from misunderstanding one’s ability. This is illustrated most famously in driving-ability surveys where 80–85% of respondents typically assert that they’re better-than-average drivers, which is, of course, a statistical impossibility. This is known as the better-than-average effect. This behavioural bias seldom applies to our clients because, after all, why would you be utilizing a financial advisor if you thought that you could manage your own investments?

However, the other type of overconfidence results in consistently understating risk. Here overconfidence manifests itself in excessive optimism and the assumption that positive outcomes are certain (or close to it) when, in fact, they’re anything but. Naturally, prolonged bull markets further inhibit one’s ability to correctly assess risk. The longer a bull market goes, the more complacent we become.

Make no mistake, my outlook’s positive. The spectacular US corporate earnings growth that we’ve seen not only this year, but for the past three, drives much of this bullishness. Layer on a global economy that’s experiencing decent, if unspectacular, growth and central banks that have plenty of capacity, thanks to several years of raising interest rates, to be accommodative, and you have all the ingredients of a bullish outlook.

However, the market environment isn’t perfect. Developed-market central banks are presently RAISING interest rates, and this is expected to continue. According to Bloomberg, traders are pricing in roughly 400 basis points of rate hikes across the seven major markets over the next year. This is, of course, on top of the many rate hikes that have already occurred. The Reserve Bank of Australia, for example, has raised interest rates three times this year.

Rate hikes constrain growth and create headwinds for equity markets. And the technology sector is particularly sensitive to rate increases as the sector carries significant debt. The five largest US tech companies, for example, have US$1.4 trillion of on-balance-sheet debt, and Nikkei Asia estimates that there could be an equivalent amount in other, less-transparent debt liabilities. Financing a revolutionary AI buildout doesn’t come cheap. Higher rates mean that the cost of financing this debt increases, which could translate to lower equity prices.

Expectations for year-end 2026 central bank policy rates – developed markets should brace for higher rates

Source: AdvisorAnalyst (based on Bloomberg data)

Further, while you can’t lean too heavily on historical averages, you also can’t ignore them. US-equity bull markets typically last about five years, so historically speaking, this one should be considered, at the very least, mature. And, as always when assessing market risk, the unexpected has to be given consideration. Events always occur that come entirely out of left field. Covid’s a good example. As is the 2011 Japanese earthquake and tsunami that roiled international markets. Such risks illustrate why portfolios should always be balanced.

Finally, when you’re thinking about throwing caution to the wind, it’s likely because you feel entirely comfortable about the market. But this is rarely the ideal time to become more aggressive. It’s when you feel awful in the pit of your stomach and you can barely stand to look at your investments that it’s time to take on more risk.

So, the next time markets take a dump, get aggressive. You’ll hate doing it, but it’ll probably be the right decision. But now, four years into a raging bull market when all seems right with your investments?

You should probably be more afraid than you currently are.

Doug Rowat, FCSI® is Portfolio Manager with Turner Investments and Senior Investment Advisor, Private Client Group, Raymond James Ltd.

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Source: https://www.greaterfool.ca/2026/08/29/the-four-year-itch/