Overheated stock market with risk of bubble associated with economy, experts say

TORONTO – “We are all in this” has been a common refrain since the arrival of the COVID-19 pandemic last March, but the gaping gap between gloomy economic data and soaring stock market values ​​suggests that some Canadians are doing much better Than others .

A large part of the population is unaffected financially by the crisis or in better shape. The housing market is strong and those who are able to work externally have saved mountains of cash they use to pump up the stock markets.

Meanwhile, disruptions have caused major disruption to workers in the service sector and other parts of the economy who have been forced to rely on government support.

“All the jobs lost in the country since the beginning of the crisis – not some, all – were in low-wage sectors, low-wage industries,” said Benjamin Tal, deputy chief economist at CIBC.

The North American stock markets have been in tears since March and have set record highs almost daily, even though COVID-19 has hit the economy and produced poor employment data.

Some individual stocks have risen in the middle of the foam. Tesla shares have risen about 1,160 percent over the past year, while Ottawa’s Shopify Inc. has risen 425 percent to become Canada’s most valuable company at market value.

The S & P / TSX composite has increased by 65 percent from the lowest in March 2020 and 6.5 percent in February alone. The rebound has been even stronger in the US, where the Dow rose 73 percent, the S&P 500 79.5 percent and the technically heavy Nasdaq composite rose about 113 percent.

Meanwhile, Canada’s unemployment rose to 9.6 percent in January, when 212,800 jobs were deleted that month.

The disruption between so-called Main Street and Bay or Wall streets is not new, but has intensified during the most “asymmetric recession” in Canadian history, Tal said.

Retail investors with healthy cash holdings have increased market volume and contributed to insane purchases that propelled stocks such as GameStop and BlackBerry Inc.

The TMX group, which operates the Toronto Stock Exchange, has noted that amid an increase in volumes, the share of retailers topped 45 percent of total sales in January, compared to an average of 35 percent the year before.

“The things that underpin the strength of retail are drivers that are going to continue for some time,” TMX CEO John McKenzie recently told analysts during an earnings call.

He pointed to the low interest rate environment that supports market values, a great work culture right now and continued growth in retail applications.

Famous investor Jeremy Grantham, who has predicted some previous bubbles, now says the bull market, which started in 2009, has “matured into a full-blown epic bubble” with “extreme overvaluation, explosive price increases, insane issuance and hysterically speculative investor behavior.”

“I think this event will be recorded as one of the great economic history bubbles right along with the South Sea Bubble, 1929 and 2000,” he wrote in a comment posted on his company’s website.

“These big bubbles are where fortunes are created and lost – and where investors really prove their goodbyes.”

While some stocks are overheating and may burst, Tal cannot see that happening for the entire market.

“I think we need to clearly distinguish between the speculative pockets that everyone is talking about and the general market,” he said.

“Of course, there is always the risk of it being drawn into it, but at this point, it does not appear to be a reasonable scenario.”

Massive fiscal and monetary stimulus is boosting markets, observers say, unless earnings collapse and central banks tighten their policies.

Still, Federal Reserve Chairman Jerome Powell said last week that the US Federal Reserve will remain dovish until employment is fully restored.

Erik Bregar, head of currency strategy at Exchange Bank of Canada, thought GameStop Reddit madness might have taken some speculative profits out of the market.

“But as soon as these stocks crashed, everyone breathed a sigh of relief and bid the market up again,” he said in an interview.

“It’s hard to kill this thing … you can come up with a lot of basic arguments that it should not be that high, but it has not paid off to go against it yet.”

He said there is just too much positive news and a broad expectation that the global economy will be strong in the second half of the year as COVID-19 vaccinations progress.

“I continue to believe the stocks will represent good value as we move forward here through 2021,” said Mike Archibald, vice president and portfolio manager at AGF Investments Inc.

He said unlimited liquidity and people putting their saved money in the stock market are key drivers for its growth.

In fact, the savings rate and cash deposits have risen by more than 10 percent in the last two quarters, the highest level recorded, says Brian Belski, chief investment strategist at BMO Capital Markets.

“Yes, valuations appear to be stretched at first glance, but they must also be considered in the context of historically low interest rates and low inflation, ingredients that are likely to continue throughout 2021 and above, in our view,” he wrote in a report.

“Looking at it through this lens, we think it’s not unreasonable for market valuation to maintain (or even expand slightly) from its current level.”

Some areas of the market, including cannabis stocks, cryptocurrency and parts of technology, are “frothy,” but other investments remain attractive, Archibald said.

“By and large, if you look at what I would call solid, solid companies – these stocks still seem to be reasonably priced for me and I still think there is a good upside potential for a number of these companies. “

It is natural and healthy for the markets to pause after strong driving. The stock markets look ahead and expect where things are going in the future, not where they stand now.

“If you can look beyond the next few months, the outlook looks extremely bright,” said Candice Bangsund, portfolio manager for Fiera Capital.

A short-term correction of five to ten percent is possible and should be seen as a buying opportunity, but massive spending is laying the floor during major downward movements, she said.

In addition, we do not know if we are in a persistent rally or a speculative bubble “until it is in hindsight,” Kristina Hooper, head of global marketing strategist at Invesco, wrote in a note.

“And it really does not matter to long-term investors. The reality is that market ups and corrections occur, but the trend line for equities in the long run is upward. ”

This report from The Canadian Press was first published on February 14, 2021.

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