Wednesday, November 13, 2013

OUTLOOK 2014

We are now in the 5th year of the bull market which started in 2008. The U.S. bull market has this year exploded; the bull market in Canada’s commodities-heavy Toronto stock market has been less impressive.  To get a better feeling where we may be in this bull market let’s revisit an old post from May, 2011 where we analyzed historical bull and bear market stats.

Historically, the average bear - bull market cycle lasts  ‘only’ 3.5 years and the time to go from trough to peak is only 2.3 years. The maximum duration of the cycle was a lot longer: 7.2 years and it took a maximum of 5.1 years to reach the peak.
From the bottom in March 2009 until today has taken close to 4.8 years and this after climbing the wall of worry that followed the Greatest Recession of the last 90 or so years. The 2008-2009 bear market was the most severe since the crash of 1929 (percentage wise) – it was even more severe than that of 1974. The Dow lost close to 49% in 2007-2009 while stats show that the maximum gain from the bottom of the bear-bull market cycle on record was 149% and averages 72%. If we apply those number to the low of the Dow in 2009 of 7062.93 then the Dow should peak at 7063 X (1+1.42) = 17092. Hmmm! Another 2000 points to go?  That may be a bit simplistic. But clearly we’re well on our way to the next U.S. market peak.

The last quarterly earnings reports resulted in close to 72% of companies with earnings surprises that exceeded analyst consensus. I would suggest that when this percentage of positive surprises levels off and when every guru states that the market will go up much further', then the time of 'crash' is near.  Other signs of an approaching crash are talk of a ‘new economy’; taxi driver gives you stock tips; or worse, your mother in law gives you stock tips. News Headlines talking about the 'great bull market'- especially when on the cover of Time Magazine - are another danger sign. Or... an exploding number of visitors to this blog! :)

We’re not there yet and with the ultra-accommodative central banks of this world, chances are that we are still a bit away. My guess, the market peaks in March or April 2015. There you have it!, A real prediction! 
For that to happen, we also should expect the TSX to pick up significantly. Especially the resource portion of the index should gain steam. In fact, Canadian Banks have had an excellent 2013 and an excellent overall bull market run. But the big catch-up is going to be in insurance companies and commodities. Retail is so competitive in Canada, it is better to stay away from it.
As far as stocks and stock market ETFs is concerned, I suggest 40% Canadian stocks and start going overweight in commodities.  I suspect that the resource bear market is coming to an end. Banks are on hold.  Another 40% of our stock portfolio should still be in  U.S. large caps – I suggest through ETFs of the Dow and S&P500.  Invest the remaining 20% in Europe and no Emerging Markets.
Interest rates  will start to rise but still are low compared to the risk of losing principal. But here is the thing when you invest in bonds or GICs: if you wait until expiry then you will get your principal back. It is only when  you sell prior to expiry and in a rising interest setting that you will experience capital losses; sometimes serious capital losses. I suggest that you start building a small fixed income portfolio by using laddered GICs.  Invest 20% in fixed income: splitting it equally into  1, 2, 3, 4 and 5 year GICs. From now on, every year the 1 year GIC will expire, while the other GICs will expire in 1,2,3 and 4 years respectively. Replace the expired GIC with a new 5 year GIC which will provide the highest interest rate of your fixed interest portfolio thus optimizing the return of your entire GIC portfolio.
Of course, the truly diversified investor will, apart from paper securities, aim to have 50% of his/her investment portfolio in real estate – in particular rental properties that provide positive cash flow.
I think 2014 will become an excellent year for investors; but do become more cautious in the second half of the year; start taking profits in your most overvalued investments around that time and build you cash hoard for the crash which will for sure come. Meanwhile, enjoy the ride.

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