The week that ended September 24th saw a rally in the “Dow” (The Dow Jones Industrial average) of 9.5%, the second best monthly performance in some fifty years, ranking second only to the one that occurred way back in March 2000.
This impressive surge in stock prices, which would have made front page news in a “bull” market, was noticed by precisely no one. Investors continue to sell off their equity funds, marking the third year in a row for redemptions.
To find another period when mutual funds were in net redemption three years running, you have to go back to 1981 when we had a recession that was never going to end. At that time stocks had given weary investors a total of zero return for the previous ten years. Of course, when just about everyone finished selling their stocks, the stock markets, refusing to co-operate with its death sentence, decided to rally for the next 18 years.
Stocks are starting to become very interesting, but few people are interested in them. After ten punishing market years, with two big bear markets, just about everyone has had enough.
The last time we had a real buying frenzy in the stock market was just before the great tech meltdown of the new millennium. The year 2000 arrived and promptly shaved about 50% off the Toronto composite index (TSX), a decline led by the technology heavyweight Nortel. But before valuations came crashing back to earth in the year 2000, investors could not get enough of stocks, pouring money into equities at the expense of just about every other asset class.
In January of 2000, the spread between the dividend yield on the S&P/TSX Composite index and a 10-Year Government of Canada bond was just over 5%. This means that investors were betting heavily on growth, since the stock index only gave you less than a 1% income yield, while long treasury bonds were offering you just under a 6% yield.
Today, the S&P/TSX Composite index offers you a 2.6% dividend yield, and so do 10-Year Canada Bonds. There is no spread between the S&P/TSX and long government bonds. Investors are saying (through their investing decisions) that they do not expect growth in stocks for the next ten years, and are demanding the same yield from stocks as they do from a 10-Year bond.
These conditions make it quite a remarkable time for stocks, and for those investors willing to buy them. Bellwether names such as Royal Bank, Enbridge, and Transcanada pipelines all offer yields that are much higher than 5-Year GICs. Investors, buying GICs for security, are paying a very high price for the feeling of safety. It takes growth to compete with inflation, and GICs just can’t provide enough growth.
A very tough ten years in world stock markets are now behind us, but most nervous investors are still not convinced that stocks are the place to be. Yet, as we saw at the end of 1982, when stock valuations have fallen far enough, and yields on good names get high enough, investors eventually take notice. When enough investors take notice, the next bull market begins.
Alan MacDonald is an investment advisor with Richardson GMP Limited. Alan helps investors with over $500,000. of assets make smart decisions about money. For more information please visit www.alanmacdonald.ca or email Alan at Alan.Macdonald@RichardsonGMP.com.
The opinions expressed in this report are the opinions of the author and readers should not assume they reflect the opinions or recommendations of Richardson GMP Limited or its affiliates.
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