By David Deacon
I wrote the following email to my clients Feb. 5, 2007: “What is in store for 2007? The current bull market, which commenced Oct. 9, 2002, is now into its fifth year without a correction. For the past 60 years, we have experienced a correction every four years. The U.S. government will work hard to maintain a positive economic and investment environment. But stocks cannot be expected to go much higher, considering they have been rising for four years already and look over-priced. Maintain a conservative equity/bond balance. Focus on defensive companies whose products and services are in demand, regardless of the strength of the economy and markets. Be comfortable selling positions in stocks, which become overpriced. Be patient with cash sitting in treasury bills and money market funds”.
The 2002 to 2007 bull market managed to continue for another nine months after I wrote that email. However, the bear market that followed in October 2007 lasted until March 2009 and knocked North American stock markets down more than 45 per cent.
I could send my 2007 email to clients today as a description of our current situation. Stock markets have been rising for more than four years without a meaningful correction. The U.S. Federal Reserve has been priming the U.S. economy with cash to the tune of $85 billion per month in an effort to stimulate, and prolong, the economic recovery. Stock prices have reached extremely overvalued levels. (By some calculations, values are approaching the levels reached at the major market peaks in1929, 2000 and 2007). As I recommended in 2007, investors should adjust their portfolios to a conservative equity/fixed income balance. For my clients that represents approximately 30 per cent in stocks and 70 per cent in bonds and cash. Focus on defensive companies with generous dividends. Sell overvalued stocks, even if they are worth less than what you paid for them. Market peaks are good times to purge portfolios of underperformers and economy-sensitive positions. Be patient with low-yielding, but guaranteed, money market funds and short- to medium-term bonds.
If I am correct in saying that we are 13 years into a long term sideways, or “range bound,” stock market (they have averaged about 16 years), we can expect at least one more significant bear market this cycle. That should set up a very attractive buying opportunity for investors who prepared for the down turn by reducing equity exposure and raising cash. In other words, to be able to buy low, you must first sell high. That would be now.
David Deacon is a Portfolio Manager with Raymond James Ltd., The views of the author do not necessarily reflect those of Raymond James. This article is for information only. Raymond James Ltd. Member-Canadian Investor Protection Fund