Does this bull have more room to run?

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This article was published 03/06/2017 (3078 days ago), so information in it may no longer be current.

It’s hard not to be nervous about the markets these days. We’re eight years into a bull market since the financial crisis bottomed out in March 2009.

So you might be asking, how much longer it can run?

Equally worrisome, bond markets have been on a bull run for decades.

It’s not as if investors can turn to fixed income for solid, steady returns while the stock market gyrates up and down wildly. Bond yields are at near historical lows and when rates rise, bondholders are likely to see significant losses too.

Then there’s geopolitical risk: Trump, Trump, Trump and more Trump — and those unforeseen unknowns that can send markets reeling.

But the message from a leading economist at one of Canada’s big banks is don’t fret — yet.

Stéfane Marion is National Bank’s chief economist and strategist and was in Winnipeg recently along with the bank’s president Louis Vachon to speak to clients.

Among those in attendance were hundreds of investors with its wealth management division, one of National Bank’s most successful in Canada, thanks in large part to its acquisitions of Bieber Securities and Wellington West Capital a few years ago — two of Manitoba’s largest and most high-profile independent firms.

Perhaps it’s because his tenure began during the darkest days ever seen for markets and the economy in the modern age.

But Marion has an optimistic reading of the state of global markets and the economy — even if considerable risks lurk in the reeds.

“There’s still some room to grow from a global standpoint given where we are in the cycle,” he said.

Marion argues the economy is now in the mature expansion phase of its natural cycle, which includes a peak, recession, recovery, early expansion and mature expansion before starting all over again.

Despite talk of a “new normal,” he says the pattern this time around still looks a lot like those of the past.

For investors ready to hide their money under the mattress or to sock more savings into GICs, fearing another market crash, Marion says we’re likely not there yet.

That’s news many investors need to hear, says Darrell Gebhardt, senior vice-president and investment adviser with Bieber Gebhardt Advisory Group at National Bank Financial Wealth Management in Winnipeg.

“What we say (to our clients) is that you can’t be so afraid that you’re sitting on cash and earning almost no return,” he says. “You have to be invested.”

Yet that’s just one side of a very polarized spectrum of sentiment he’s seeing with clients and the investor public overall.

As a wealth manager, Gebhardt expends a lot of effort convincing half of his clients to add a little more risk to their portfolio while talking the other half out of trying to chase returns and instead to be a little less aggressive.

He often finds himself repeating over and over again: “Don’t chase the highs and the hot sectors. Set your mix, consistently rebalance and collect the income, but don’t be so afraid that you don’t invest.”

It’s been a successful mantra. National Bank has singled out his practice as one of the top wealth management groups in the country.

Like Marion, Gebhardt says investors do have a lot to be concerned about — such as that guy with the funny comb-over and his affinity for social media.

“This is the first time ever where you might have to pivot your investment strategy based on a tweet from the president of the United States,” he says.

U.S. President Donald Trump and the volatile mix of controversy, uncertainty, promise and profit he brings to the White House has the potential to send markets soaring and plunging in just one trading day.

Yet investors are shaking off his rants and tribulations quickly.

“Market volatility has been extremely low,” Gebhardt adds.

To Marion, this is a hallmark of the early days of the mature expansion phase of the world economy — something we haven’t seen in more than a decade.

“The reality is global trade is growing faster than output for the first time in years,” Marion says. “That means better business conditions and a faster-growing economy.”

Stock valuations — what investors are willing to pay to own a company relative to its debt, revenues and other measures of profitability — are not cheap. But Marion adds growing bottom lines should help companies measure up to their share prices.

“It’s not just what earnings are doing now,” he says. “It’s what we expect down the road because financial markets are forward-looking.”

Global profit expectations are also being revised positively for the first time since 2011.

“Imagine that: people have been disappointed by the global economy for six consecutive years and this is the first year we’re seeing people surprised by economic momentum and they need to revise their economic forecast,” Marion says.

To that end, global growth is expected around three per cent this year and Canada shouldn’t be a laggard — even if a credit rating agency recently downgraded the big banks based on our high debt levels and over-heated housing market.

Marion argues Moody’s overlooked one aspect fuelling our economy — making it arguably healthier than other developed nations with higher ratings.

“We have the best population growth among mature economies of the OECD (Organisation for Economic Co-operation and Development).”

The reason being is immigration. Across Canada’s major cities, outside of Alberta and Saskatchewan — which are starting to recover, by the way — employment is at or near all-time highs.

And immigrants are driving this growth. He adds Manitoba is a leader in this respect. All of our net population growth is due to immigration and Marion argues that’s a major reason we have nation-leading low unemployment and an economy that chugs along slowly, but surely.

That’s not to say everything is hunky dory.

“Where we face some challenges going forward — like what will happen if there’s a big interest rate shock?”

A one per cent increase on a five-year mortgage would boost the average monthly mortgage payment in Vancouver by $500 and in Toronto by $400, he adds.

By contrast, the increase would be about $160 a month here.

“In Winnipeg, you can cope with this shock, but I’m not so sure in Toronto and Vancouver, and it might even be outside the control of our own central bank,” Marion says, adding five-year mortgage rates can be more affected by what the U.S. Federal Reserve does.

In other words, if the Americans hike rates, which is likely, we’re likely to see an increase in our five-year mortgage rates.

Then there’s the question of how long the mature expansion phase can go on before peaking and going into recession.

“The largest mature phase of mature expansion ever observed in the history of the United States was 84 months in the 1960s,” Marion says, adding he believes we are about three months into this part of the cycle.

“In the first year of the mature expansion phase, the chances of a recession are quite low and even the second year, but as you enter the third year — ah-ha!”

That’s when we reach the average length of a mature expansion phase: 39 months.

Yet investors need not worry about predicting the peak, Gebhardt says.

Instead, they need to focus on their risk tolerance. They need to ask themselves how they would feel if their portfolio fell 20 per cent over a few days.

That’s why diversification is paramount to dealing with potential crashes.

Hold a variety of assets: fixed income — like short-term, investment-grade bonds in the anticipation of rising interest rates — commercial real estate, infrastructure (suc as pipelines and power plants), blue chip Canadian, U.S. and global equities, and gold and alternatives to hedge against geopolitical risk.

“Crucial to that is setting and not forgetting.

“You must have the discipline to rebalance,” Gebhardt says.

This strategy may not be unique, but it’s likely the right prescription for uncertain times.