2017 has been a good year in both the Canadian and US equity markets. In fact, there is no equity market in the world which is not up.
First, in North America the three engines of growth are still in place, low inflation, low interest rates and low unemployment. What we have just seen in the latest round of earnings reports is the vast majority of companies reported earnings in excess of analyst’s expectations. Stock prices are driven off of earnings and when earnings go up, it effectively resets the potential stock price to the upside.
A couple of other factors are certainly contributing to global equity markets: 1. High levels of productivity, namely GDP and 2. Low levels of unemployment. The US as an example has an unemployment rate of only 4.1%. 4.0% is considered to be zero unemployment.
Finally, as we have sighted before, the bond market is a reasonably good predictor of the equity markets. A normal yield curve such as we have now is a positive indicator for equities. If the yield curve flattens or worse yet, inverts, that would be a clear indicator to reduce equity exposure. Just this month for example the BOC chose to hold rates the same, this again will steady the Canadian equity market.
There will always be volatility but currently volatility as measured by the VIX in both Canada and the US is remarkably low. 11 in the US and only 7.5 here in Canada. The historic average is 15. Things aren’t considered volatile until the VIX (also known as the fear indicator) gets to 20 or so. The all time high as you might imagine was 80 in October of 2008.
For all the above reasons we are fairly positive on our outlook for 2018. It is also our view that the longer-term secular bull market is still in place.
And finally, this is something that has been all through the media recently. Recently futures on Bitcoin has just begun trading on the CBOE. It has literally reached the point where the cab driver is asking about it. There are now over 1,000 cryptocurrencies and most will ultimately fail. Bitcoin is of course the largest and one which others must use for clearing.
Our takeaway is that the distributed ledger technology of blockchain (the software of Bitcoin) is incredibly disruptive to many intermediary business models.
Our view of Bitcoin is negative for the following reasons:
- It is not a company, it is more like a commodity. There are no earnings, it doesn’t pay a dividend, there are no underlying assets other than the cryptocurrency itself. This means it is impossible to put an actual value on it so pricing is purely speculative.
- There is very little liquidity given that there are a finite number of coins. Having said that, anything without liquidity is dangerous because in addition to being hard to buy, it will be even harder to sell and when there is a price correction, all the investors will have to run out through a very small door.
- The record shows that anything that goes up that far that fast is inevitably going to fail. A tree doesn’t grow to the sky. Norther Telecom and Bre-ex shareholders were left holding the bag. Even companies like Cisco that saw a similar parabolic rise in the early days of the internet eventually had a hard reset and still has not returned to those levels.
- One last indicator is that at the moment, retail investors are very focused on asking us questions about two areas: cannabis stocks and bitcoin/blockchain. To be clear, both of these areas are pure speculation and are in their blue-sky phase where no business models need to prove their long-term value and no one needs to prove they are the best. They go higher because people believe they are going higher and nowhere do we see this more prevalently than in the recent rise in the price of Bitcoin. We might even suggest that with people now even borrowing money to get in on the action it has truly hit the “Mania” phase.
We are very happy with the returns we have had in 2017 and look for another positive year in 2018. We wish everyone a happy holiday and a happy, healthy and prosperous 2018.
Disclaimer: This material has been prepared to provide information on the products and services offered through your Manulife Securities Incorporated (MSI) Advisor. Manulife Securities is a Trade Name used by the related companies MSI (an Investment dealer) and Manulife Securities Insurance Inc.(an insurance distributor operating as a national account agency). Manulife Securities related companies are 100% owned by The Manufactures Life Insurance Company (MLI) which in turn is 100% owned by the Manulife Financial Corporation a publically traded company. Please confirm with your Advisor which company you are dealing with for each of your products and services. Details regarding all affiliated companies of MLI are provided in the Important Client Information Brochure which can be found on the Manulife Securities website www.manulifesecurities.ca. Stocks, bonds and mutual fund products and services are offered through MSI, Manulife Securities Incorporated is a Member of the Canadian Investor Protection Fund and a Member of the Investment Industry Regulatory Organization of Canada. Banking products and services are offered by referral arrangements through our related company Manulife Bank of Canada, additional disclosure information will be provided by your Advisor upon referral.