The arousal

On Wednesday the three biggies – the Dow, S&P and Nasdaq – all touched fresh record highs.

On Thursday (as this is being scribbled) they did he same. For the first time the Dow index topped the 40,000 mark. The S&P 500 continued its advance past 5,300 – a barrier first crossed a day earlier. Bond yields fell. Bond prices jumped. Suddenly traders were giving 70% odds US interest rates will actually fall this year. Maybe twice. Starting in September. Maybe even July.

Yes, it was a memorable turnaround from the rate-induced funk and morosity of early April, when the main US market index slumped more than 5% amid hotter-than-expected inflation.

So far this year (at this moment), the S&P has gained 12%. The Dow is up 6.5%. The Nasdaq has added 13.5%. The main ETF tracking US markets is 12% higher in five months. The TSX on Bay Street is 7% above January levels. People with B&D portfolios they haven’t touched are looking at double-digit returns, which includ tax-deferred capital gains, tax-reduced dividends and tax-free return of capital.

Meanwhile what are most Canadians doing? Yup, struggling with mortgage debt payments or moaning about houses they can’t afford, while ‘saving’ for downpayments in low-yield near-cash investments consumed daily by inflation.

Oh well. There’s a reason we have a yawning wealth inequality in Canada. In part, at least, it’s self-inflicted.

Why are markets aroused and swelling?

The economy, stupid. It’s just fine. US unemployment is below 4% and has been there for two years. The GDP is growing. Consumer spending and saving are on track. And if Trump is elected (a startling 50% chance at the moment) the betting is he’ll lower corporate taxes (or certainly not increase them), muscle the Fed into more accommodative monetary policy, spend gobs of federal funds on industry, gut expensive and restrictive environment regs and skew trade in favour of domestic producers. Mr. Market, like Stormy Daniels, embraces stimulus.

Second, inflation is more under control than it was last month. The first cooler price report of the year came down this week, showing a drop in both headline and core inflation. This is despite higher mortgage interest charges and energy prices. Combined with data showing wage gains are cooling and hiring is slowing it suggests America is coming in for a soft landing.

So, third, the betting is the Fed can let rates start to slide. The economy is just fine and unlikely to overheat with a gradual reduction in the CB policy rate. Boss Jerome Powell has assured investors rates will not be rising, and this week’s data shows the dangers of easing are contained. Mr. Market, as stated, now thinks it’s seven-in-ten likely a cut comes in September and another by Christmas. Further reductions in 2025 and an end to a 23-year-high spike in the cost of money. Especially if Trump (gulp) ascends.

Finally, profits. More than anything, investors want companies to make money so their equities rise in prices. It’s happening. The latest quarterly reporting season is just ending with over 70% of corporations beating analysts’ estimates. The rebound in profitability has been nothing short of dramatic. Expectations were high – investors anticipated growth of 5%. In reality, bottom lines have jumped by almost 8%.

So, the bull is back. This year alone (it’s only May) the main US market has made two dozen new record highs. Conditions now seem to be in place for more – despite the US election, Gaza, Ukraine or the Putin-Xi bromance.

Meanwhile Canadian house prices languish or grow squishy as sales fade, mortgages are prohibitive, real estate taxes rise and policymakers stagger. There are way better places for your money, kids.

But what of the risks of having exposure to the financial markets?

This blog is not above stooping to quote itself. And here is what we wrote a few days ago – even before this erotic eruption of enthusiasm.

Recall what the stock market’s done over the last 20 years – two decades which contained lots and lots of reasons to wake up at night in a cold sweat, fearing disaster, loss, turmoil and collapse. Markets crashed when the dot-com bubble burst in 2000. Following that was the greatest terror attack ever on any western nation – Nine Eleven, in September of 2001. Then came America’s longest war, in Afghanistan. Next was the subprime mortgage crisis, the collapse of major Wall Street banks and the global credit crisis which nuked stocks in 2008-9, before a recovery. The auto industry almost bankrupted. American real estate blew up. There were debt crises in Europe, Greece, Portugal, Venezuela and Brazil. After that came Covid, the global pandemic, millions dead and the 2020 stock market dump. The Chinese property market tanked. Russia invaded Ukraine, pitting it dangerously against NATO. And Hamas attacked Israel, leading to mass casualties in Gaza and the threat of a new Middle East conflagration.

The market reflects the steady advancement of technology, the growth of the global economy, the sum of human progress and investor optimism that tomorrow, next year or decades to come will be better than now. So far, so good. Downturns, panics, scares and reversals have been sharp and short. Advances have been steady and sustained. Those who invested, stayed invested and slept through the emotion, did just fine.

Just maybe the era of easy gains, cheap money, FOMO and real estate delusion is ending. More of us must understand that security and success come not from owning a pile of used building materials but from the liquidity, freedom from debt and lifelong income that financial, assets can bring.

Tell your children.

About the picture: “Sun’s out guns out! Need my hat on,” writes A.P. “This is Lenny from Russell On. Just celebrated birthday number five! Among his favorite things are walks and pickup rides to Tim Hortons! Also loves cheezies and naps. I believe he’s balanced and diversified.”

To be in touch or send a picture of your beast, email to ‘garth@garth.ca’.