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The year ahead: Here we are now, entertain us!
1/19/2019 4:06:37 PM
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Investment management insights from a leading Canadian expert.

By Tyler Mordy  | Tuesday, January 09, 2018


One has to be a certain age to feel nostalgia for the grunge rock band Nirvana. However, their seminal 1991 song, “Smells Like Teen Spirit,” managed to garner widespread appeal and can still get a diverse crowd rocking. Lead singer Kurt Cobain’s repeated refrain “Here we are now, entertain us,” captured the new nonchalance of the so-called slacker generation – an early manifestation of the now ubiquitous “whatever.” A parallel to this has played out in financial markets. Since the depths of the financial crisis, corporate profits have boomed, and global risk asset markets have soared. It’s been quite the show. What’s next?

In this environment, one would expect a little joie de vivre. Yet, for many, all of this has been met with a shrugged “whatever” response. Volatility has been low. Turnover has been low. And, this is the only multi-year bull market in history where trading volumes are declining rather than increasing.

What’s happening? Behavioral psychologists would point to 2008’s global financial crisis and, since then, the lingering presence of what they call recency bias – the greater weight that recent experience can have on our decision making. The effect is even more powerful when recency is combined with salience – the more something means to you, the more vivid your recollection of the event.

Prior to the crisis, investors largely underestimated the probability of such an event precisely because they had no personal experience of one (the most comparable precedent occurred in the 1930s). But then the opposite occurred. Since 2009, many investors, hostage to their recent and vivid crisis experience, overestimated the probability of a recurrence. In large part, this explains the broad apathy toward stock markets.

However, there is solid evidence that all of this lingering risk aversion is finally fading as the global economy gains more traction. Risk appetites are now returning with zeal. And why shouldn’t they?

The record-breaking streak of gains in global stock markets in 2017 has been supported by the broadest global growth in a decade. For the first time since 2008, all 45 of the largest economies tracked by the OECD have been in a synchronized expansion. That economic momentum has lifted earnings per share for global corporations above $30, a level first reached about 10 years ago.

Where to next? The next phase of the global recovery will close the wide cyclical gap that has opened up between the U.S. and the rest of the world. While the U.S. started recovering almost immediately in 2009 (providing a monetary roadmap for global policymakers along the way), many other economies have been stuck in grinding recessions and are now only starting to lift off. This still has a long way to run.

Investment implications

To be sure, this has been a long cycle, particularly for the U.S. At 8.5 years, it ranks third out of 33 cycles recorded since 1854. But the attendant bull market has been a strange and melancholic affair…seemingly better slouching apathetically on a therapist’s couch than splashed all over the cover of Barron’s. And why not? Since 2008 global investors have endured rolling geopolitical concerns, dramatic elections, viruses, Brexit, terrorist attacks, Trump’s erratic twitter feed, etc. Many investors have been happy to sit this one out. But stock markets have been incredibly resilient, at least in the U.S.

Now try to imagine what happens if the data actually turn positive everywhere around the world. While we are not rabid bulls on global growth, a mild and, importantly, globally-synchronized recovery has taken hold. But with enthusiasm for risk-taking finally making a comeback, expectations have become higher. That means this next growth stage in the post-crisis period will need to provide an encore with even more lively entertainment: Robust momentum and profit growth will need to show up quarter after quarter. Otherwise, many investors will just shrug and respond with an “Oh well, whatever, never mind.”

Tyler Mordy, CFA, is President and CIO for Forstrong Global Asset Management Inc., engaged in top-down strategy, investment policy, and securities selection. He specializes in global investment strategy and ETF trends. This article first appeared in Forstrong’s Gobal Thinking feature. Used with permission. You can reach Tyler by phone at Forstrong Global, toll-free 1-888-419-6715, or by email at . Follow Tyler on Twitter at @TylerMordy and @ForstrongGlobal.

Notes and Disclaimers

© 2018 by Fund Library. All rights reserved. Reproduction in whole or in part by any means without prior written permission is prohibited.

The foregoing is for general information purposes only and is the opinion of the writer. The author and clients of Forstrong Global Asset Management may have positions in securities mentioned. Commissions and management fees may be associated with exchange-traded funds. Please read the prospectus before investing. Securities mentioned carry risk of loss, and no guarantee of performance is made or implied. This information is not intended to provide specific personalized advice including, without limitation, investment, financial, legal, accounting or tax advice.

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