Bankrate.ca

 

May 2014

 

Time to buys stocks?

Equities indexes are hitting record levels. But most Canadians would be best using extra cash to pay down debts.

 

This month the S&P 500 and Dow Jones Industrial Averages hit record levels. The S&P TSX, which is up a whopping 80 percent since it early 2009 lows excluding dividends, came within a whisker of doing so too.

 

That said, the mood is different than during peaks in the early 2000s (prior to the bursting of the Dot.com bubble) and May 2008 (prior to the popping of the US housing bubble). Back then you could not go to a party without having people sidle up to you and brag about how well their portfolios were doing.

 

However so many Canadians were burned in those two stock market crashes that many did not participate in the most recent run-up. Now many are wondering if they are missing out.

 

Running to bubble territory… and then doubling

The temptation to get back into the stock market could be huge during coming months. According to government statistics, the economy is doing reasonably well. Job creation, while sub-par for a recovery period, has been steady in the United States, Canada’s largest trading partner. Canada too has done well, despite a small hiccup in April, when according to Statistics Canada, 28,900 posts were lost. For example the unemployment rate came in at a respectable 6.9 percent. 

 

Furthermore, while corporate earnings in the US are at peak levels relative to Gross Domestic Product and the steady build up in stock prices over the past five years suggest that a correction is long overdue, that is far from guaranteed to occur.

 

There is an old saying in financial markets that stocks will rise to insane bubble levels…. and then double. While that is unlikely to happen anytime soon, the US central bank has been doing all that it can to boost asset prices, in the hopes that the wealth created will trickle down into the real economy. So stocks could well continue to rise. If that happens, more Canadians will be tempted to shift more of their funds into equities.

 

Pay down your debt

An approach though for those with extra funds available is to firm up their balance sheets.  Household debt in Canada, which was at 163.6 percent relative to income in the third quarter of last year, is at near record levels, as are housing prices, which many say could be due for a cooling.

 

True, with posted five-year fixed mortgage rates currently in the 5 percent range at the CIBC and the other big banks (though special offers could lower that substantially), the benefits to be had from reducing debt may seem small.

 

After two market implosions, with households tapped out and asset prices at record levels, now is as good a time as any for caution. However you may have to put with the occasional guy at parties telling you how well his stock portfolio is doing.

 

peter@peterdiekmeyer.com

 

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