Last updated: March 11 2013
A guest column by Dr. Michael Graham, Ph.D. whose career has spanned 50 years, leading research and investment strategy at Wood Gundy, Dominion Securities Ames/Pitfield, Merrill Lynch Canada, Midland Walwyn, and now his own investment counselling firm Michael Graham Investment Services Inc. through which he writes about Canada’s potential as an exceptional worldwide place for investment.
If investing isn’t the most contrary business I will ever know, it’s certainly the most humbling – regardless of expertise or reputation! A year ago famed author and forecaster Harry Dent led off 2012 with dire warnings of a summertime meltdown. His advice: “Get 100 per cent out of stocks”. Those who did would today be significantly the poorer. Not necessarily because Mr. Dent was wrong in his economic and fiscal forebodings, just that in their collective wisdom those ever-contrarian stock markets saw fit to think otherwise.
For one thing near-zero interest rates don’t offer much of an alternative when weighed against yields on the safest of dividends that are likely to keep growing (thereby boosting the yield on cost) as successful companies continuously raise their annual payouts.
The Dividend Alternative was undoubtedly a very material contributor to last year’s upbeat stock markets. It’s a groundswell that shows every sign of continuing as financially strengthened corporations disburse more to their shareholders and as central bankers remain committed to keeping interest rates artificially low for years longer yet.
In addition to the axiom about never fighting the Fed, that oldest of investment adages about the trend being the investor’s friend began taking on fresh legs in 2012, this despite a daunting list of “what ifs” for Mr. Dent and other doomsters to feast on.
In the U.S., above all, the need for comprehensive fiscal and tax reform remains as great as ever, but an economy powered by a rebound in housing, a revival in manufacturing, rising exports and a booming energy sector shows encouraging signs of recovery.
The Congressional Budget Office’s lowering of its deficit estimates to the $850 billion level from over a trillion could be a latest tell-tale signal. If a more experienced, second-term President Obama and a more pragmatic newly-elected Congress were to recognize the firmer ground the world’s leading economy is now on and strike a realistic deficit-reduction bargain, the relief rally in the stock markets would not only be huge, it would reverberate around the world.
Indeed, this might be what prescient markets are already trying to tell us - no more last-minute fiscal cliff or debt ceiling or sequestration histrionics, but this time a genuinely workable longer-term debt and deficit-reduction plan that would be welcomed by investors everywhere. What is more, a reinforcing market precedent could also be falling into place as the broad-market S&P 500 index recovers to test the 1500 level and thereafter its post-Y2K, new millennium peak of 1527 in the year 2000.
In 1983, the Dow Jones Industrial Average finally recaptured the magic 1,000 threshold it had first reached in 1966. Once established, thousand point increments followed at expedited intervals. Just as a powerful 17-year base turned out to have been formed back then, could there soon be a 13-year base to build on in 2013: History would suggest we stay tuned – and invested!
To add to the anticipation is also America’s stunning march toward energy independence and self-sufficiency. The multiplier effects of ultra cheap natural gas and abundant oil stand to be enormous, the investment possibilities breathtaking. An interlocking Canada stands to be a major beneficiary too.
All of which is not to rule out the near-term correction that late-February showed signs bringing as new worries like an inconclusive Italian election surface and as over-bought markets inevitably pause for breath and begin searching out new (up-trending) support levels.
There will also be ongoing need to keep a close watch for any significant shifting in the tell-tale U.S. and Canadian yield curves, as well as for any slippage in all-important and value-determining corporate earnings – no worries on either count as yet.
Nevertheless, such is the newfound structural strength of in today’s’ markets that the arrows would keep pointing higher – to add to the case for a new worldwide bull market having been spawned in that despairing spring of 2009 when the S&P 500 bottomed at 666 and the TSX at just below 7500.
Remember, as well, that where bull markets are born in the depths of despair, bear markets take hold at the heights of euphoria like in the spring of 2000.
Today’s improved but still fickle investor sentiment is not nearly at the euphoric stage as yet – not even close!
© Michael Graham Investment Services Inc. February 2013 – all rights reserved