Market Watch 1999

Now that the American equity markets have scaled their Everest – 10,000 on the Dow – in spectacular fashion, many other world markets (but not Canada) have risen to new or recovery highs. The resilience everywhere has turned out to be absolutely amazing, but it begs the question… what’s next?

There’s little doubt there will be challenges ahead as investors gaze down from today’s nosebleed heights: the pivotal U.S. economy enters an unprecedented tenth year of expansion (one already requiring economic textbooks to be rewritten); a European refugee problem the likes of which we’ve not seen since World War II looms large; and concerns mount over the much ballyhooed Y2K problem. The consequences will likely be nailbiting volatility and frequent market pullbacks in face of these worries, quite aside from the need for the high-flying U.S. market to establish a “base camp’ before the Dow goes on to still-higher conquests.

Against such a backdrop, should we not retreat to the sidelines, or even sell and take the profits, with a view to buying back more cheaply later? Not surprisingly, I’m being asked this question with increasing frequency. My answer remains an emphaticno” – not as long as our economies keep growing, and inflation remains subdued, the business climate stays strong and key trends keep pointing in a friendly direction. Adding to my belief that we should stay on the longer-term investment tracks we’ve set ourselves is the fact that Canadian equities almost alone among the world markets are still dragging their heels a long way below previous peaks. A latest trip to a boom ing and frightfully expensive not-so-United Kingdom painfully brought home just how cheap we are, and what a bargain Canada has become in international investment and currency terms.

Furthermore, the “new” Canada I keep harping on shapes up as a safe haven free of the political risks Kosovo and the Balkans pose for Europe – and even the U.S. Yet, here we are still wallowing in the basement of the world stock market league table. Remembering that superior investment also requires fortitude, I’ll pump for a combination of solid fundamentals, bargain cheapness and relative safety every time. In so doing, let’s also look beyond the overall market averages to world-ranking Canadian equities of the kind mentioned in my last column – since which time, by the way, I’ve added Toronto-Dominion Bank to my “until hell freezes over” list.

“Compounding interest” replied Albert Einstein when asked what was the mightiest force on Earth. He was right, but also wrong.

While reinvested interest adds up very powerfully over time, rising dividends ploughed back are an even more potent force – in fact, are tantamount to doubling compounding. Hence, I urge those of us who don’t need regular investment income to give serious consideration to reinvesting as an important building and averaging tool – particularly with well-chosen Canadian equities and equity products (e.g. well-managed mutual funds) through which to accumulate wealth in even more superior fashion.

A mentor of mine used to impress upon me the need to “listen to the markets”. I submit that this is precisely what we should be doing at this sensitive stage – listening to markets that tell us of the big, powerful forces driving them, and of Canadian equities crying out for inclusion in our ongoing plans for building wealth through carefully planned and positioned long-term investing.