What now for Canadian stocks?

We are, indeed, blessed. The ’90s were not an easy period for Canadians. It took a long time for us to recover from the government excesses of the two previous decades and the deep recession of ’90-’92. But finally, we’ve come back into the light.

• Household incomes are on the rise again.
• Taxes are on the decline.
• Productivity gains are impressive — not as good as in the U.S., true, but definitely much better than we’ve experienced in many years.
• Inflation, while somewhat higher, is contained.
• Unemployment is running at the lowest levels we’ve seen in a couple of decades.
• Our exports are strong and our industries are humming.
• Our high-tech entrepreneurs are flourishing, for the most part.
• The trade surplus numbers are healthy.
• New construction is booming.
• And our stock markets! Oh, our stock markets! After eating American dust for most of the ’90s, they’ve become the envy of the world.

We’re running way ahead of the Dow, trampling the S&P 500, even beating Nasdaq. The summer saw one record high after another on the TSE. So yes, we are very fortunate these da. But now the eternal question: What next?

The U.S. Federal Reserve Board, through its moderate approach to interest rate increases, looks to be on the verge of engineering yet another soft landing for the American economy. That would be good news for us, as it would prolong the current expansion for at least another couple of years.

Continued productivity growth should continue to provide fuel for more disposable household income for Canadians. I don’t expect to see wholesale tax cuts any time soon, especially if Jean Chretien sticks to his guns and remains Liberal leader. He’s more interested in spending than saving, but the pressure will remain on all levels of government to exercise fiscal responsibility in their planning and that’s good news for us all.

The Canadian dollar keeps resisting all attempts at a rally, which makes our exporters very happy since they are enjoying a huge advantage in world markets, and especially in the U.S., our number one trade partner by far. Despite the economists’ insistence that the loonie should be a lot higher, that doesn’t look like it’s going to happen any time soon.

So the prognosis is for more of the same through the winter. No crises, unless they spring from some totally unexpected source. Just more steady, non-inflationary growth. It may be dull, but it’s sure great. If all we have to complain about is the cost of gas, things can’t be too bad.

No market flies to the moon. Yes, Canada was undervalued, but that was last year. The TSE 300 has soared since then. Many of those undervalued companies are now fully priced. The ones that aren’t tend to be in industries that investors are shying away from, like forestry products. Value is becoming more difficult to find.

Energy stocks, for example, were a bargain in the summer of ‘99. Some of them are still attractive now, but they’re a lot more expensive than they were. Ditto the popular industrials like Bombardier (it’s doubled in a year) and the hot tech stocks like Celestica.

Then of course there’s Nortel, which almost single-handedly drives the TSE because of its heavy weighting. Nortel has enjoyed a terrific run. When you consider you could have bought these shares at around $30 (split-adjusted) a year ago at this time, you can quickly see the huge contribution the stock has made to the TSE surge.

Nortel is a fine company but I doubt that anyone expects that its stock is going to triple again in the next 12 months. Or even double. Even if the rest of the TSE should put on a dazzling display, there’s not enough heft there to generate the scale of return we’ve enjoyed in the past year.

All of this is to say that, while I expect our markets to continue to make advances in the months to come, the pace will inevitably slow. The explosive period is behind us. Going forward, we should realistically look for a rise in the 15%-20% range over the next 12 months — which, if you stop to think about it, isn’t anything to hang our heads about.