A Wealthsimple Trade app icon is shown on a smartphone on Tuesday, Dec. 15, 2020. Some stock trading platforms say usership has spiked in 2020, as a whipsawing stock market and more time at home has Canadians day trading. THE CANADIAN PRESS/Jesse Johnston

A Wealthsimple Trade app icon is shown on a smartphone on Tuesday, Dec. 15, 2020. Some stock trading platforms say usership has spiked in 2020, as a whipsawing stock market and more time at home has Canadians day trading. THE CANADIAN PRESS/Jesse Johnston

Overheated stock market at risk of bubble in a disconnect from economy, experts say

Canada’s unemployment rate climbed to 9.6 per cent in January as 212,800 jobs were erased that month

“We’re all in this together” has been a common refrain since the arrival of the COVID-19 pandemic last March, but the yawning chasm between dismal economic data and soaring stock market valuations suggests some Canadians are doing much better than others.

A large segment of the population is untouched financially by the crisis or in better shape. The housing market is strong and those able to work remotely have saved mountains of cash they are using to pump up stock markets.

Meanwhile, lockdowns have caused major disruptions for workers in the service sector and other parts of the economy that have been forced to rely on government support.

“All the jobs that were lost in the country since the beginning of the crisis — not some, all — were in low-paying sectors, low-paying occupations,” says Benjamin Tal, deputy chief economist for CIBC.

North American stock markets have been on a tear since March, setting record highs almost daily even while COVID-19 has battered the economy and produced lacklustre employment data.

Some individual stocks have soared amid the froth. Tesla shares are up about 1,160 per cent over the past year while Ottawa’s Shopify Inc. has risen 425 per cent to become Canada’s most valuable company by market capitalization.

The S&P/TSX composite is up 65 per cent from March 2020 lows and 6.5 per cent in February alone. The rebound has been even stronger in the U.S., with the Dow up 73 per cent, S&P 500 79.5 per cent and the tech-heavy Nasdaq composite up about 113 per cent.

Meanwhile, Canada’s unemployment rate climbed to 9.6 per cent in January as 212,800 jobs were erased that month.

The disconnect between so-called Main Street and Bay or Wall streets is not new, but has been accentuated during the most “asymmetrical recession” in Canadian history, said Tal.

Retail investors with healthy cash balances have increased market volumes and contributed to frenzied buying that propelled stocks like GameStop and BlackBerry Inc.

The TMX Group, which runs the Toronto Stock Exchange, has noted that amid an increase in volumes, the proportion of retail trading peaked at 45 per cent of total volume traded in January, compared with an average of 35 per cent a year earlier.

“The things that are underlying the strength in retail trading are drivers that are going to continue for some time,” TMX chief executive John McKenzie recently told analysts on an earnings call.

He pointed to the low interest rate environment that supports market valuations, a large work-from-home culture right now and continuing growth in retail trading applications.

Famed investor Jeremy Grantham, who has predicted some past bubbles, now says that the bull market that began in 2009 has “matured into a full-fledged epic bubble” featuring “extreme overvaluation, explosive price increases, frenzied issuance and hysterically speculative investor behaviour.”

“I believe this event will be recorded as one of the great bubbles of financial history, right along with the South Sea bubble, 1929, and 2000,” he wrote in a commentary posted on his company website.

“These great bubbles are where fortunes are made and lost — and where investors truly prove their mettle.”

While some stocks are overheated and could burst, Tal doesn’t see that happening for the whole market.

“I think that clearly we have to distinguish between the speculative pockets everybody’s talking about and the general market,” he said.

“Of course there’s always risks that it will be dragged into it but at this point it doesn’t seem to be a reasonable scenario.”

Massive fiscal and monetary stimulus is propping up markets, observers say, unless earnings collapse and central banks tighten their policies.

Yet Federal Reserve chairman Jerome Powell said last week that the U.S. central bank will remain dovish until employment fully recovers.

Erik Bregar, head of currency strategy at the Exchange Bank of Canada, thought that the GameStop Reddit frenzy might have taken some speculative excess out of the market.

“But as soon as those stocks crashed, everybody breathed a sigh of relief and bid the market up again,” he said in an interview.

“It’s hard to kill this thing … you can make lots of fundamental arguments that it shouldn’t be this high, but it hasn’t paid to bet against it just yet.”

He said there’s just too much positive news and widespread expectation that the global economy will be strong in the second half of the year as COVID-19 vaccinations progress.

“I continue to believe that stocks are going to represent good value as we move forward here throughout 2021,” said Mike Archibald, vice-president and portfolio manager with AGF Investments Inc.

He said unlimited liquidity and people putting their saved money into the stock market are key drivers for its growth.

In fact, the savings rate and cash deposits have increased by more than 10 per cent the last two quarters, the highest level on record, says Brian Belski, chief investment strategist at BMO Capital Markets.

“Yes, valuations appear stretched at first glance, but they also need to be considered within the context of historically low interest rates and little inflation, ingredients that are likely to persist throughout 2021 and beyond, in our view,” he wrote in a report.

“When viewed through this lens, we believe it is not unreasonable for market valuation to sustain (or even expand slightly) from its current level.”

Some areas of the market, including cannabis stocks, cryptocurrency and parts of technology are “frothy,” but other investments remain attractive, said Archibald.

“By and large if you look at what I would call solid, stalwart companies … those stocks still appear to be reasonably priced to me and I still think there’s good upside potential for a number of those businesses.”

It’s natural and healthy for markets to pause after strong runs. Stock markets are forward-looking and anticipate where things are going in the future, not where they stand now.

“If you can look beyond the next few months, the outlook is looking extremely bright,” said Candice Bangsund, portfolio manager for Fiera Capital.

A near-term correction of five to 10 per cent is possible and should be viewed as a buying opportunity, but massive spending is putting a floor under any big movements downward, she said.

Besides, we won’t know if we are in a sustained rally or a speculative bubble “until it is in the rear-view mirror,” Kristina Hooper, chief global market strategist at Invesco, wrote in a note.

“And it really doesn’t matter for longer-term investors. The reality is that market rallies and corrections occur, but the trend line for stocks over the long run is upward.”

Ross Marowits, The Canadian Press

CoronaviruseconomyStocks

Get local stories you won't find anywhere else right to your inbox.
Sign up here

Just Posted

A health care worker prepares to test a Coastal GasLink field worker for COVID-19. (Coastal GasLink photo)
Coastal GasLink begins COVID screening of pipeline workers

Construction is once again ramping up following Northern Health approval of COVID management plan

FILE – A COVID-19 vaccine being prepared. (Olivia Sullivan/Sound Publishing)
B.C. seniors 80 years and older to get COVID vaccine details over next 2 weeks: Henry

Province is expanding vaccine workforce as officials ramp up age-based rollout

Chris Paulson of Burns Lake took a quick selfie with a lynx over the weekend of Feb. 20-22, 2021, after the wild cat was found eating some of his chickens. (Chris Paulson/Facebook)
VIDEO: Burns Lake man grabs lynx by scruff after chickens attacked

‘Let’s see the damage you did, buddy,’ Chris Paulson says to the wild cat

Northern Health has declared a COVID-19 outbreak at Brucejack mine, 65 km north of Stewart on Feb. 11, 2021. (Pretivm Photo)
Northern Health has declared a COVID-19 outbreak at Brucejack Mine, 65 kilometres north of Stewart on Feb. 11, 2021. (Pretivm Photo)
Northern Health reports 20 more COVID-19 cases in outbreak at Brucejack Mine

So far, 42 people have tested positive, nine cases are active and self-isolating onsite

Fisheries and Oceans Canada released it's 2021 Pacific Herring Integrated Fisheries Management Plan Feb. 19. (File photo)
Northern herring opportunities kept to a minimum

2021 management plan caps Prince Rupert fishery at 5 per cent

Abbotsford’s Kris Collins turned to TikTok out of boredom when the provincial COVID-19 lockdown began in March 2020. She now has over 23 million followers on the video app. Photo: Submitted
Internet famous: Abbotsford’s Kris Collins is a TikTok comedy queen

Collins has found surprise stardom alone with a phone

A Vancouver restaurant owner was found guilty of violating B.C.’s Human Rights Code by discriminating against customers on the basis of their race. (Pixabay)
Vancouver restaurant owner ordered to pay $4,000 to customers after racist remark

Referring to patrons as ‘you Arabs’ constitutes discrimination under B.C.’s Human Rights Code, ruling deems

Nanaimo children’s author and illustrator Lindsay Ford’s latest book is ‘Science Girl.’ (Photo courtesy Lindsay Ford)
B.C. children’s writer encourages girls to pursue the sciences in new book

Lindsay Ford is holding a virtual launch for latest book, ‘Science Girl’

Pig races at the 145th annual Chilliwack Fair on Aug. 12, 2017. Monday, March 1, 2021 is Pig Day. (Jenna Hauck/ Chilliwack Progress file)
Unofficial holidays: Here’s what people are celebrating for the week of Feb. 28 to March 6

Pig Day, Canadian Bacon Day and Grammar Day are all coming up this week

Staff from the Marine Mammal Rescue Centre, passersby, RCMP and Nanaimo Fire Rescue carried a sick 300-kilogram steller sea lion up the steep bluff at Invermere Beach in north Nanaimo in an attempt to save the animal’s life Thursday. (Photo courtesy Marine Mammal Rescue Centre)
300-kilogram sea lion muscled up from B.C. beach in rescue attempt

Animal dies despite efforts of Nanaimo marine mammal rescue team, emergency personnel and bystanders

Doctors and counsellors warn of an increase in panic attacks, anxiety, depression and suicide ideas between ages 10 to 14, in Campbell River. ( Black Press file photo)
Extended pandemic feeding the anxieties of B.C.’s youth

Parents not sure what to do, urged to reach out for help

Join Black Press Media and Do Some Good
Join Black Press Media and Do Some Good

Pay it Forward program supports local businesses in their community giving

Kara Sorensen, diagnosed with lung cancer in July, says it’s important for people to view her as healthy and vibrant, rather than sick. (Photo courtesy of Karen Sorensen)
B.C. woman must seek treatment overseas for inoperable lung cancer

Fundraising page launched on Karen Sorensen’s behalf, with a goal of $250,000

Gina Adams as she works on her latest piece titled ‘Undying Love’. (Submitted photo)
‘Toothless’ the kitty inspires B.C. wood carver to break out the chainsaw

Inspired by plight of a toothless cat, Gina Adams offers proceeds from her artwork to help animals

Most Read