Outlook 2010: Can this bull market continue?

Stocks have soared in recent months, but reaching new highs may take a while.

Two months before the last federal election, Stephen Harper sat down with CBC’s Peter Mansbridge and uttered a line that he’d quickly regret: “I think there’s probably some great buying opportunities emerging in the stock market.” Many Canadians didn’t want to hear it; jumping into the TSX in October 2008, in the midst of the worst recession in decades, seemed ridiculous, to say the least. But it turns out Harper was right. The market has shot up 17.55% since then, and it has grown nearly every month since April.

For investors like Winnipeg’s David Mintz, that is great news. He stopped contributing to his RRSP when the market crashed, but plans to restart — with a lump sum for the payments he missed — in 2010. “I don’t think we’re looking at a global economic collapse anymore,” says Mintz, who works in administration at the College of Registered Nurses of Manitoba, “and the Canadian economy will recover next year.” He expects the TSX to reach pre-recession levels in about six months.

No Canadian economist will agree with Mintz — most say that it could take years for the S&P/TSX composite index, now sitting at under 12,000, to hit 15,000 points again — but they are generally optimistic that the market upswing will continue. The National Bank’s chief economist, Stefane Marion, predicts the S&P/TSX will hit 12,700 by this time next year, while Warren Jestin, Scotiabank’s chief economist, thinks the index will top 12,750. Getting to that point won’t be easy. Jestin, in a report, wrote that “when you get beyond the initial issues with shifts in inventories and auto manufacturing, there’s a very weak foundation for further growth.”

A seemingly inevitable interest rate hike in the second half of 2010 means even more bumps in the road. Richard Kelly, an economist at TD Canada Trust, warns that if rates increase, the market will become much more volatile. “What industries will be ready for that?” he asks. “There will be a fundamental rethink — which companies are weak, and which will perform well?”

Kelly doesn’t think we’ll see a double dip — when GDP moves back into negative territory — but does think the market likely will take a slight dive at some point in the year. Vincent Delisle, a Scotiabank economist, says the TSX will see dips between 5% and 10% — not the 50% some people still expect. “Another meltdown would be surprising,” he admits.

Still, investors can take comfort in knowing that, historically, markets make significant rebounds after recessions. According to mutual fund tracking company Morningstar, during nine previous recessions dating back to 1957, the TSX composite index fell an average of 31.8%. Six months after those downturns officially ended, the market jumped 18.3%, while a year later it was up 31.6%. Two years on, the S&P/TSX was on average 51% higher than during the recession.

Not all market watchers are optimistic about North American indexes. David Rosenberg, chief economist and strategist at Toronto-based investment firm Gluskin and Sheff, thinks markets are overvalued by 20%. He wouldn’t be surprised to see equities, especially in the United States, fall. “This may come as a surprise, but the market can indeed go down,” he says. Equities, he explains, have too much risk and too much growth — he’s waiting for another correction before seriously investing again.

Jason Kelly, the Japan-based author of The Neatest Little Guide to Stock Market Investing, is even more pessimistic. Kelly says all of the usual valuations investors use to determine how equities will perform — like company earning and cash flow — went out the window when the U.S. government began taking a more active role in the country’s finances. “Now the market relies on what the Treasury, feds and Congress are going to do,” he says. “We can’t analyze that. I don’t know when the next bailout will be.” Today, he adds, stocks are trading as one giant mass, making it difficult to determine whether one company is better than another. “Stocks all went down together and up together this year. Asset classes have become a frozen block.”

Of course, no one can accurately predict how investors will act in 2010. But the general consensus is that the worst is behind us and the market isn’t overheating. Or as Kelly says, “The economic rebound is here.”