Q. The current American bull market began in 2009, following the Great Recession, and is now officially the longest in American history. Should that worry investors, or is there still room for this bull to run?
A. Both the economic expansion cycle and the stock market bull run are long in the tooth, by any measure, so investors would be wise to exercise some caution. Financial history suggests that extended periods of above-average equity market returns, as seen in the U.S. since 2009, are followed by at least a few years of muted or even negative returns. What is the turning point for the cycle? No one knows. But looking ahead, it is very hard to imagine that equity markets in the next five years will deliver returns that come close to matching those enjoyed over the preceding half-decade.
Q. What factors are most likely to cause a market downturn, if one is to take place?
A. The most obvious one is a significant economic slowdown, as the U.S. expansion runs out of gas amid rising interest rates. Don’t forget that the Federal Reserve Board has an almost unblemished record of triggering recessions, even when its goal is to gently cool the economy. Monetary policy is a blunt instrument. Second, with a notably erratic U.S. president at the helm, one cannot rule out the prospect of a generalized trade war, a major foreign-policy debacle, and/or an impeachment scenario. Any of these would probably be enough to sap confidence and prompt U.S. consumers and businesses to cut back on spending.
Q. Canadian markets haven’t exactly mirrored American markets. What are the implications for Canada if the U.S. markets experience a correction? Is Canada more insulated now?
A. I am gloomy on Canada for several homegrown reasons, including the trends in government policy on our side of the border, but also because the date of the next U.S. recession is getting closer by the day. Suffice to say that Canada will be caught up in any looming U.S. economic downturn, full stop. We are no more insulated from U.S. economic and financial developments than was the case 10 years ago.
Q. The last financial crisis was triggered by subprime mortgage securities. What are the big risks today?
A. I don’t see much chance of a repeat of the U.S.-centred financial crisis that occurred in 2008-09. But there is an outside chance that the large-scale build-up of credit in China, Canada and a few other countries over the last decade will end badly as global financial conditions tighten.
Q. Investor and business confidence has not been as strong in Canada as it has been in the U.S. Why do you think that is?
A. The Trump era is proving to be a uniquely challenging one for Canada, in part because of profound uncertainty on the trade file, but also because of other policy changes being implemented by the U.S. administration and Congress. The cross-border disparities in tax, energy and regulatory policies are striking. Here, taxes are rising and the regulatory burden on business is increasing, almost on a daily basis. Meanwhile, the U.S. is moving to reduce taxes and streamline regulations. The result is that capital and top talent are leaking out of Canada – a trend that’s likely to accelerate in the next two years. One telling statistic: the balance of foreign direct investment has turned dramatically negative for Canada, amounting to many tens of billions of dollars of net outflows per year. This points to our diminished competitiveness. So far, governments in Canada have done little to address the problem – in fact, in some ways they are busy making it worse.
