Bull or bear? Economic engine still has plenty of gas

Wayne Wachell, chief executive officer, Genus Capital. | BIV archives

Q&A | Growth hasn’t peaked, though warning signs have begun to appear, says Wayne Wachell, chief executive officer and founding partner of Genus Capital


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: There’s room to grow yet in the stock market. This cycle could run up to two more years, given the tax cuts and more capital flowing into the U.S. to help sustain this momentum. However, we are taking a more cautious stance in our approach and tilting toward defensive sectors, as some of our indicators begin to flash yellow around the rest of the world.

Q: What factors are most likely to cause a market downturn, if one is to take place?

A: The likely cause of this downturn will be higher interest rates due to an unexpected rise in inflation. All cycles tend to end when the [U.S. Federal Reserve Bank] begins to raise rates, typically due to inflation rates increasing drastically. This will choke off the liquidity, as money supply begins to slow and borrowing becomes costlier both for people and corporations.

Q: Canadian markets haven’t exactly mirrored American markets and have experienced a minor correction already. What are the implications for Canada if the U.S. markets experience a correction?

A: Since the U.S. is leading the global growth, a slowdown will not only affect it, but the rest of the world as well. Demand will begin to slow in the U.S., which impacts export-heavy countries such as China and Canada.

Q: Investor and business confidence has not been as strong in Canada as in the U.S. How much of this is attributable to the uncertainty over the North American Free Trade Agreement?

A: Most of it – many businesses are holding off on new investments within Canada because of the uncertainty. Some of this can also be attributed to the U.S. tax cuts, as they’ve created more favourable conditions for corporations to set up in the U.S. now. The lack of pipeline progress is a Canadian-specific event acting as a hindrance to the Canadian energy sector, which makes up a large portion of the [Toronto Stock Exchange] TSX.

Q: It has now been a decade since the last American recession, which became global. Canada did not suffer as profoundly as the U.S. did, thanks to our banking system. Are we necessarily any more insulated now?

A: No; in fact we are more vulnerable as the world becomes more and more integrated with each other. Treaties and trade agreements have dominated the world in the last decade as businesses look to become more efficient by cutting labour and materials costs by purchasing and moving their production abroad.

Q: The Great Recession in the U.S. was triggered by a real estate asset bubble, and the one before that was triggered by a stock market bubble – the dot-com crash. What are the big risks today?

A: The biggest risk today is China, coupled with the trade war uncertainty. When the two largest economies begin to come in conflict with one another, the rest of the world is bound to suffer.