Columns

The crash that cried wolf

Ross Laver November 17 1997
Columns

The crash that cried wolf

Ross Laver November 17 1997

The crash that cried wolf

Columns

Personal Business

Ross Laver

The difference between good luck and bad luck is often a matter of perspective. The morning after last month’s stock market plunge, a Maclean’s reporter spoke by telephone to a retired investor in Atlantic Canada. It turned out that she was breathing easy: fearing a market dip, her financial planner had shifted her out of equity mutual funds last July. When she heard about the sharp plunge in share prices on Oct. 27, “I thought, Wow, aren’t I lucky?’ ”

At the time, her response made perfect sense. But the trend in the market since then proves once again that it’s better to stay

invested during periods of volatility than to retreat to the sidelines and wait for conditions to improve.

How so? Well, to begin with, the drop in share prices last month was nothing like the massive meltdown portrayed by most media reports. It wasn’t even the worst stock market decline of 1997. Last month’s selling spree drove the Toronto Stock Ex-

change 300 index down 6.2 per cent. In comparison, the index slid 9.3 per cent between early March and mid-April, when inflation fears were stoking concern about the impact of rising interest rates on corporate profits.

There’s a lesson in the media treatment of these two events. October’s drop struck during a single frenzied trading day, prompting Third World War-style headlines and sombre “I told you so” lectures from pundits eager to waggle their fingers at “greedy” investors. In contrast, the earlier decline unfolded over several weeks. The loss of share value was much more significant, yet it lacked obvious drama—and so was ignored by most commentators.

And what of those predictions of imminent doom? For the most part, they were forgotten on North American markets last week. By the end of trading on Friday, the TSE 300 stood at 6,852, a gain of 15.6 per cent since Jan. 1 and only five per cent below its all-time record, set on Oct. 7.

Despite the current volatility, many analysts believe last month’s downturn will turn

The doomsayers have repeatedly called for a bear market, and they haven’t been right yet

out to have been a mild hiccup on the way to yet more gains.

Which brings us back to that retired investor referred to above. Even with the recent dip, Canadian stock prices are generally higher now than in July. In other words, probably would have made more sense to have remained in the market all along instead of selling stocks and mutual funds during the summer and buying them back after the correction.

In their haste to draw conclusions, the doomsayers have managed to perpetuate two unfortunate myths about the stock market. One is that today’s markets are so over-

valued that they have lost all connection with the state of the economy and corporate performance. The other is that investing in the market right now is far too risky for small players.

In reality, the tremendous run-up in stock prices over the past three years has everything to do with the state of the economy— specifically low inflation, low interest rates and spi-

ralling corporate profits. Yes, unemployment is still high, but that hasn’t stopped Canadians from buying more houses, cars and consumer goods than at anytime since the 1980s. Today’s stock prices amount to bet that inflation will stay low and that company earnings will remain strong. Time may prove otherwise, but the pessimists have been calling for a bear market every year the past three or more years, and they haven’t been right yet. If anything, shareholders are too quick to react to every piece of economic news, poring over it for any clue as to the direction of interest rates.

As for risk, that again depends on one’s perspective. True, people who invest Treasury bills or GICs are guaranteed make money, and in that sense are taking risk. But in a broader sense, such people are taking a very big risk—the risk of forgoing profits they would have earned by investing a portion of their savings in a well-diversified basket of stocks and staying in the market for the long term, regardless of hiccups, corrections and “meltdowns.”