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

Alberta chief medical officer of health Dr. Deena Hinshaw reported 11 additional deaths over the past 24 hours. (photography by Chris Schwarz/Government of Alberta
Red Deer active COVID-19 cases drop slightly

Province reports 267 additional COVID-19 cases, 11 new deaths

On Monday, Feb. 22, Island Health listed Glacier View Secondary on 241 Beacher Drive in Courtenay as having a COVID-19 exposure Feb. 17 and 18. Black Press file photo
Red Deer sets new COVID-19 case record

There are now 565 active cases in Red Deer

The Vault Sports Pub re-opened for dine-in on Feb. 8, 2021. Leah Bousfield/ Rimbey Review.
Rimbey restaurants excited to be through second lockdown and re-open to dine-in

All say that the Rimbey community’s support was amazing during the difficult time.

Across the province, there are 2,738 active cases of COVID-19, with 18,417 recovered cases. There have been 288 deaths from the virus in Alberta since the beginning of the pandemic. (File photo)
Red Deer has 564 of central zone’s 766 active COVID-19 cases

Government of Alberta identifies 328 new COVID-19 cases Sunday

COVID
Red Deer up to 546 active cases of COVID-19

Province added 380 additional cases Saturday

Bookings for COVID-19 vaccines for people age 75 or older start Wednesday. (File photo by THE CANADIAN PRESS)
Updated: Delays for seniors booking for vaccine appointments

By 9:20 a.m. Wednesday, 4,500 seniors had booked their appointments

Black Press File Photo
Valentine’s Day shooting in Maskwacis leaves one male in hospital, one male in custody

19-year-old Francis Edward Nepoose from Maskwacis has been charged with attempted murder.

Red Deer Court of Queen’s Bench Justice Anne Kirker is expected to sentence Satnam Singh Sandhu on Friday. Red Deer Advocate file photo
Updated: Sylvan Lake man pleads guilty to manslaughter for strangling wife in 2019

Kulvinder Sandhu was strangled and died in hospital several days later

Sentencing delayed in the stabbing death of Samantha Sharpe, of Sunchild First Nation. (Red Deer Advocate file photo)
Central Alberta man not criminally responsible for killing his father in 2020: judge

Psychiatrist testified Nicholas Johnson was psychotic when he killed his father

The cover of “Hometown Asylum: A History and Memoir of Institutional Care.” (Submitted)
Ponoka-born author writes history of old mental hospital

“Hometown Asylum: A History and Memoir of Institutional Care” covers 1911 to 1971

Jacqueline Buffalo. (Photo submitted)
TikTok connects Indigenous women during pandemic

Maskwacis influencers share their stories

Todd Hirsch. (Image: screenshot)
ATB vice president gives financial forecast to Ponoka chamber

Predictions for reopening of the economy and recovery outlined

The 24/7 Integrated Response Hub is currently located in the Wetaskiwin Civic Building. Shaela Dansereau/ Pipestone Flyer.
Wetaskiwin business owners concerned over 24/7 Integrated Hub’s impact downtown

Downtown businesses have had loss of customers, threats, increased property damage and break-ins.

Meteor spotted over Edmonton, Alta., on Feb. 22, 2021 by several, who took to social media to share their surveillance camera captures. (@KixxAxe/Twitter)
VIDEO: Fireball meteor streaks across sky, spotted by early-morning risers in Alberta, B.C.

Videos of the quick streak of light flashing across the sky before 6:30 a.m. MST

Most Read