Look, the TSX is at 10,000 points!

If you’ve been living on another planet since last fall and look at the stock markets today, you must be wondering what everyone was so worried about these past few months. As this article is being written, the Toronto Stock Exchange is at approximately the same level as it was in October 2008. Same thing for the Dow Jones.

In short, it’s as though nothing happened over the past six months. Astonishing, isn’t it?

Toronto Stock Exchange S&P/TSX Index
Source: Yahoo Finance

30%... for now

In fact, no, it’s not astonishing. After it came crashing down to nearly half its value between July and March, the Canadian stock index has since rebounded more than 30%. But the markets are still quite volatile and, these days, bullish trading sessions are sometimes followed by very bearish ones.

This is because the financial markets have properties that are forgotten all too soon when they fluctuate from one extreme to the other, as they have been doing since last July:

  • whether in good times or in bad, their progress is never linear. Rather, it’s in sudden bursts, both up and down;
  • they are driven by two irrational factors: fear, when there is a downturn, and greed, when there is an upswing; 
  • and it’s precisely when they are most irrational that the best investment opportunities present themselves.

The people who, in March, ignored the fear and continued investing as usual are now patting themselves on the back. The others are asking themselves if this might be the right time to “get back in.” Perhaps … but only if it’s for the right reasons.

A sucker’s rally?

Right now, some analysts are warning investors to resist the temptation to jump on the bandwagon when it may already have reached its destination. In their opinion, the factors that would justify the markets’ current exuberance are not yet visible in the economy. In fact, they feel that institutional investors returning to the market because they are forced to invest the large amounts of liquid assets they have on hand are responsible for the recent rebound … as are others who want to be the first to take a chance on the signs pointing to an economic recovery.

But, it is true that the signs are not completely convincing. To date, consumer spending in the US is not up and corporate investment remains stagnant. In fact, only the governments are spending massive amounts of money… money they will soon have to pay back to their creditors (for example, the federal Finance Minister recently announced that, this year, the deficit would amount to a colossal $50 billion!) Are these really signs of a recovery? Many people don’t think so.

Conditions for a true economic recovery
SAccording to economists, for the stock markets to be assured of a true economic recovery, at least some of the following six conditions will have to be fulfilled south of our border.
ConditionsThe current situation
1. Increased consumer spendingNo immediate signs
2. Improvement in the residential real estate marketNo visible progress for housing starts
3. Job recoveryLJob losses seem to be stabilizing
4. Income growthNot in the cards for the time being
5. Business confidenceUncertain according to surveys
6. Resumption of credit flowImproving steadily

To invest or not to invest?

In short, if you want to start investing again because you want to make a quick buck, it may not be worth your while. But, over a longer term, don’t lose sight of the fact that the markets are still more than 30% lower than in the summer of 2008. Sooner or later, they’ll make up this loss, so the potential for an upswing is better now than it was at the same time last year.

But, be aware, the road will very likely be a bumpy one!

Combien de temps ?
The New York Times recently introduced an on-line calculator to find out how long it would take for someone to recover his/her investment losses using different scenarios. You enter your numbers and the sometimes surprising results are displayed on an interactive chart. Click here to try it out.