Fear stalks the stock markets – fear of missing out.
There has been a decisive shift in investor psychology in recent months. The trepidations about investing that lingered long after the global financial crisis and market crash of 2008-09 have finally disappeared. The traffic jams at online brokers TD Direct Investing and RBC Direct Investing last week are less a story about technology issues than they are of investors acting on a fear of missing out on hot sectors and markets.
Some words of advice for the bullish hordes: Be careful out there. There's a fine line between confidence and hubris in investing.
Marijuana stocks have been a big contributor to the trading frenzy at online brokers, but the aggressive stance of investors lately is much broader than that. Mutual-fund industry statistics show that for the first 11 months as a whole last year, bond funds far outsold equity funds. But in November, the most recent month for which there are data, investors unloaded a net $478-million in bond funds and bought a net $940-million in equity funds.
There are a few possible causes for this shift, starting with an accumulation of good stock market returns. The U.S. stock market has been a juggernaut in recent years and lately has been reaching new highs on a regular basis. The Canadian market hasn't been nearly as strong, but it still managed to add a 9.1-per-cent total return last year (share price change plus dividends) to the 21.1-per-cent jump in 2016.
Adding a sense of urgency to these returns has been the attention lavished on bitcoin and other cryptocurrencies. Their surge in value has arguably made them as much a part of popular culture as internet stocks were back in the late 1990s. People see the money made in bitcoin and it motivates them to find their own winning investment.
For those who find bitcoin too obscure to invest in, there are plenty of choices if you want some action. Marijuana stocks have been energized by the plan to legalize cannabis in Canada by July, 2018. Canopy Growth Corp. (WEED), a leader in the sector, was up 248 per cent for the 12 months to Jan. 5. The Horizons Marijuana Life Sciences Index ETF (HMMJ), an exchange-traded fund that track an index of marijuana stocks, has increased 86 per cent in price in the past month.
Even the old standby sectors favoured by aggressive investors are hot. The materials sector – basically mining – was the second-ranked performer among the subindexes of the S&P/TSX composite index in the past month, with energy next. The weakest performers have been classic defensive sectors – telecom services, utilities and consumer staples, the latter being the second-best performing sector over the past five years.
TD Direct Investing reports unprecedented levels of investor activity last week – double the trading volumes of a year earlier, and triple the level of overall client activity. Online brokerage firms get overwhelmed when investors get cocky. The same thing happened in 1999-2000, as tech stocks entered their final epic surge before a market crash.
There's a correct way for mainstream investors to trade hot stocks and sectors. Quarantine your speculative investments – don't let them mix with your investments for retirement or your children's postsecondary education. Speculate with money you can afford to lose, and be mentally prepared for a loss. In fact, be prepared to lose everything at worst.
The broader trend of more aggressive investing may actually be a modestly good thing. It's true that the stock markets haven't had a serious correction in ages. People selling bonds to buy stocks right now are definitely late to the party. But bear markets tend to be triggered by recessions and global economic growth shows signs of strength right now.
Interest rates are starting to trend higher, but they remain too low to generate the gains many investors will need to reach their financial goals. For the long-term investor, a shift of a limited amount of money from bonds to stocks could be sensible in that light.
Something all investors should bear in mind right now is that the ability to understand risk suffers when there's a lot of enthusiasm about strong markets, sectors and stocks. The big risk right now seems to be missing out, but that's wrong. Losses hurt more than gains feel good.
Rob Carrick