On January 28, Miki Nachmani, our VP of Business Development, attended a lecture given by a prominent Canadian economist. He did an excellent job of scaring all those in attendance. Using lots of graphs and charts he stated his case that the U.S. is headed for a recession, and he recommended that investors liquidate their portfolios and hide out in cash. Since that day the S&P 500 has risen over 10% and the Nasdaq is up over 13%. Hmmm…
The good news for our clients is that while we listen to this kind of analysis, we seldom act upon these kinds of market calls. In this case, we held firm to our belief that the markets had over-reacted to the downside in the final quarter of 2018, and that they would rebound in time. We certainly didn’t anticipate that our clients would recover all their 2018 losses so quickly, and end up at all time highs as of today—but we certainly aren’t complaining. And we were once again confirmed in our belief that nobody can time the markets.
Blackrock is the largest asset management company in the world, with client balances of over $6 trillion (more than three times the size of the total Canadian economy!). Yesterday morning, Blackrock CEO Larry Fink had this to say:
“We have a risk of a melt-up, not a meltdown here. As I said, the biggest risk is that clients are under-invested, not over-invested. So, we see more upside here, especially in equities …We have record amounts of money in cash.”
As the chart below shows, cash balances held by consumers and companies are at their highest levels in 10 years. At current interest rates, after taxes and inflation, investing in cash leads to negative returns. This is unsustainable. When something cannot be sustained, it will end.
As a result of significant buy-backs by major companies, huge mergers in sectors such as media, telecommunications and pharmaceuticals, the supply of quality U.S. shares has gone down sharply in the past few years. If money on the sidelines comes into the market and creates significant new demand, you don’t need to be an economist to figure out what will happen to stock prices.