A trader on the floor of the New York Stock Exchange in August. Most investors seem to believe we still haven’t reached the cyclical peak.Yuki Iwamura/The Associated Press
By any measure, North American stock markets are expensive. As I write, the price-to-earnings ratio of the S&P 500 is 28.68, according to macrotrends.net. That’s nowhere near the record high of over 120 that was set during the 2008-09 financial crisis, but it’s well above historic averages.
But most investors seem to believe we still haven’t reached the cyclical peak. In other words, there are more profits to come.
That was the majority consensus among those who responded to a recent poll of my social-media followers. It was not a scientific survey, but past results from this group have generally been surprisingly accurate in predicting future trends.
This time we asked: Which asset class do you think will perform best between now and year-end? There were four choices: stocks, bonds, gold and bitcoin.
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Bonds drew little interest, despite last week’s rate cuts in Canada and the U.S. Lower interest rates usually boost bond prices and, with more central bank easing likely to come in the fall, the outlook for the bond market between now and year-end looks more promising than we’ve seen in a few years. In an online discussion last week sponsored by Canadian Imperial Bank of Commerce (CIBC), the bank’s deputy chief economist, Benjamin Tal, said he expects the Fed and the Bank of Canada to continue to cut rates into next year, with the Fed eventually dropping its rate by a total of 100 basis points.
Cuts of that magnitude would have a significant positive impact on short-term bond prices. But only 3 per cent of respondents to our poll felt bonds would be the top performer as the year winds down.
Bitcoin also drew a meagre 3-per-cent support. That’s more surprising because the mystical metal has gained about 25 per cent so far this year and recently touched an all-time high of US$124,457.12. Despite that strong performance, there is a lot of skepticism towards cryptocurrencies. Christine Lagarde, president of the European Central Bank, describes bitcoin as “a highly speculative asset, which has conducted some funny business and some interesting and totally reprehensible money laundering activity.”
Gold meets with less resistance. December futures set more new highs last week, and the price is up about 43 per cent year-to-date. Among our poll respondents, 38 per cent felt it would be the best-performing asset between now and year-end.
That’s a strong show of confidence, but some of the world’s smartest investors aren’t convinced. Warren Buffett, for one, isn’t a fan of the metal. In a letter to Berkshire Hathaway shareholders in 2011, he wrote: “Gold has two significant shortcomings, being neither of much use nor procreative. True, gold has some industrial and decorative utility, but the demand for these purposes is both limited and incapable of soaking up new production. Meanwhile, if you own one ounce of gold for an eternity, you will still own one ounce at its end.”
But gold also has its proponents. Economist Nouriel Roubini, also known as “Dr. Doom,” once said: “In times of financial crisis, gold shines as the ultimate safe-haven asset.”
I wouldn’t go so far as to say we’re about to revisit 2008, but Donald Trump’s tariff policies and the fragile state of the global economy are causes for concern.
Despite this, stocks were chosen by 56 per cent of the survey respondents as the asset class that will perform best over the next three months. The fact that gold and bitcoin have outperformed stocks this year didn’t seem to matter.
As of Sept. 19, the S&P 500 INX was ahead 13.31 per cent year-to-date, while the S&P/TSX Composite TXCX had gained 20.38 per cent.
Interest-rate cuts should be beneficial for stocks, especially if there are more coming, as Mr. Tal suggests. “I’m optimistic about next year and into 2027,” he said.
Michael Keaveney, CIBC vice-president, managed solutions, who was also part of the panel discussion, said the current environment suggests that a balanced portfolio that includes fixed income assets is the best choice for investors going forward.
But he warned that any bond assets denominated in U.S. dollars should be hedged into Canadian currency. “The U.S. currency is going to come down,” he said. “One of our policies in our portfolios has typically been to hedge currency because we really believe that bonds should not give you volatility. If you expose your investments to currency, you are going to get some volatility you don’t want.”
As for stocks, he said the Magnificent Seven are “priced for perfection,” but he suggested they are still riding some positive tailwinds.
Bottom line: Maintain a balanced portfolio, hedge currency back to Canadian dollars and keep your tech stocks.
Gordon Pape is editor and publisher of the Internet Wealth Builder and Income Investor newsletters.