Are investors having fun yet?

Even as lockdowns linger, the market surges. Some of it may be silly, but some of it is just a return to normal times, experts say

Stocks go up.

Sometimes they go down, but mostly they go up. The world can be thrust into a catastrophe of apocalyptic proportions, a viral illness infecting millions and swallowing economies whole, and — sooner or later — stocks will go up.

The S&P/TSX Composite Index made good on this theory last week, reaching the 20,000 mark on Tuesday for the first time ever. Despite lockdowns and unemployment, rising inflation and supply-chain bottlenecks, the market has staged a dramatic recovery that erased its pandemic-era losses and then some.

To quote Jason Heath, a financial expert: “It’s a bit odd.”

The rise over the past 14 months represents one of the strongest bull markets ever. The TSX has climbed 78 per cent since stocks nosedived in March 2020, edging past its pre-pandemic levels last January. It puts past recoveries to shame, with markets taking less than a year to reach prerecession highs when, in comparison, the markets took six years to recover after the 2008 crash.

What gives? For starters, a sanguine economic outlook and an abundance of stimulus have propelled a surge in investing — both in equities and real assets. Household savings have soared during the pandemic while bankruptcy and defaults rates have remained impressively low.

Fred Demers, an investment strategist at BMO Global Asset Management, says the market is a reflection of life returning to normal.

“People feel like things are getting better. Commodities are doing well, defaults are low and there’s a strong expectation of economic growth into next year,” says Demers.

Meanwhile, stay-at-home restrictions combined with the rise of ultra-addictive fintech have fostered a widespread interest in finance.

Take Ryan Muise, for example, a 37year-old webinar moderator who opened a Wealthsimple account right before the lockdowns came into effect. Before the pandemic hit, Muise gave all his savings to the banks to invest for

him. But then he found himself stuck in his North York apartment with too much time on his hands and a wealth of crowdsourced financial advice at his fingertips.

“Most days I’m sitting at home, at my desk, without too much on my plate. So I pull up the Wealthsimple app and I usually follow whatever most people are talking about online,” Muise explains. “If people are talking about a certain cannabis stock, I usually buy it and sell when necessary. I don’t always make a big profit, but any losses I take don’t stay low for very long. The stocks go up eventually.”

Muise holds a diverse portfolio — focusing primarily on tech, cannabis and entertainment — and takes most of his cues from Reddit forums dedicated to day-trading.

Lately, he’s been wondering how long the market’s exuberance will last.

The speculative behaviour of investors has produced a bubble of sorts, as assets with little inherent value rise well beyond their actual worth.

The GameStop saga — which may now seem like ancient history — is one of many examples. The latest marker of frenetic trading activity is AMC, the beleaguered movie-theatre chain that doubled in value last week as retail investors drove up the stock price for laughs. As of Friday, it was valued at roughly the same as Deutsche Bank.

Muise knows all about it. He bought $150 worth of dogecoin in 2015 — when the cryptocurrency was worth a fraction of a cent — meaning the value of his cryptocurrency portfolio rose to $350,000 in May after Elon Musk professed his love for decentralized banking on Twitter. Muise sold his holdings last week and bought himself a Tesla. (Just go along with it — this is normal now.)

To him, the markets don’t seem sustainable. “I mean, if I can cash out $350,000 on dogecoin, then something’s probably wrong,” he says.

What happens if the bubbles in the market burst?

Heath says the average investor would be prudent to ignore all this. Every peak that the S&P 500 and the TSX hits is eventually eclipsed by another, higher peak. So while the market may be in a bubble phase right now, it will still rise over time, he says.

“Timing the stock market is very, very difficult. What matters is your risk tolerance and time horizon. If you’re investing for the long term, this milestone doesn’t matter. Stocks will go up,” Heath says.

Soon-to-be retirees should rest easy, too, he adds.

“Ideally, a retiree is only taking a modest amount of withdrawals from their investments every year. Maybe between two and five per cent, depending on their age or situation. So if you’re only taking out a small per cent of your overall account, you probably don’t need to change your investment strategy,” says Heath.

Dan Hallett, vice-president of research at HighView Financial Group, says investors who pull out of the market because they fear a collapse end up putting themselves at a much greater financial risk.

“I can’t even count the number of people that I spoke with in the late 2000s that told me they either hesitated investing their idle cash in 2007 and early 2008 or sold all of the stocks they owned around that same time,” Hallett says.

“Without exception, every one of them sat out the full crash driven by the 2007-09 financial crisis, and sat out the full recovery of that bear market’s loss. All of them jumped back in at a point where it proved to be a negative overall.”

When looking at a diversified mix of global and domestic stocks, Hallett says he expects rates of return will be significantly positive over the next decade but more modest than the market in the decade prior to the pandemic.

To navigate the current state of the market, Hallett says your best bet is to hold assets that each play a unique role in your portfolio. For example, the economy may or may not be headed into a period of inflation — if so, “it’s not a bad idea to make sure part of your portfolio will benefit from more inflation,” he says.

“It’s that kind of boring stuff that makes for a reliable, sustainable investment plan.”

Because, after all, stocks go up.