Money Talks: Momentum of stock market rally is questionable
Money Talks is a business column from CBC radio.
By Michael Hlinka, CBC business columnist:
Michael Hlinka: Momentum of stock market rally is questionable
Last week, the Toronto Stock Exchange broke the 10,000 mark. Some people in my
business assigned particular importance to this event. Others didn't, noting
that other than 10,000 being a nice round number, there's no real meaning to
it.
However, everyone did agree that the market's direction is telling us something
… what the message is, however, is open to debate.
One interpretation I heard floated was that there may be light at the end of
the economic tunnel. There was a surprisingly strong employment report out of
Canada on Friday. There was actually job creation in April, while in the United
States fewer people were thrown out of work than had been expected. People
losing their jobs doesn't sound like good news, but it's the rate-of-change
argument: Before there can be positive growth, the decline has to abate and
there's a certain logic to that point of view.
But here's my reading of the recent action in the TSX: The market was badly
oversold, and it should never have been below 10,000 in the first place.
How can I reach that conclusion? Actually, fairly easily. When people think
about investing, they have two broad choices: They can either put their money
into stocks or bonds. Since the world's Central Banks have been cutting
interest rates aggressively, the return you make on bonds - particularly
government bonds - has fallen off a cliff. And we know that stock markets have
a manic-depressive quality to them - their highs are generally too high and
their lows almost always tend to be too low.
What I'm saying is that 10,000 seems about right for the TSX, at least right
now.
Where do the markets go from here? My guess is that it's sideways over the next
few years … and here's why. The economy will eventually start to grow, slowly,
as all the monetary and fiscal stimulus starts to kick in. But at the same time
- and this is very important - inflation is going to rear its ugly head sooner
than you might think.
I don't know if you heard the recent comments from Tim Horton's CEO, but he
warned that price increases are around the corner. When I walked out my door
this morning, I saw that a litre of gasoline was perilously close to the $1
mark. According to Statistics Canada, even shelter costs are going up. All
these increases will contribute to inflationary pressures and weigh down the
stock market.
Look, don't get me wrong. I'm as happy as the next guy that the Toronto Stock
Exchange is hovering around 10,000 instead of 7,000. But I'm not particularly
hopeful that it will go much higher, at least in the foreseeable future.
