The End Of Cheap Money Is Not Around The Corner And Why ‘There Is No Alternative’ To The Markets

Once you factor out winning the lottery or receiving a massive inheritance, investing in stocks is one of the most effective ways to build wealth today. Ten years of low interest rates have left even the most risk-averse investors little choice. At the time of writing, the Bank of Canada’s benchmark rate was 1.25 per cent, largely the result of a slow start to the year with economic growth muted at 1.3 per cent. (The Bank had expected to see the economy expand by 2.5 per cent in the first three months of the year.)

What does all this mean? Fixed income investments such as bonds and Guaranteed Investment Certificates (GICs) simply are not offering yields big enough to best inflation (currently sitting at approximately 2 per cent) after income tax is factored into the equation.

Even with the Bank of Canada projected to increase interest rates this summer, those increases won’t be enough to make a positive difference in a portfolio. That’s why market-shy investors are taking the TINA approach to common stocks.

TINA is the abbreviation of “There is No Alternative”. The term originated with British intellectual Herbert Spencer in the 1800s. A proponent of laissez-faire government and free markets, his argument to critics was “There is No Alternative”. In the 1980s, British Prime Minister Margaret Thatcher, herself a strong supporter of free markets, picked up the phrase and used it so often she was nicknamed Tina. Today, the term is used to describe a segment of investors who never wanted to be in the market but are because it’s the only way they can achieve their education, housing or retirement objectives. I have more clients investing in the stock market today because of this TINA environment. And it all comes back to low interest rates.

A Deeper Dive On Interest Rates

Since the financial crisis of 2008, central banks around the world have kept interest rates low in order to stimulate their economies. By charging less for financial loans and making funds more easily accessible, the hope was that businesses would borrow to improve and/or expand and individuals would save less and make more purchases, creating a virtuous circle of spending.

The mantra quickly became lower interest rates for longer. It worked. The International Monetary Fund has raised its global growth forecasts for 2018 and 2019 to 3.9 per cent because of strong trade and investment.

In my opinion, housing, manufacturing, retail and automotive sales and inflation—pretty much all the key economic indicators—are trending in the right direction. People seem to have more money in their pockets and are spending it. President Trump’s tax policies even before they took effect have certainly boosted spending in the U.S.

As a result, central banks around the world are starting to raise interest rates. The U.S. has been at the forefront of this shift having raised interest rates a number of times in the last 18 months. Canada has also raised interest rates over the same period. It’s likely the European Central Bank will do the same. No longer is the term ‘lower for longer’ valid. The central banks’ mandate is to control inflation and stimulate full employment. At the time of writing, unemployment rates are at record lows in the U.S. and Canada, sitting at 3.9 per cent and 5.8 per cent respectively. Strong employment along with the prospect of an increase in tariffs are paving the way for inflationary pressure providing further incentive for the Federal Reserve and the Bank of Canada to encourage people and organizations to save by raising interest rates.

That said, any increases should be viewed in relative terms. Even though interest rates have increased, they started at almost zero. If you increase interest rates from zero to 1 per cent, that’s still low. It will take several interest rate hikes going forward to generate returns high enough to positively impact a portfolio if the investments are in fixed income products. That’s why I believe there is still no other alternative than investing in the stock market if your objective is growth.

And then there’s politics. What if North American Free Trade Agreement (NAFTA) is not renegotiated favorably for Canada? Will the Bank of Canada continue with its plan to raise rates or will it hold off?

The Tina Effect On The Stock Market

Just as interest rates have been low for the last 10 years, the stock market has enjoyed arguably the longest bull market in its history. The case can be made that a major correction has been avoided and the market surge has been sustained, in part at least, because TINA investors have come into the market during dips, buying low and selling high.

How To Handle Market Volatility

Even though there has been some volatility recently, corporate earnings are strong and stocks are largely fairly valued. This is still a good time to be in the market. My approach: Cautious optimism. In other words, have confidence in the market but be prepared if things go south. This means never chasing the next hot stock. Instead look for investments that make sense regardless of any policy change.

Here are three key pieces of advice to stay invested and protect your portfolio until there is a more viable alternative.

Make sure your portfolio is unique to you.

Just because you’re medium risk, for example, doesn’t mean your portfolio should be the same as 100 other people. One of the things I do is create portfolios specific to each individual client’s needs.

Diversify.

It’s the cheapest way to protect your assets.

Be proactive and constantly evaluate your portfolio.

The buy and hold strategy made famous by Warren Buffett no longer works. When your investment reaches the target you’ve set, take the profits and rotate them into something that is currently cheap.

Allan Small is the Senior Investment Advisor at the Allan Small Financial Group with HollisWealth®, a division of Industrial Alliance Securities Inc., (www.allansmall.com) as well as the author of How To Profit When Investors Are Scared. He can be reached at (416) 332-3863 or via email at allan@allansmall.com.

This information has been prepared by Allan Small who is an Investment Advisor for HollisWealth®. The opinions expressed in this article are those of the Investment Advisor only and do not necessarily reflect those of HollisWealth. HollisWealth® is a division of Industrial Alliance Securities Inc., a member of the Canadian Investor Protection Fund and the Investment Industry Regulatory Organization of Canada. Allan Small Financial Group is a personal trade name of Allan Small.