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Always expect the unexpected.

Markets can change course quickly and unexpectedly.

Gordon Pape says that when you least expect it, expect it.By Gordon Pape, Editor and Publisher

If there is one thing I have learned over the decades I’ve been writing about investing it’s that nothing should ever be taken for granted.

Just when the way ahead seems very clear, a sinkhole appears in the middle of the road and everything changes.

For example, think back to last fall. The central banks had finally decided to wind down the financial stimulus that had saved the global banking system during the financial crisis of 2008-09. Interest rates were on the rise, with the U.S. Federal Reserve Board being especially aggressive. It raised its key rate four times in 2018 and at least three more increases were expected this year in a move back to “normalcy”.

At the same time, Quantitative Easing was being unraveled as the Fed started selling off some of its bond inventory, which has swollen its balance sheet to an astounding US$4.5 trillion.

The road ahead looked clear – except it wasn’t.

Three things happened to derail the whole process.

First, Donald Trump threw a hissy fit about the rate hikes, claiming they were damaging the economy (and his re-election chances). He used his Twitter account to repeatedly berate the theoretically independent central bank and its chairman (who he had appointed), Jerome Powell. He threatened to appoint two of his political supporters to the board, although one, Herman Cain, withdrew his name from consideration last week.

While the President was on the rampage, the stock market obliged by taking a deep dive in the run up to Christmas – the Santa Claus rally looking more like the St. Valentine’s Day massacre as stocks fell to almost bear market territory. Investors never like rate hikes and the prospect of more to come in 2019 spooked them.

The final straw came in the form of reduced growth projections from several international organizations such as the IMF and OECD as trade wars undermined global commerce.

In January, the Fed abruptly changed course and now no further increases are planned for this year. The Bank of Canada is also retrenching.

This sudden shift has dramatically changed the entire investment climate.

The stock market has rebounded strongly and securities that were hard-hit when rates were on the rise suddenly look good again.

For example, last fall no one wanted to own bonds, which are highly sensitive to rising rates. But look what’s happened this year. As of the time of writing, the FTSE Russell Universe Bond Index, which represents both government and corporate bonds, was up 3.08 per cent year to date. That’s a big move in less than four months. Long-term bonds, which are the most sensitive to interest rate movements, were up 4.71 per cent in that period.

Utility stocks also saw their fortunes turn around. Between April and December 2018, the S&P/TSX Capped Utilities Index fell 8.4 per cent as rising interest rates took their toll. But from Dec. 24 until now, the index has advanced 21 per cent and is almost 11 per cent higher than at this time a year ago.

Shares in utility companies rarely show dramatic price swings but this year has been an exception. Fortis (TSX: FTS), long one of my favourites, is ahead 10.5 per cent year to date. Emera (TSX: EMA) has gained more than 16 per cent. Canadian Utilities (TSX: CU) has advanced 18.5 per cent. Short-term price changes of this magnitude in the utilities sector are almost unheard of – but when central banks suddenly change direction, anything can happen.


Real estate investment trusts (REITs) have also benefitted. They too are interest sensitive, so the rate policy change has pushed their prices higher as well. The S&P/TSX Capped REIT Index was ahead 10.3 per cent for the year as of the time of writing, and several individual securities were doing even better.

Don’t try to predict the markets

The takeaway from all this is that the stock and bond markets can change course quickly and unexpectedly. That’s why market timing rarely works. The only way it can succeed is if the world unfolds exactly as expected. It hardly ever does.

This article was originally published in The Toronto Star.

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