Suddenly, hope is busting out all over. Almost every day (okay, last Friday was an exception) seems to bring a little good news, cheering stock markets and instilling some optimism in consumers. That's great. I just hope it's real.
The mood swing really began when the U.S. Federal Reserve Board announced on March 18 that it will spend up to $1.75-trillion (U.S.) this year to buy mortgage-backed securities and U.S. Treasury notes "to provide greater support to the mortgage lending and housing markets". That translates into a huge cash infusion into the American economy and while that may lead to inflation down the road, it's a move that may forestall the deflationary spiral that was looming. Stock markets applauded.
On March 23, the applause turned to cheers when embattled Treasury Secretary Tim Geithner released details of a plan to combine with the private sector to purchase up to $1-trillion worth of bad loans from U.S. financial institutions.
As that was happening, Suncor and Petro-Canada announced a mega-merger that dramatically changes the dynamics of the oil patch and may open the door to a tidal wave of M&A activity in the West. Energy trusts, facing the imposition of the new trust tax in less than two years, could be a prime focus in this situation.
Then there were the statistics. Canadian inflation showed a modest increase. Sales of existing homes in the U.S. recorded a surprising 5.1 per cent jump in February while new home sales were up 4.7 per cent from January. Factory orders in the States were up 3.4 per cent last month. It was the largest gain in over a year and defied economists' expectations. (However, the fact that the driving force behind the numbers was a 32.4 per cent gain in orders for military aircraft and parts raises the question of whether this was a turnaround or merely a blip.)
All of this has prompted some investors to get off their backsides and start pumping some of their cash back into stocks. As I write, with only two trading days left in the month, the S&P/TSX Composite Index is up 8.6 per cent for March while the Dow is ahead by 10.1 per cent and the S&P 500 by 11 per cent.
So is the worst really over? For the TSX, the answer is maybe but only in the sense that the March 6 intraday low of 7,480 may have been the bottom for this cycle. I'm not as optimistic about the U.S. indexes, however.
In his March 24 prime time press conference, President Barack Obama, who has emerged as the world's Cheerleader of Hope, did his best to instill confidence in Americans by saying he is seeing signs of progress in the economy. But he quickly tempered that by warning there is still a high hill to climb and urging an increasingly balky Congress to approve his budget.
Here at home, we've been hearing a similar message from former Bank of Canada Governor David Dodge who has no axes to grind and can speak his mind freely now that he is out of office. He repeated again last week that it will take "years" before the global economy returns to pre-crash levels, warning that 2009 will be "a very dark page in the economic history of the world".
That's sobering stuff and it should remind investors not to become overly ebullient quite yet. There are still many shocks to come and we would be wise to expect stock market volatility to continue through the spring and summer. Don't sell those bonds yet!
In fact, rallies such as the one we saw in March are a good time to review your portfolio and see if it is time to make some changes. Many of those beaten-down stocks you've been clinging to have probably gone up in value. Ask yourself whether you want to continue holding them at this stage. There may be more attractive opportunities out there or you may want to become more defensive by building cash or adding quality bonds or preferred shares to your mix. (The banks continue to flood the market with new issues of high-yielding preferreds.)
Hope is a wonderful emotion – it keeps us going even in the darkest times. But investors must temper it with reality and the reality right now is that we still have a long way to go before economic stability is restored.
Gordon Pape's latest book is Tax-Free Savings Accounts: A Guide to TFSAs and How They Can Make You Rich. Buy your copy at 27 per cent off the suggested retail price by going to http://astore.amazon.ca/buildicaquizm-20
Gordon Pape is one of Canada's best respected financial authors and the nation's leading expert on mutual funds.
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