This article was first published in the Globe and Mail on June 15, 2024. It is being republished with permission.

by Tom Bradley

Many investors are scratching their heads and wondering about the continued rise of stock prices, a run that started in the fall of 2022. Is it real or are things getting carried away?

During a cross-Canada tour last month (watch a video of the presentation here), we addressed this question. Our chief investment officer, Salman Ahmed, told clients that things are normal, more normal than they’ve been in many years. He provided a checklist.

The economy is expected to keep growing, as are corporate profits. Check. Stock valuations have risen in recent months but are still within their historical range. Check. Fixed-income securities offer yields that are in excess of inflation. Check. People are worried about politics and the next recession. Check. And three-, five- and 10-year returns for balanced portfolios are in line with long-term expectations. Check.

The one thing that is starting to be not-so-normal is the level of speculation in the market, or put another way, the enthusiasm for higher-risk investments.

Before I get there, some background.

In our client presentations, I referred to 2021 as being the most speculative time in my 40-year investment career. In the back half of that year, the steady postpandemic recovery turned into a frat party.

It was remarkable. We had the meme stock craziness. Options trading was through the roof. There seemed to be a new crypto coin (I can’t bring myself to say “currency”) every day. Anything related to electric vehicles was worth billions. Investors were excited about anything with a technology element to it, including companies in competitive, profit-challenged industries. And there was a buzz about NFTs (despite them being a mystery to most people, including me).

The party was fuelled by a wave of exciting new technologies and extremely cheap money. Interest rates were near zero in North America and negative in some parts of the world. It was a great time to borrow and risk-taking was encouraged. I’ll never forget meeting with a well-to-do retired client who desperately wanted to use his line of credit so he could join in the fun.

Fortunately, or unfortunately, depending on your perspective, rising interest rates wrecked the party and caused a nasty hangover in 2022. I like to think of it as a much-needed period of normalization.

Which brings me to today. With interest rates holding at much higher levels and the go-go investments mentioned above having crashed, I would have bet my mortgage that another speculative rush was years away, but I would have been wrong.

Meme stocks are back with a vengeance. Based on a few Reddit posts, two unremarkable companies, GameStop and AMC Entertainment Holdings have seen their stock prices gyrating like it was 2021 again.

Stock and option trading are up significantly, with penny stocks making up an increased percentage of the volume. Bitcoin is on a roll and valuations on AI-related companies, many of which don’t yet have a revenue model, assume they’re all going to be successful.

Some of these strategies have investment merit but, as in 2021, what’s noteworthy is how many high-risk, high-volatility, high-valuation things are raging at the same time.

To be clear, this isn’t nearly as wild a party as 2021, at least not yet. There are some elements missing. The market for initial public offerings is still dead, despite a long list of companies that private equity firms want to list.

Measures of sentiment – how bullish or bearish investors are overall – are in neutral territory. Indeed, I’m finding that many investors don’t seem to appreciate how good a year their portfolios are having.

So, is excessive speculative behaviour something to be concerned about? The answer is yes. It rarely produces lasting returns and often leads to disappointment. It can also reflect more broadly a complacency in the market toward risk and unrealistic expectations.

If you’re part of the party, make sure the risk you’re taking is appropriate in the context of your overall portfolio. It’s one thing to play with some fun money, but quite another to bet your retirement savings.

For me, elevated risk-taking is on the radar screen again although, as my partner says, the investment landscape is normal for most of the important factors we care about. Business fundamentals are going in the right direction and valuations are reasonable outside of a few areas of extreme enthusiasm.