By Tom Bradley

A reporter called yesterday wanting to talk about the S&P/TSX Composite Index breaking through 14,000. He wanted to know my thoughts on the market’s rapid rise from the low of March, 2009 – what had taken 5 years to accomplish in the prior run-up, took just 2 years this time.

I responded by saying that we shouldn’t get too hung up on the previous high or low, especially the ones established in 2008 and 2009. In hindsight, 15,155 was fueled by a debt-induced bubble and didn’t represent anything close to fair value. On the other hand, 7,480 was an equally false bottom. With the collapse of the financial system a definite possibility, valuations on all types of stocks got to ridiculously cheap levels. Indeed, the first 4 months and 2,000 points of the subsequent market recovery could be attributed solely to valuations moving back into a more normal range.

So what about 14,000? As usual, I don’t know where we’re going from here. As I map out all the factors that will influence markets going forward, it’s confusing ... but then again, it always is. We should never pretend to know where the market will be going in the medium term.

Having said that, I find myself sitting in neutral position on equities for the following reasons:

  • The outlook for profit growth is just OK - profit margins are already high, input inflation is becoming a factor, and consumers and governments continue to be burdened with debt. But corporations are in a strong position to take advantage of any uncertainty. They’re sitting on plenty of cash with which they can grow their businesses, increase dividends and/or buy back stock.
  • Valuations in some areas of the market are getting stretched, but there are still lots of cheap stocks to be found. A theme in our funds is slow growing, high-quality companies (Canadian and foreign), with a specific focus on Japan and Europe.
  • Investor sentiment is heating up (which is negative for stocks), but is not at an extreme. There are still plenty of skeptics out there.

Given the big surge we’ve had in the markets, we shouldn’t be surprised if we see serious price declines, particularly in the hot areas of the market – i.e. resource stocks and gold. But I don’t think we’re heading for a replay of the 2008 meltdown.

If we do get a market pullback, I believe it will look more like 2000-2002 than 2008. The earlier bear market had a particular theme to it (technology), which led to huge declines in the TSX and S&P 500. But there was money to be made throughout that period. I watched my former partners Art Phillips and Rudy North do well, as did my current partner, Wil Wutherich. They found cheap stocks in the shadows of the technology and large-cap boom. Today there are equally attractive situations in the shadows of the commodity boom.