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Is the party over for stock market?

During the pandemic, stocks surged to dizzying new heights . Now they’re crashing fast, threatening to erase gains of the past two years.

JACOB LORINC BUSINESS REPORTER

For much of the COVID-19 pandemic, Canadian investors lived by a simple, stress-free maxim: stocks go up.

Even as a viral illness infected millions and swallowed economies whole, the stock market soared, slicing through the upheaval and delivering double-digit returns that padded investors’ portfolios.

The biggest corporate winners of this time reflected our rewired lives. While we binge-watched “Tiger King,” Netflix stock jumped 108 per cent. As we forgot to unmute ourselves in meetings, Zoom shares leapt 422 per cent. In 2021, when the outside world finally looked inviting again, Home Depot stock grew 54 per cent.

Soon enough, bubbles began surfacing everywhere. A rush of new stock traders, enticed by easy-access trading apps like Wealthsimple, played the market like it was Candy Crush. Companies without obvious business prospects — the “meme stocks” à la GameStop, AMC Theatres and BlackBerry — saw their shares surge as bored investors bought them for laughs.

Now those investors are reckoning with a downturn.

Since January, stocks have embarked on a dizzying decline that has seen some of the most successful companies plunge from their pandemic highs.

The S&P 500 — one of the broadest measures of the American economy — is in a bear market, down 20 per cent from its peak at the beginning of the year. Should the index fall below the 3,850 mark, reflecting a 33 per cent drop from January,

RBC analysts warned clients last Monday they would take it as a sign the market was “starting to price in a recession.”

In savings accounts and nest eggs, the tumble threatens to erase the gains so many investors made over the past two years, leaving many Canadians with less money for retirement, their children’s college educations or down payments on properties.

“I think some people formed unrealistic expectations during the pandemic that things would stay this good forever. But now we’re seeing the other side of that,” said Philip Cross, a senior fellow at the Macdonald-Laurier Institute and former chief economist at Statistics Canada.

For the coming years, analysts in Canada and the U.S. have predicted low annual returns in the single digits — far below the approximately 17 per cent average annual return the S&P 500 produced through the 2010s.

With economic uncertainty ahead, Canadians, more than half of whom have some kind of stock market equity holding, will now have to carefully navigate a tempest of volatile assets and shifting interest rates.

The most recent bull run started shortly after COVID-19 touched North America, when central bankers dropped interest rates to record lows to avert the worst of a virus-fuelled recession.

Cheap debt and government stimulus kept the economy afloat, while helping families and businesses make ends meet when times were tough.

Some of that money, unsurprisingly, made it into investments. With little else to spend on and quick-access cash in abundance, investors piled their funds into a vast array of assets, from technology companies to cryptocurrency.

Ryan Muise, a 37-year-old webinar moderator from Toronto, opened a Wealthsimple account at the outset of the pandemic and built a diverse portfolio of tech, cannabis and entertainment stocks, taking his investing cues from Reddit forums dedicated to day trading.

Last year, when the value of his cryptocurrency suddenly grew to $350,000, he sold his holdings and bought himself a Tesla.

Even to Muise, the markets didn’t seem sustainable.

“I mean, if I can cash out $350,000 on dogecoin, then something’s probably wrong,” he acknowledged.

Beyond investors’ joie de vivre, a storm was brewing in the real economy. At shipping ports in China and Taiwan, manufacturers were struggling to keep up with consumer demand. Indebted businesses, eager to recoup lost revenue, hiked prices and posted higher salaries to recruit workers. As Russian tanks rolled through the streets of Mariupol and Kharkiv, the price of oil and wheat surged globally.

On Wednesday, Statistics Canada reported that Canadian inflation has risen 6.8 per cent over the past year, led by gas, food and housing costs.

The high cost of inflation has prompted the Bank of Canada to raise interest rates, a measure to slow consumer demand by making the cost of borrowing more expensive both for consumers and businesses.

But that cooling measure has also provoked the beginnings of a bear market that could have ripple effects across the economy, raising the spectre of a recession.

As of last week, Netflix stock had fallen 70 per cent from its pandemic high. Shopify, a homegrown darling of the tech world, fell nearly 80 per cent. And Amazon, once ranked as the world’s most valuable public company, dipped 40 per cent. (Now that title belongs to Saudi Aramco, a Saudi Arabian oil company — another sign of the times.)

Already, stumbling public companies have shown signs of downsizing. On Tuesday, Netflix, which made plans to expand in Toronto during the pandemic, announced it was cutting 150 jobs across the company amid a slowdown in revenue and a decline in subscribers. Meta Platforms, the company formerly known as Facebook, instituted a hiring freeze through to the end of the year.

Some economists, including those at major banks, fear that central bankers won’t be able to navigate the “soft landing” they aspire to achieve while interest rates rise.

“Every time central banks start to tighten monetary policy, there’s some shock to the financial system. So of course I’m concerned about a recession,” said Macdonald-Laurier’s Cross.

The stock market, to be sure, is not always an accurate indicator of economic outcomes. Investors spook easily, and can react with knee-jerk paranoia to the news of the day. In the 1960s,

Nobel Prize-winning economist Paul Samuelson joked that the markets had predicted nine of the past five recessions.

Canada’s economic indicators, to bolster that sanguine outlook, have pointed to a strong recovery in the labour market and business activity.

Unemployment is low, retail sales are high, and Canadian households have amassed a whopping $300 billion in savings over the past two years, thanks in part to government stimulus dispersed early in the pandemic.

But those same indicators that point to a strong domestic economy are all the more reason for the Bank of Canada to hike rates faster, Cross said.

“The real economy, as we’ve seen, has dealt with higher interest rates and the tightening of financial conditions quite well. But that’s exactly the problem. People are still spending, so prices are still climbing. The point of rate hikes is to get to a place where people say, ‘OK, time to stop spending.’”

In the midst of these bracing market fluctuations, financial advisers are quick to encourage investors not to panic.

With even the bond market down this year, Candice Bangsund, portfolio manager for Fiera Capital, recently told The Canadian Press she was advising clients before the market’s downturn to shift some of their portfolio into non-traditional asset classes, like private credit, real estate, agriculture or infrastructure.

Jason Heath, a financial planner with Objective Financial Partners, advises that often the best choice, for casual investors, is to keep calm and carry on.

“Stocks are a forward-looking investment that generally represents the economy six months from now. So they’ll fall when the markets anticipate a recession, but then they’ll start to climb again in anticipation of the rebound, even while you’re in a recession,” Heath said.

“The thing with the stock market is that, often by the time you hear that things are going badly, it’s too late to do anything about it.”

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2022-05-21T07:00:00.0000000Z

2022-05-21T07:00:00.0000000Z

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