Criticism has been directed at this column for being too negative about the stock market. However, consider the following.
Since 1998, the North American stock markets on average are virtually unchanged.
There have been huge declines followed by recoveries, but nevertheless, overall, there has been no gain. Furthermore, in view of the low dividend yields, investors would have been further ahead by simply buying bonds or even banks’ certificates of deposit.
Is the past a prologue to the future? Perhaps that is being too optimistic.
First of all, public-sector outlays, one of the mainstays of our economy, will be restricted; the outlook, to put it in perspective, will be challenging.
Provincial and local governments are in disarray. Their expenditures represent a crucial per cent of total GDP, but they need to slash spending in order to close massive fiscal gaps.
Needless to say, the federal government’s finances are in the worst shape since the end of the Second World War. A few years ago the federal budget was generating an annual surplus of $13-billion, compared to the approximately $70-billion deficit nowadays.
Either taxes have to be increased substantially or major cutbacks loom in spending programs by governments at all levels.
This retrenchment in the public sector will be among the greatest headwinds facing our economy. The stock markets remain optimistic that the bounce in GDP in recent quarters is a harbinger of better times. However, more government expenditure programs are out of the question as all their treasuries are empty. Yet, it was those stimulus programs that sustained the economy over the past year.
To compound that problem, there is underway a political shift on public opinion, characterized by a powerful move to cut budget deficits.
That raises the question: how will the economy do without continued support now that all the governments’ stimulus programs have been completed?
On top of all that, the U.S. economy is in a fragile state. Nearly half of our GDP comes from exports to south of the border. The consensus view is that growth there will slow because of declining government spending and weak exports.
Both Canada and the United States pin some hope on expanding markets overseas that will entail demand for their exports. Yet, the European Union is in deep economic trouble, China is trying to curb its excessively strong economy, and most other nations are cutting back on governments’ stimulus spending.
Given the gathering clouds referred to above, it is 1ikely that the stock markets will continue to surprise by going nowhere – or declining.