Global Trade and Social Turmoil
 

Markets Making All Time Highs

October Looms
 

What Could Possibly Go Right?

In my last commentary (May/2025) I looked at the massive stock market rally from the April lows. The debate at the time was whether this was a Bear Trap or the continuation of the Bull Market which began in October 2022. My conclusion was the latter. There was just not the kind of Economic evidence to support a recession call for the US. Markets do not go down and stay down just because they are high. A new Bear Market needs recurring and worsening business and economic data. That was not evident last May.

Ok so what about today? The conflicts in the Middle East and Ukraine are as bad as ever. Trade chaos continues. Tariff consequences are beginning to seep into economic data but are yet difficult to quantify. Meanwhile Stock Markets are making highs nearly every week. Are Markets “Irrationally Exuberant”?

I think not, and what follows is my case for why I believe the Bull Market remains intact.

In December 1996, then Federal Reserve Chairman Alan Greenspan made his famous “Irrational Exuberance “speech. Markets were making all-time highs, and he felt investors were becoming indifferent to risk. However, the Bull Market paid no intention. Had an investor liquidated their stock investments they would have missed the following gains on the S&P:

1997 +20.3%

1998 +26.7%

1999 +19.5%

When the Bear Market came in 2000 the S&P declined 10.1%*

(Yahoo Finance-Kevin Matras, November 15, 2024)

You might say this time is different. The World is in such turmoil and the current US Republican Administration is changing the rules of governance, in the words of the President “like no one has ever seen before.” News flash: it is always different. Let us look at what was happening in the world after Greenspan’s speech.

Between 1996 and 2000 the following took place:

The war in Kosovo/Bosnia/Yugoslavia continued and NATO Forces were involved.

President Clinton was impeached over his friendship with Monica Lewinsky

Hong Kong was “Returned” from the UK to the Peoples Republic of China

Y2K fears ranged from planes falling out of the sky to ATMs locking you out of your cash.

What about the “October Effect”? This refers to the belief that stocks go down in October. It is more a psychological expectation than a real phenomenon. Statistics contradict the theory. One hundred years of Octobers ending October 2023 shows a net positive return despite major crashes like 1907,1929 and 1987*. (the latter not only saw the steepest one day % market decline in history it was also mere months after I embarked on my life on Bay Street, no wonder I don’t believe in market timing)

(*Tom Lee – Fundstrat Capital, September 2025)

We have a rather benign economic environment in the US. Inflation and unemployment are low by historical averages. Interest rates are almost certainly going to go lower starting this month and an old Wall Street expression warns us “Don’t Fight the Fed.” Do not look for down markets if rates are dropping. Tom Lee at Fundstrat Capital in his September 8th 2025 commentary points out that the times when rates were previously cut in September (September 1998 and September 2024), the S&P rallied 6.2% and 2%, respectively.

Finally, corporate earnings are coming in higher than what was feared, and capital spending planned for this year and next is remarkably high. AI may be over hyped but there is no denying the capital being spent on it. Whether the investment will pay off for the mega companies involved is a topic for discussion in 2026

What should an investor do?

Investors should consider maintaining their equity allocation and not let fearful headlines affect their long-term plans. One of my investment rules that allows me to be less fearful of stock market volatility is to see that investors have 2 years’ worth of liquid assets (cash, GICs maturing, investment or pension income) sufficient to cover your living expenses. If you do not have to sell stock during a downturn to cover living expenses, you dramatically reduce the odds of taking a permanent loss of capital.

We are always happy to review your investments with you to ensure your asset allocation and risk levels are aligned with your investment objectives and risk tolerance. Let us answer any questions or concerns you may have.