As Canada’s economy comes under pressure, the stock market is the hottest asset class.
But with the government forecasting the economy will shrink this year by 2.7 per cent and the economy to grow by 2 per cent in 2018, many investors are betting on an even bigger boom in the economy in the years ahead.
That would leave a lot of investors out of pocket, but for many who are looking to build wealth and create a stable life in the new century, it’s a big gamble.
The stock market was up nearly 7 per cent on Monday, the highest it’s been in more than a year.
The Dow Jones industrial average rose 0.9 per cent.
Canada’s stock market index jumped 7.3 per cent over the same period, while the S&P 500 rose 6.6 per cent, according to Thomson Reuters data.
But the most volatile asset class, the bond market, has been a bit more volatile.
For most of the year, it was trading near record highs.
But in October, it surged more than 7 per-cent to a record high of $1.3 trillion.
Investors now see a long-term risk in a market that’s seen the biggest gains in nearly a decade.
That could push down interest rates even further.
The risk that a massive market rally could cause interest rates to rise could weigh on the economy as investors seek to refinance their debt and make long-range plans for retirement.
“It’s a little bit more risky than the markets we’ve been using,” said Tim McCollum, a senior economist at BMO Capital Markets in Toronto.
“But it is a risk that we are taking on.”
A big stock market rally may force the government to take more drastic action, which could lead to higher interest rates for Canadian homeowners and businesses, said Mr. McCollus.
“The bigger the market rallies, the greater the potential for a negative impact on growth,” he said.
Investors could be waiting for some sort of announcement from the government on the debt that it’s borrowing to fund the economy.
The government has been borrowing heavily to pay for the cost of borrowing, and in recent months, it has been spending more on the infrastructure.
That’s creating a huge drag on the growth of the Canadian economy.
But as the economy grows, it may not be as much of a drag on growth as the stock price would suggest.
“This is a very, very risky thing to do,” Mr. McElligott said.
“I’m not saying you can’t put a lot more pressure on it, but if you have that much debt on the table, you’re not going to get any of the benefits.”
The risks are even greater if the government decides to buy government debt, which some economists say would be a big mistake.
Mr. Delaney said it would be foolish to bet the stock prices on the Canadian dollar as a gauge of the health of the global economy.
“What happens if the world becomes even more expensive?
What happens if inflation spikes?” he said in an interview.
The fact that the market has been so volatile makes it difficult to gauge the risks in the stock markets, he said, adding that it is not unusual for stocks to surge during times of stress.
The risks for investors are amplified by the fact that Canada’s debt is at a record low.
Canada has borrowed $1 trillion to cover its debt burden of $14.3-billion.
As of the end of April, the debt was just under $10-billion, down from $14-billion as recently as September, the first month of the Conservative government.
The economy is expected to grow 0.3% in 2018 and is projected to grow 1.1% this year, with the economy expected to be growing at 2.1 per cent this year.
Mr., the CEO of the investment bank Bank of Nova Scotia, said the risk of a huge market rally is still very real.
“We are seeing the largest economic downturn in history and we have to start to take a long, hard look at where we are in the market, how much we are going to lose, what we are actually able to do in terms of capital investment and what we need to do to recover,” he told CBC News.
He said if Canada’s markets continue to do well, it would help them to “start to look at how to recover.”
With files from The Canadian Press