North American stock markets are currently perceived as expensive by investors, with the S&P 500’s price-to-earnings ratio standing at 28.68, significantly above historical averages but far from the staggering high of over 120 recorded during the financial crisis of 2008-09. Despite this valuation concern, many investors believe that the market has not yet reached its cyclical peak, suggesting optimism for continued profit growth.
This sentiment was echoed in a recent informal poll conducted among social media followers, where participants were asked to predict which asset class would perform the best by year-end. Four options were presented: stocks, bonds, gold, and bitcoin. Interestingly, bonds attracted minimal interest, even following recent rate cuts in both Canada and the U.S. Typically, lower interest rates enhance bond prices, and speculation suggests that additional cuts from central banks may occur in the fall, potentially benefiting the bond market. CIBC’s deputy chief economist, Benjamin Tal, indicated expectations for the Federal Reserve and the Bank of Canada to continue reducing rates into next year, with projected cuts totaling around 100 basis points, which would likely boost short-term bond prices. Nevertheless, only a mere 3% of poll respondents believed bonds would be the optimal performer.
In contrast, bitcoin, which has surged approximately 25% this year and recently hit an all-time high of $124,457.12, similarly garnered just 3% support in the poll. Skepticism about cryptocurrencies remains high, as evidenced by comments from Christine Lagarde, the president of the European Central Bank, who labeled bitcoin a “highly speculative asset” linked to questionable activities.
Gold, on the other hand, found more favor among investors, with December futures reaching new highs and a year-to-date increase of around 43%. Among poll respondents, 38% predicted gold would be the standout asset by year-end. This confidence, however, is met with skepticism from notable investors like Warren Buffett, who has criticized gold’s lack of utility. In the past, he claimed that holding gold yields no intrinsic value over time. Yet, others, including economist Nouriel Roubini, have championed gold as a safe-haven asset during financial crises.
The prevailing preference, however, was for stocks, with 56% of respondents selecting them as the asset class expected to excel in the upcoming months. This optimism persists despite the fact that gold and bitcoin have outperformed stocks year-to-date. As of mid-September, the S&P 500 had gained 13.31%, while the S&P/TSX Composite was up by 20.38%. The prevailing view is that ongoing interest rate cuts will support stock prices, a sentiment reinforced by Tal’s outlook for the next few years.
CIBC’s vice-president of managed solutions, Michael Keaveney, recommended maintaining a balanced portfolio that includes fixed-income assets while advising caution regarding U.S.-denominated bonds, advocating for currency hedging to mitigate potential volatility from a declining U.S. dollar. He characterized current high-flying tech stocks, often referred to as the “Magnificent Seven,” as “priced for perfection” but still benefiting from positive market conditions.
In summary, despite high stock valuations and a myriad of contrasting opinions on bonds, gold, and cryptocurrencies, investor sentiment leans significantly towards equities as the favored asset class for the remainder of the year. A balanced investment strategy adapting to potential currency fluctuations appears to be the route many are considering as market dynamics evolve.
