One of the biggest risks of investment is that many people look in the rearview mirror when making decisions. This includes purchasing a specific fund, allocating the market based on the returns of the previous year, or especially listening to experts'explanations of the latest economic data.
The problem is that many people forget that the stock market is forward-looking, reflecting expectations rather than what has happened. Decision-making based on backward-looking analysis can be very expensive.
For example, Canadians who listened to economic data reports in 2015.
Oil prices have gone to the toilet, the economy is considered on the verge of recession, and the report's pessimism is overwhelming. You see, the next year is the best year for the Canadian market. As the recovery of the energy industry and the strong housing market boost consumer spending, this year's returns are double-digit.
Not surprisingly, this recovery came a year later in the 2017 economic data, and now many of the same experts are waving banners, pointing out that Canada is leading the G7 in economic growth year by year.
This is not surprising, because human nature is passive rather than active, especially for those who have no direct market experience. It's harder to be a reversionist, asking questions about the reliability of basic data and, most importantly, whether it's repeatable.
With regard to the latest bullish report on Canadian economic data, why not take a different approach? First, ask why the Canadian stock market announced the world's worst return in early 2018.
Perhaps investors are questioning what kind of economic growth will be one year from a standardised benchmark? What is the impact of three interest rate hikes on heavily indebted consumers? These consumers accounted for 57.5% of GDP, a record high, slightly higher than 49% in 2000, while the percentage of wages in GDP remained unchanged, just below 44% of GDP. Given that housing expenditure accounted for nearly 60% of last quarter's economic growth, how will high interest rate expectations affect the economy that is over-reliant on real estate?
In addition, NAFTA negotiations pose a serious risk to our economy, which depends heavily on exports to American consumers. At the same time, Canada's tax revenue has been rising, including our national carbon tax and the ongoing small business tax change, which is falling in the United States. Finally, our oil and gas industry continues to be under pressure from the rapid growth of shale production in the United States, restrictions on existing pipelines and a sharp decline in foreign investment.
This is not to say that people should avoid the Canadian stock market. On the contrary, in some industries, there are enormous opportunities due to the over-hawkish interpretation of the interest rate prospects of Canadian banks. This hawkish attitude seems to be reflected in the appreciation of the Canadian dollar since last summer.
Generally speaking, when reading economic reviews, it is important to look at the market experience of interviewees, even of authors, especially when they happen to provide their own interpretation of economic data. It also helps to adopt investigative methods, such as questioning the reliability of data, which may be unreasonable, such as very large unemployment rates and unusual gains or losses, and asking whether the reported data are repeatable in the current environment. This means finding out all the factors that you think will bring you to your destination, paying attention to the road ahead, and looking for obstacles to avoid.