David Rosenberg: The last year of the cycle

As we enter 2018, the “backdrop is eerily similar to 1988, 1999 and 2006”, warns David Rosenberg, chief economist and strategist at Canadian money manager Gluskin Sheff. “And what we know about each of those years is that the one that followed was the last of the cycle.” In short, investors should enjoy the next 12 months, because this bull market and economic expansion is on its last legs.

“I am far from advocating that anyone head for the hills or move totally into cash just yet,” Rosenberg cautions. But it’s time to invest more defensively. So “focus on companies with strong balance sheets” and “low refinancing risks”. Look for “earnings quality and predictability”, and don’t be surprised if long-term bond yields “go even lower” than they are today. One problem is that stocks – particularly in the US – are pricing in “very little in the way of anything possibly going wrong”.

Another risk, reckons Rosenberg, is that the departure of Federal Reserve chair Janet Yellen as well as several other key Fed members leaves a “relatively inexperienced” US central bank team trying to unwind quantitative easing. That suggests that a policy error is a very real possibility. “The history of new Fed chairs is that they overtighten… and we know what history says about the consequences… economic, financial or both.”

On the bright side, Rosenberg is far more excited about Japan than he is about the US. Corporate governance is improving and many companies have the spare cash to spend on boosting dividends and share buybacks. Better yet, it’s relatively cheap. “Japan is one of the few markets globally that is not trading at premium multiples relative to its history and is an under-owned market both globally and locally.”