The wealth effect: What, me worry?

Behavioural finance analyst Ken Norquay casts his skeptical eye on the notion that the baby boomers have had their financial dreams come true. Why would they worry?

While travelling in Colorado in late May, I noticed several articles in USA Today about the baby boom generation and real estate. ‘Baby boomers’ are those born between 1946 and 1964. These articles reminded me of the late 1980s, when baby boom statistics were used to sell mutual funds. The sales pitch was that boomers were entering that age when they would be saving for their retirement.


So much money! So little time! The wealth effect often leads to wealth-draining spending sprees.

Those savings would find their way into stock market mutual funds. In the 1990s, there was a great expansion in the mutual funds business and a huge rise in the world’s stock markets. Books like Boom, Bust & Echo by David Foot, and The Pig and the Python by David Cork were used to persuade investors to buy and hold equity mutual funds. In the 1990s, the prophecy was fulfilling itself.

The baby boomers are retiring

Fast forward to 2019. Those same boomers are about 30 years older. Many have retired and are living off their savings. Does the old theory still hold up? As retired boomers slowly spend their savings, is the mutual funds business slowly shrinking? Is money slowly finding its way out of the stock market? Is the boomer phenomenon that caused a rise in the 1990s going to cause the stock market to fall now?

In my stock market book, Beyond the Bull, I point out that in the financial world, everything is connected to everything else. In Canada, for example, boomers who own houses have enjoyed huge tax-free gains these past 30 years. In the USA, boomer homeowners enjoyed big gains until 2006, then big losses, then big gains again as house prices rose and fell in the American mortgage fiasco and the banking crisis.

The value of one’s home affects how one feels. In turn, this ‘Wealth Effect’ influences our investing. When we feel wealthier, we feel more confident and optimistic. When confident optimism is the prevalent mood in the investment community, the market is at the top. Aging population, movement of cash in and out of the stock market, home values and the wealth effect: it’s all connected.

US stock market trends

Let us examine the trends of the financial markets that most affect Canadian investors to see if we can benefit from this interconnection.

The US stock market (S&P500) touched a new high in early May, confirming the long term uptrend that began in March 2009. Because the Dow Jones Industrial Average did not hit a new high, many journalists missed this new record. This is the longest bull market in US history: 10 years, two months.

My interpretation is that the orthodox stock market high occurred in January 2018 (S&P500: 2,872, 3% lower than May’s high) and that the huge up and down swings since then are part of a long-term down-trend. In fact, on the third trading day after the May 1, 2019 all-time high, the S&P500 was already below the orthodox high set 16 months earlier. Mathematically, the trend of the S&P500 is still UP; when we look below the surface, we see it is in the early stages of a long term decline.

Canadian stock market trends

The Canadian stock market has been trading in step with the US. The orthodox top occurred in January 2018 when the TSX Composite hit a high of 16,421. In the next 16 months, after two violent down drafts, it registered a new high (1 % higher than the orthodox high) in April 2019. Seven trading sessions later, it was already below the orthodox high. The TSX is in the early stage of a long-term downtrend.

The interconnectedness of the Canadian and US stock markets has always been clear. The Canadian market outperforms the US when energy and metals prices are strong. The American market outperforms when energy and metals are weak. Energy and metals prices have been weak since 2011-2014.

The 20 year+ bond market

Long bond prices rose in a zigzag path from 1981 to 2016: almost 35 years of falling interest rates. Since July 2016, long term interest rates have zigzagged upwards. Within that zigzagged up trend, there has been a sharp decline in the last six months.

The Canadian bond market zigs and zags with the US, but the uptrend of Canadian interest rates has not been as sharp as the US.

Long term interest rates are in an uptrend in both Canada and the USA.

The market and interest rates

In my book, Beyond the Bull, my Countercyclical Model explains how interest rates lead the stock market. Normally, about 6 months after the bond market peaks (July 2016), the stock market peaks. But six months after the 2016 bond reversal, Donald Trump’s presidential inauguration triggered a yearlong speculative blow off in US stocks.

That blow off ended in January 2018 with the orthodox top in the stock market. Interest rates (the bond market) and the stock market are connected.

The US Dollar vs. the basket of non-US currencies has been drifting sideways since January 2015. The interesting surprise for me has been the short-term trend these past 17 months: even as the US slaps trade-war tariffs on a variety of imports, the US Dollar has been slowly rising.


The Canadian Dollar was about $0.74 US at the end of May 2019. During the oil crash of 2014-15, the Loonie first dropped through 74 cents in December 2015. Although it has bounced up and down during that time, no net progress has been made. Over the past four months, the Loonie has declined slightly, even as oil prices rose slightly. The long term trend of the Canadian Dollar vs. US Dollar is neutral.

Unstable energy prices lead to low interest rates

Energy prices have been in an uptrend since the post-crash low in February 2016. Although the statistics show this uptrend clearly, it doesn’t ‘feel’ like an uptrend because of high volatility. For example, oil prices dropped over $34 a barrel between October and December 2018. Since then, oil has gone up over $22 a barrel. All this price action in seven months! High volatility is a sign of emotion in a market.

That’s the mystery of oil prices: who are the emotional ones? Which big oil players are so emotional that their behaviour in the oil markets is causing these dramatic ups and downs? Unstable energy prices contribute to unstable economies. In Canada, oil-induced economic weakness is pressuring the Bank of Canada to keep interest rates low. Everything’s connected.

Gold uptrend is weak

The price of gold in US dollars is neutral. Statistically, it’s a weak up trend: the price of gold has not moved above its 2016 high. Ironically, gold prices reflect both inflation and deflation. How can this paradox be?

In times of strong inflation, gold is valued as a commodity and rises like all other metals. In times of deflation, gold is valued as a currency, and rises because it is perceived as a safe investment haven. Because gold’s uptrend is so weak, we can conclude that investors have not been worried about either inflation or deflation for the past few years.

What, me worry?

Perhaps investors are not worried at all. Perhaps the recent violent swings in the stock market have dulled our senses. (S&P500 swings: down 338 points in February 2018, up 408 points into September 2018, down 594 points into December 2018, up 607 points until May 1, 2019, and now heading down again.) Every time the market drops sharply, it comes right back. Why would we be worried?

In the late 1980s, the baby boomer generation was worried that they might not have enough income to retire because it hadn’t saved enough capital. They were worried about the stock market because they had recently witnessed the 1987 crash and realized it could happen again.

They were worried that governments wouldn’t be able to pay their old age pensions because there were so many boomers and so few younger taxpayers to carry the burden. And, following this time of pessimism, the market climbed higher and higher. Pessimism occurs at market bottoms.

Many boomers own houses worth way more than they had expected. The S&P500 hit a new high on May 1. Financially, the once-worried boomers of the late 1980s are basking in the glow of financial success. That whole generation we call the baby boomers, has had its financial dreams come true. Why would they worry?

Optimism occurs at market tops. The stock market is at the top of its cycle now.

Ken Norquay, CMT, is the author of the book Beyond the Bull which discusses the impact of your personality on your long-term investments: behavioural finance.


This is an edited version of an article that was originally published for subscribers in the June 2019/First Report of The MoneyLetter. You can profit from the award-winning advice subscribers receive regularly in The MoneyLetter.

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