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NEWS photo Mike Wakefield

REC Dominion Securities’ David French oversees the company’s
West Vancouver office.

But degree of risk is always a factor

By Janet Ketchen and David French
Contributing Writers

EQUITY markets are per-
forming much like the lyrics
in the song by The Fifth
Dimension: up, up and aw:

Given the back-to-back gai
the past nvo you are forgi
(and it’s not surprising) for feeling a
twinge of altitude sickness. If there is
a conventional wisdom about
today’s market, it would be that
stocks are overdue for a correction.

Perhaps they are. But what of
these so-called conventional wis-
doms?

Conventional thinking may give
you a warm, safe fecling, but is it the
sort of attitude that allows
you to make the most of
investing opportunities?

Part of the current fears
about future corrections
seem to be colored by the
idea that markets have been
too good for too long and
that a pullback is somehow
needed to redress imbal-
ances that have built up.

The shortcoming of this
attitude arises when you ask
the question: Compared to
what? Two consecutive
years of 20% gains are
unusual but not unheard
of.

The last time this
occurred was 1978/°79

(+24%/ +38%). The three kets.

JANET Ketchen ..
Bullish on the mar-

preceding years also produced posi-
tive gains and the market went on to
post another 25% rise in 1980.

From mid-1987 to carly 1995
the Toronto Stock E
300 was contined t
ticr at 4,000. The Index bounced
off 4,000 a couple of times and
popped above it for a brief period in
1993/94.

When markets hovered around
4,000 again in January 1995, they
had gone nowhere in seven-and-a-
half years. The TSE appreciated only
4% per year over the nine years since
the summer of 1987 and qualified
for one of the lowest returns on
record for a period of that length.

It is not a given that stock prices
must, or will, go up as fast as they
have. Stock prices
are a reflection of
the future prof-
itability of public
companies. Are
these — expecta-
tions out of
whack compared
to past periods?
Consider this.
The marker is
some 40% higher
than it was in the
summer of 1987.
The earnings that
underpin it look
to be almost 60%
higher. So, by
one measure,
stocks are cheaper
today than they

Analysts bullish on stocks :

inflation and low interest rates also
support a scenario that allows
investors to pay even higher prices
for these earnings.

The view from beautiful, bounti-
ful B.C. tends to overlook the fact
that elsewhere in Canada the econo-
my has endured a prolonged period
of treading water. The Canadian
economy and corporate profitability
have now begun to improve.
Canadian stock markets have started
to behave as though company earn-
ings will once again be growing.

These expectations for fucure
growth are realistic, based on
Canada’s sound fundamentals and
forecasts for:
© faster overall economic growth
* led by a sustainable broad-based
advance in the private sector
* which can absorb our still-large

See Equity page 47

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