February’s frothy backdrop was comprised mainly of (1) a successful continuation of COVID-19 vaccination administrations across
the globe; (2) patient and (seemingly) stubborn signalling from the Federal Reserve and other central banks in combination with
newly awoken hopes for additional fiscal stimulus; (3) ever-growing interest in investing from the retail community, as exhibited by
Reddit’s r/wallstreetbets user growth to ~9.3mn (+40% m/m); (4) sustained idiosyncratic pockets of speculative mispricings across a
variety of assets/securities, most notably in thematic highflying equities and cryptocurrencies; and (5) a steady rise in global yields,
followed by a last-minute inflection to pre-election highs during the month’s last week.

High valuations and rising bond yields are not a friendly environment for investors. And while that likely means correction risk is elevated, bond yields and earnings growth are moving higher for good reason. The economy is recovering and in the longer term that is very good news.

Money that flows into or out of an asset class, sector or individual company matters, sometimes a lot. Consider the fact that apart from initial or secondary public offerings or option-related issuance from a government treasury, the number of shares available for purchase in a given company is relatively stable. We are simplifying things here, but if a group of new investors, perhaps Reddit followers who just received a fresh cheque (or check) from their new President, decide to put some money into “ABC Co.”, all else being equal, the share price will rise. It will rise until enough pre-existing or new investors decide that they are willing to sell their shares given the new price. Of course, this works in both directions.

Dividend-focused investing is at the core of most Canadian investors’ portfolios, and for good reason. As bond yields grinded lower for much of the past 40 years, the quest for other sources of cash flow fed a steady stream of investors and capital into dividend-paying equities. And it has been a relatively pleasant ride, as this portion of the market has historically enjoyed good returns and less volatility than the overall TSX (a strong combo). Throw on some preferential tax treatment and we continue to believe dividendpaying equities should remain at the core of most portfolios.

It appears that we have reached a critical moment in the market cycle. Speculative froth has stretched equity markets beyond what was initially expected, with S&P 500 and TSX forward P/E ratios appearing overextended at 22.1x and 16.6x, respectively. Despite hopes for a less eventful year, we may not be party to that pleasure after all if this month is any indication of what is yet to come.