Nobody knows what the TSX will do over the next three years. Certainly not me. But I think that it’s unlikely to crash again like it did in late 2008 and early 2009. Since that’s the case, I feel more comfortable investing. I feel that earnings are likely to improve from depressed levels and profitability will support share prices.
I made a chart to illustrate what I think may happen:
2010 started off with a rally, but we’re starting to see interest rates rise. Worry about interest rates will hold the market down for a couple months, then it will turn upwards. It will rise to a little over 13,000 by the end of the year, growth of about 13%.
2011 will be less profitable. After two years of strong growth (2009: 36%, 2010: 13%), the market will take a breather. Income trusts become taxable and there will be some political uncertainty before the next election cycle. The TSX will test resistance just below 14,000 early in the year and end the year right around 14,000, for a tepid 6% gain.
2012 will be a very profitable year for investors. World demand will return in a big way, major economies will be firing on all cylinders and the rise of the consumer in emerging economies will be the top story. It won’t be all straight up, with resistance at the previous high around 15,000, but the market will fly from about 14,000 to about 16,600, turning in a 18.6% return for the year far ahead of the previous all-time high.
In reality, anything could happen. The above story is fun to tell, but even I don’t believe it. Can you see where the two halves of the chart match? History rarely repeats itself, although it often rhymes. The markets are more likely to rise than to fall, but it’s never so simple.