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Resources Getting Started The Wise Investor Online Investing Glossary Book Centre globefund.com Alert Table of Contents Put your financial adviser on a leash February 11, 2000 100% Foreign content for your RSP December 22, 1999 Tax Loss Selling or Dealing With Your Mistakes November 26, 1999 Life Stages of your RRSPs November 12, 1999 Just give me boring (but great) rates of return November 3, 1999 De-mystifying Demutualization - part Two October 25, 1999 De-mystifying Demutualization - part One October 19, 1999 Seg funds for the simple minded September 14, 1999 The interest rate game Part 2 August 12, 1999 The interest rate game Part 1 July 30, 1999 Choosing funds: Five for the long run July 14, 1999 New Funds: To buy or not to buy July 2, 1999 Making sense of momentum investing June 18, 1999 Rating the fund managers June 4, 1999 Resource recovery hinges on supply and demand April 30, 1999 Tech funds draw strength from favourable trends March 24, 1999 Withdrawing from your RRSP March 9, 1999 The economic implications of the euro - An interview with Ranga Chand February 12, 1999 Underperforming small-cap funds have strong upside potential January 29, 1999 How to pick a winning equity fund portfolio January 15, 1999 View the Weekly Insight archive

Yankee doodle dandy — what’s driving the U.S. market? STEPHEN NORTHFIELD From Going Global: Profitable Investing Outside of Canada Tuesday, December 29, 1998 This profile of the U.S. market has been excerpted with permission from Stephen Northfield's Going Global: Profitable Investing Outside of Canada, published by Prentice Hall Canada Inc. Going Global profiles the investment climates of major and developing countries, and explains how foreign holdings can help reduce risk and improve long-term returns. Who would have predicted 10 years ago that Wall Street would be the bugle boy for one of the greatest bull markets in history? Not many. Most would have placed the rally cap on the Japanese market instead, and for good reason. The U.S. stock market hasn’t been the best performer over the past decade — its 20-per-cent or so average annual return has been easily eclipsed by a handful of red-hot Latin American and European markets. But, given its size and standing in the global marketplace, there’s no question that the U.S. market has set the tone, not to mention the pace, for what has been a most rewarding decade for investors. It remains to be seen whether Wall Street can stay perched on the bull’s back going into the next century. After calling for a major correction for years, the bears seem to have finally gotten their way late this summer as the U.S. market, spooked by events in Russia and Asia, tumbled from record highs set in July. Despite that, U.S. stocks are still hovering around break-even for the year — hardly a disaster by any standards, especially coming on the heels of a string of very lucrative years for those who were wise enough to ignore the bulls and stay in the market. What’s Driving the Dow? While the economies of continental Europe languished and Japan puttered along listlessly, the U.S. economy has enjoyed something of a renaissance in the 1990s that has helped fuel the market’s superior performance. The U.S. economy has grown at about an average three-per-cent clip over the past five years, compared to a tepid 1.3-per-cent for Japan, the world’s second-largest economy, and 1.6 per cent for Germany, 1.4 per cent for France and 1.3 per cent for Italy. Wholesale restructuring — often at the cost of thousands of jobs — has helped put the mettle back into America’s industrial base, resulting in a steady increase in productivity and helping to put the term “downsizing” into the everyday lexicon. The leaner-is-better mantra has spread to Europe and Canada, but most countries lag the U.S. by as much as a decade. Another big boost has come from the increasing integration of technology with the economy. Besides boosting productivity, the proliferation of technology is changing the face of American industry. Where a decade or so ago you would automatically have associated GM or Ford with American industry, a person is now as likely to think of Microsoft or Intel. Smokestacks are giving way to semiconductors, and the U.S. economy is becoming a less cyclical beast as a result. The industrial renaissance has been accompanied by more prudent fiscal stewardship out of Washington. While the federal debt remains staggeringly high, the deficit has been tamed, inflation has dropped right off the map and interest rates have slipped to lows not seen since the 1960s. So far, the U.S. Federal Reserve has displayed an enviable knack for effectively shepherding the economy through one of the longest uninterrupted expansions this century. Fed chairman Alan Greenspan has managed, thus far, to sustain the tricky balance between letting the economy simmer along without allowing it to boil over. His determination not to allow an overheating economy to re-ignite inflation — evidenced best by the Fed’s market-roiling series of interest rate hikes in 1994 — has won him kudos from most corners. The credibility of the Fed has probably never been higher than it is right now, a crucial factor because markets run as much on perception as they do on fact. THE U.S. MARKET* (as at the end of May, 1998) Return: 1-year (38.4%), 3-year (33%), 5-year (26.2%) and 10-year (18.7%) Number of listed stocks: 8,851 Market capitalization: U.S.$11.3-trillion Weighting of world stock markets: 48% WEBLINKS: New York Stock Exchange: www.nyse.com/ American Stock Exchange: www.amex.com/ Silicon Investor: www.techstocks.com GREAT CHAT GROUPS: Motley Fool: www.fool.com/ U.S. Securities and Exchange Commission: www.sec.gov/ Morningstar.Net: www.morningstar.net/ MUTUAL FUNDS GALORE: Yahoo: www.yahoo.com/ The Street.com: www.thestreet.com/ CNN: www.cnnfn.com/ Business Week: www.businessweek.com Forbes Magazine: www.forbes.com Fortune Magazine: www.fortune.com * Performance figures are annualized average returns in Canadian dollars for Morgan Stanley Capital International country indices. Stock market weighting, number of stocks and capitalization are from the World Bank's International Finance Corporation.   One of the key drivers in the U.S. market has been the staggering flow of cash into stocks. Net flows into mutual funds averaged about U.S.$20-billion a month into U.S. equity funds through 1996–97. The value of stocks owned by U.S. households now exceeds the value of their real estate assets for the first time in history. And, while the demand for stocks continues, the supply has dwindled. A surge in merger and acquisition activity and the increasing popularity of share buyback programs — much to the chagrin of oldtimers who actually expect to get paid dividends for holding shares — resulted in a net reduction of the amount of the supply of stock on U.S. exchanges in 1997. Hmm, let’s see...rising demand, falling supply...survey says — higher stock prices. The enthusiasm of foreign investors have been another pony in harness for the U.S. market. Foreign investors flocked to the market during the Asian crisis, parking their cash in what was widely perceived to be the proverbial safe haven in the storm. The sustained flow of foreign dollars into the U.S. bond market — particularly by the Japanese — has benefited the stock market as well by helping to keep interest rates low. To a certain extent, stocks are just like any other commodities — if people want to own them, regardless of their underlying value, demand will drive up the price. Clearly, the sterling performance south of the border has been driven in part by the fact that we’re living through a period where investors want to own stocks in general, and U.S. stocks in particular. That’s great while it lasts, but sentiment of this sort, as the badly abused bears on Wall Street have pointed out repeatedly, can shift quickly. Given the wonderful convergence of all this great news, the startling gains by the market should be less surprising. Even so, the rally has gone farther, faster than most observers predicted. All along the way, high-priced Wall Street strategists have been throwing up red flags, warning that the bubble was about to burst. To be sure, there have been moments of fear and loathing, most specifically in late 1997 during the Asian crisis, but also sharp drops in August 1997 and in the summer of 1996. Each time, most spectacularly in the wake of the Asian meltdown, the U.S. market was able to get back up, dust itself off, and head higher. By early April, the Dow had shed 9,000 points, investors were plowing cash into mutual funds and money managers in turn were plowing it right back into equities. By April, cash levels in U.S. equity funds had slipped to 5.5 per cent, near a 20-year low. While the correction in late summer was the most severe challenge the U.S. market has faced since Grey Monday, don’t rule out the possibility that the market will regain its winning form once again. Why have the bears been wrong in recent years? Part of the reason is that they’ve been applying the same sniff test to this rally that they’ve used in the past, and they keep detecting the musky smell of a bull. The problem is, this bull ain’t like the other bulls — it’s a different, more elusive beast. The market rally has driven many traditional market valuations into no-man’s land, where rational analysis seems almost pointless. Dividend yields have slumped to record lows. The average yield for the stocks on the Standard & Poor’s 500-stock index had slumped to about 1.4 per cent by mid-1998, lower than any time in history. That means, in essence, that investors are generating little income from holding equities, that the investment decision now is motivated almost purely on the premise that stock prices will continue to rise at a steady clip. Traditionally, cyclical lows in dividend yields have been harbingers of a correction. Some analysts pooh-pooh these concerns, saying that the slimmed-down dividend yields are due to the fact that companies are using free cash flow to buy back stock or reinvest in their businesses, both activities that, in theory at least, should benefit shareholders. Dividend yields aren’t the only valuation barometer that’s gone a little wonky. Price–earnings multiples — which have averaged about 17 over the past decade — had soared to about 23 for the S&P 500 by mid-1998, which means that investors are paying a higher premium for a company’s earning power. Book-to-price ratios — which relate stock prices to the book value of a company’s assets — have ballooned to well above historical norms. A mitigating factor, clearly, has been the sustained drop in interest rates and accompanying decline in inflation in the United States, indeed across much of the developed world. Lower interest rates, and more importantly, expectations that rates will stay low, have led to a revaluation of equities in the past few years. Few analysts argued with the notion that the U.S. market was expensive prior to the late summer correction — especially given the clear slowdown in earnings momentum through the first half of 1998. The problem has been that it’s looked that way for the past few years. Among the handwringers has been Mr. Greenspan, who has tried without success on a couple of occasions to gently nudge investors into being a bit more restrained in their enthusiasm, most directly in late 1996 with his public musings about the irrational exuberance at work in the market. If this is irrational exuberance, most Canadians are all for it. We have caught a fair bit of the glow from south of the border, economically and investment-wise. With 80 per cent of our exports going to the U.S., good times there mean good times here. Because of the close ties between the two economies there has always been a pretty tight correlation in the performance of the two markets, so Bay Street has been marching to the bullish tune coming out of Wall Street. That’s a blessing and a curse for Canadians. On the one hand, our market has benefited and so have the many Canadians who place a big chunk of their foreign investments into the U.S. market. The downside is that, because of the close links, there’s very little diversification benefit from investing in U.S. stocks and mutual funds. Regardless of where you think the Dow will be at the end of the year, that’s an important consideration for any of you seeking to improve the long-term performance of your portfolios by spreading your money around. Any investor who is loaded to the gills with U.S. and Canadian stocks is exposed to more risk than they would be if they spread their investments out among other markets that aren’t as closely linked. Given the breadth, the variety and the sheer size of the U.S. market, no international investors can afford to ignore Wall Street. But Canadians shouldn’t fool themselves that their U.S. nest eggs will provide them much of a safety net from weakness in the Canadian market over the long haul. If the TSE jumps the rails, the odds are the Dow’s already there in the ditch. By Stephen Northfield, Investment Editor for the Globe and Mail and author of Going Global: Profitable Investing Outside of Canada. Going Global is available for purchase through the GLOBEfund Book Centre in collaboration with ChaptersGLOBE.com.

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