Go up and never stop

This article was first published in the National Post on April 2, 2022. It is being republished with permission.

by Tom Bradley

Things are getting back to normal as the pandemic abates. We’re travelling again, going to restaurants and socializing in person. Some things are different from the pre-COVID-19 world, but we have a good idea of what normal is going to look like.

Investors, on the other hand, have a slanted view of normal. When markets are rising, stock picks are working out and returns are good, it’s normal. When prices fall, people ask what’s wrong with the stock market, even if it’s down from great heights and still above its long-term trend line.

It’s an asymmetric view. Up is normal, no matter how high. Down is abnormal, regardless of the starting point.

I make this observation because the capital markets have been doing a lot of normalizing lately. We’re going through a meaningful return to trend. Here are three areas where price moves are garnering headlines, but may just be a return to normal.

Interest rates

It’s not obvious what normal is for interest rates. Fixed-income markets have been on a bull run for 40 years, with rates dropping from the high teens to almost zero (remember, bond prices rise when yields fall). But things have lately been quite different. Rates are rising and exchange-traded funds (ETFs) that track the bond market are down 8% year to date, extending a pattern that started last year.

Is this an aberration or a return to normal? The answer lies in the two components of a bond yield: the expected rate of inflation and the real return. For most of the bond market’s history, yields have been above inflation, leading to positive real yields, but central bankers’ obsession with economic growth and full employment has changed that in recent years. Yields were running below the consumer price index (CPI), even before inflation spiked.

A negative real yield means investor capital buys fewer goods when the bond matures. An investment guaranteed to leave the holder worse off is not sustainable, which suggests the normalization process has further to go. To achieve positive real yields, we’ll need to see higher yields, lower inflation or a combination of the two.

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Stock prices are inextricably linked to corporate profits. Prices fluctuate far more than profits, but over time they reflect the success of the underlying companies.

A feature of this bull market, however, has been the enthusiasm investors have had for funding fast-growing companies that have the potential to be profitable, but are currently losing gobs of money. The non-profit sector reached dizzying heights last year despite persistent losses.

More recently, stocks of these growth companies have plummeted. For example, DoorDash, Tilray, and Peloton are down between 50% and 80% from their highs. Holders might think the stock market has lost its mind, but an alternative explanation is that buyers are now putting a more reasonable valuation on what is still a highly uncertain future.

Like any business, these companies need to turn their promise into profits. Not until then will we know what normal really is.


It’s harder to call the dramatic rise in commodity prices a normalization. Prices for some things have skyrocketed because of supply chain issues and the war in Ukraine. But a good portion of the recovery in commodities and resource stocks has just been a bounce back from a starting point that was anything but normal.

Prices were depressed and there wasn’t enough capital being invested to maintain production, let alone increase it. Oil was being written off for dead even though the world was consuming 100 million barrels a day. Copper prices were in the doldrums despite the metal having an important role to play in the economy’s digitization and electrification.

These commodities are highly cyclical, but it could be argued that their prices are much closer to normal than they were two years ago.

There’s no right answer as to what normal is, as this column makes clear, but we know it’s not stocks trading at 50 times sales, oil being spurned and investors ending up worse off from owning a bond.

Markets always overreact, so having a sense of what normal is now, or at least probing the question, can uncover wonderful opportunities and prevent big mistakes. Think about that before you celebrate your brilliance in good markets, or yell at your screen and call the market crazy when stocks are going down.