The stock market is booming and Canadians are leaning in like never before.
Canadian households have scooped up more than $180-billion worth of stocks over the past year, according to the latest Statistics Canada data released this month.
That’s higher than any 12-month period on record, including 2021, the last time financial markets were this frothy.
The latest wave of retail buying leaves many investors heavily exposed to stocks at a time when market optimism is uncomfortably high and the risk of a pullback could be rising.
Over the past few years, the retail investor base has emerged from the pandemic trading boom as a powerful cohort with a serious appetite for risk.
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Everyday investors have treated any weakness in financial markets as a reason to load up on more stocks. All year, they have doubled down through the chaos of tariffs and trade wars, ignoring the consensus forecast of economic damage to come.
Fortune has favoured their boldness. The S&P/TSX Composite Index recently hit the 30,000 mark for the first time – albeit briefly – and is up by 32 per cent since the April sell-off.
Looking back a bit further, investors have seen a historic bull market coalesce over the past five years, during which the TSX has gained 83 per cent, while the S&P 500 of American blue-chips has doubled.
Even bigger gains have been spun off by the names most popular with retail investors. Tesla Inc. TSLA-Q shares have tripled over the past five years. Nvidia Corp. NVDA-Q has risen more than tenfold.
Such monster returns have emboldened a new generation of fearless investors.
Household balance sheets show a record level of participation in the stock market in Canada. About half of the country’s household financial assets are now tied up in stocks.
In one sense, these numbers reflect a positive trend. Investing has been democratized. It’s much easier and cheaper for regular Canadians to tap into the profits of the corporate sector.
The worry is for those investors who have overshot. Even the most passive investors could see their stock allocations creep too high just by virtue of the market’s upward trajectory.
But Canadians are also enthusiastically adding to their stock positions with new purchases. They do so even as stock valuations have risen to concerning levels.
The S&P 500 trades at nearly 24 times its forecasted earnings for the next year. That’s about 40 per cent higher than the average price-to-earnings ratio over the past two decades.
Canadian stock valuations are not nearly as concerning. But whenever the U.S. market tanks, the TSX inevitably follows suit. Plus, investors here have been ravenous for U.S. stocks this year, judging by recent cross-border securities transactions.
Discount brokerages here regularly show American stocks among their top traded, especially those leading the artificial-intelligence movement, such as Nvidia, Palantir Technologies Inc. PLTR-N and Advanced Micro Devices Inc. AMD-Q.
Beyond personal finances, there is also a market-level risk when it comes to too much retail investor exuberance.
“When retail investors are all of a sudden really, really enthusiastic about something – whatever that thing is – that does not tend to be a very good sign,” said Benjamin Felix, chief investment officer at PWL Capital.
Just before the dot-com bubble burst, the share of equities on U.S. household balance sheets surged to what was then a record high, just shy of 40 per cent. Today, that number sits at more than 45 per cent.
“That should ring alarm bells, even if the buoyant stock market keeps rising for a while amid enthusiasm for AI,” John Higgins, chief markets economist at Capital Economics, said in a note.
Plenty of Canadian investors have too much riding on the stock market. Don’t be one of them.