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Will 2017 buck the unlucky No. 7 trend for investing?

Today’s investors have gone an exceptionally long time without a scare, which is why the current bull market on Wall Street is one of the oldest in history and fear gauges are so complacent.

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People who believe that walking under ladders is bad luck may also want to be wary of investing during years that end with a seven.

The recent run of such years displays an unusual knack for nasty surprises – from the financial crisis in 2007, to the Asian debacle in 1997, to Black Monday in 1987.

What to make of this odd streak of unlucky sevens? For the most part, absolutely nothing. If you're of a rational turn of mind, it's obvious that the appearance of a certain numeral in the date can't influence events.

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But the regular rhythm of these market-shaking episodes should remind us that there is a more realistic reason for worry. It's the historical fact that bad things happen and they tend to happen every few years.

Today's investors have gone an exceptionally long time without a scare, which is why the current bull market on Wall Street is one of the oldest in history and fear gauges are so complacent. But if the past provides any guide, we can expect an unsettling event of some description to crop up relatively soon.

It could be something as dramatic as U.S. President Donald Trump deciding to slug it out with North Korea. More likely, though, it will be something so mundane, so technical, that it will evade attention at first.

The financial crisis, the Asian contagion and Black Monday all started with what appeared to be minutiae – tiny malfunctions deep in the wiring of the global financial system.

In the case of Black Monday on Oct. 19, 1987, one major factor was the recent introduction of portfolio insurance strategies. Those clever systems tried to buffer large investors from losses through program trading, in which computers would automatically sell stocks if prices declined. That seemed like benign innovation – until a market downturn triggered wave after wave of cascading sell orders.

The Asian crisis that began in July, 1997, was rooted in something equally boring – fixed exchange rates that encouraged developing countries such as Thailand and Malaysia to borrow in U.S. dollars. When those currency pegs broke down and local currencies plummeted in value, the crisis countries could no longer support their piles of foreign debt and international lenders fled, leading to brutal downturns across southeast Asia.

The global financial crisis that lurched into being 10 years ago this week, on Aug. 9, 2007, also seemed like a yawn at first. It began with problems in carefully engineered towers of householder debt known as collateralized mortgage obligations. When some of the assumptions embedded in those complex products failed, investors panicked and the entire financial system eventually seized up.

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All these crises share two features: Few, if any, investors saw them coming, and we're still arguing about their exact causes years after the events. Keep that in mind when you hear people discuss the outlook for today's stock market.

Optimists acknowledge that the current market bears some similarities to 2007, but don't view the parallels – such as a tightening Federal Reserve or lofty stock prices – as grounds for worry. U.S. home prices are nowhere near as frothy now as they were a decade ago, John Higgins of Capital Economics says. Furthermore, stocks and bonds don't look so expensive if you compare them to today's extraordinarily low interest rates.

"We doubt that another crisis lies around the corner," Mr. Higgins wrote in a note Wednesday.

But others aren't so sure. Jeffrey Gundlach, chief executive of money manager DoubleLine Capital in Los Angeles, said Tuesday that he is tracking the ratio of copper prices to gold prices as an early warning sign of inflationary pressures. Copper – at least in theory – moves up in line with the economic growth, while gold is traditionally an inflation hedge. So a rising copper-gold ratio should indicate a rising probability of stronger inflation ahead.

That's exactly what Mr. Gundlach is seeing right now. He believes inflation and interest rates are headed up, which should lead to much greater volatility in the stock market and probably a small decrease in the S&P 500 by year-end.

To be sure, that's a far cry from a real debacle. If history teaches us anything it's not that sevens happen to be unlucky, but that crises appear regularly and always seem to come out of nowhere.

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About the Author

Ian McGugan is a reporter with The Globe and Mail's Report on Business and has been writing about investing, economics and business for more than 20 years. He joined the Globe and Mail in 2010. He has been executive editor of Canadian Business magazine and founding editor of MoneySense magazine. More


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