An optimist and a pessimist meet for a coffee. “Things can’t possibly get any better,” the optimist says. The pessimist responds: “I think you’re right.”

That’s how David Rosenberg, chief economist at Gluskin Sheff and Associates Inc., described the psychology of this “classic late cycle.” He wasn’t the optimist in the scenario.

Speaking at an Empire Club of Canada event in Toronto on Thursday, Rosenberg offered a bearish outlook for 2018, which he pointed out is the year of the dog in the Chinese zodiac. (The last year of the dog was 2006, he noted, which was the end of a cycle no one saw coming at the time.)

Read: Warning signs for investors in 2018

To survive the year ahead, the dog “needs some late-cycle training,” said Rosenberg.

After a banner 2017 for investors, Rosenberg expects returns for the coming year to look very different. The current market expansion is now 103 months old, the second-longest on record, compared to the post-war average of 60 months.

“When consumer confidence is at its peak, a recession is usually a year away,” he said.

It’s important for investors to know where things are in the current cycle, a point Rosenberg estimated to be around “the seventh-inning stretch.” Portfolios need to change with the cycle, he said.

That means choosing companies with predictable earnings rather than volatile ones. It also means looking abroad, where many markets aren’t in the same phase of the cycle. He’s particularly bullish on Japan, where increased female participation in the labour force and a more liberal policy for work visas has offset the economic threat from an aging population and where Rosenberg said the stock market is showing signs of breaking out.

“This is going to have legs that go beyond the year of the dog,” he said of the Japanese market.

Read: Time to jump into Japanese equities: report

Ian Russell, president and chief executive officer of the Investment Industry Association of Canada, identified other risks during his speech at the event, including sudden shocks to the financial system. The growth in exchange-traded funds means investors are increasingly “buying the market rather than individual companies,” he said, which makes them more vulnerable to asset price declines across the market and major geopolitical events.

“The potential is there for an unprecedented herd mentality, leaving market-makers with limited scope to absorb panic selling,” he said.

Regulatory fragmentation, with the United States going in the opposite direction from much of the world in deregulating financial markets, is another concern, according to Russell. Canada is making progress with the Cooperative Capital Markets Regulatory System, but Russell lamented the fact that only five provinces and one territory have signed on and that it won’t be operational for another year.

He also referred to the Financial Consumer Agency of Canada’s memorandum of understanding with the Investment Industry Regulatory Organization of Canada to establish a framework for compliance and the new Financial Services Regulatory Authority of Ontario, which will develop regulations for the insurance industry and other financial institutions.

Read: Investors urged to consider active investment, multi-asset approach in 2018

“We need a careful approach to regulation, finding the appropriate and most cost-effective rules to guide financial advice and market dealing,” said Russell. “We have made good progress but need to rely even more on evidence-based analysis and more effective cost-benefit work.”

This article originally appeared on the website of Benefits Canada‘s companion publication,

Copyright © 2018 Transcontinental Media G.P. Originally published on

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