We have turned the page on a difficult and turbulent 2020. However, there are signs that the current upward market trend can continue. Here are 20 of our favourite charts heading into 2021, organized into the following categories:

-2020 Index Returns
-Economy
-COVID and Sector Returns
-Market Analysis
-Central Banks and Inflation
-Asset allocation and Portfolio Construction

2020 Index Returns

Here are the major index returns for 2020. Most indexes were positive, though there was a large gap between the largest gainers (Nasdaq) and the more modest ones(TSX).

Economy

Report card: Here is an overview of recent positive and negative developments as we turn the page on 2020 and look to 2021. The “interesting” category (items of interest which may end up positive or negative) centers on the new U.S. government with President Biden and the potential of a soft U.S. dollar.

Business cycle “reset” due to COVID: Heading into 2020, this chart indicated the U.S. was most likely in a “late cycle” or “end of cycle” phase. COVID changed everything. The two most likely stages at this point are “early cycle” or “start of cycle”, with “recession” a distant 3rd.

Turning the corner toward recovery:

COVID and Sector Returns

Winners and losers: The two charts below give a quick view of the sector-based winners and losers from the COVID pullback.

The impact of technology on 2020 S&P 500 and TSX returns: The overnight creation of a “stay-at-home” economy was great news for tech stocks.

Strong year for green energy: Green energy continues to grow its market share and experienced strong returns last year.

Market Analysis

U.S. equity valuations to end 2020 increased year-over-year: As we see higher valuations, we should lower return expectations accordingly. Currently, U.S. forward P/E ratios are about 22.33 times earnings, compared to the 25-year average of about 16.3 times earnings. The forward P/E was 19.3 times earnings at the end of 2019.

The S&P 500 since 1900: Here we see the steady growth in the S&P 500 since 1900.

The S&P 500 and market volatility: Here, we see the major pullbacks the S&P 500 has experienced since 2010 and the subsequent recoveries.

U.S. bulls are longer and stronger than bears: Using data going back to The Great Depression, we see that the average S&P 500 bull market is 54 months, and the average total return is 166%, whereas the average bear market lasts 22 months but sees a 42% drop. Once again, the average bull market lasts longer and gains more than the preceding bear market lasts & drops. Note that the COVID-related recession lasted only 1 month and saw a 34% drop.

Intra-year declines happen every year, don’t panic! History has shown that a large majority of calendar years see at least one drawdown of 5% or more. Years like 2017, where markets truly head upward with no real speedbumps, are exceedingly rare. It is generally a good idea to ride out the volatility, as markets always rebound given time.

Weak outlook for fixed income: With central bank rates at emergency lows, bond yields have followed suit. Medium-term return projections for the fixed-income space are in the low single-digits:

Central Banks, Fiscal Stimulus, and Inflation

U.S. Fed made a series of emergency rate cuts: During the first wave, drastic action was taken by the U.S. Fed as they made a series of emergency rate cuts. Currently the Fed’s key rate is 0.25%, as is the Bank of Canada’s key overnight rate. The EU overnight is at 0%.

Inflation should be low in the near term but will rise in the long term: When so much money is injected into the overall money supply, rapid inflation becomes a long-term concern.

Inflation: Over the next 1-2 years, inflation should remain low but looking at a longer timeline, expect inflation to move upward.

Inflation’s impact on market returns: As we see below, the inflation environment has historically influenced where returns are best derived. We are currently in a low inflation environment, and as our previous charts show, we expect inflation to remain low in the near-term, followed by upward movement.

Asset Allocation & Portfolio Construction

Can you commit for 10 years? Why does the industry always talk about a “long-term mindset”? The historical worst-case for stocks over any 10-year period since 1950 is -1%.

Broad diversification is a great risk-mitigator: If there’s only one chart you want to look at, this is the one. Diversification is one of the best risk mitigation strategies one can undertake.

Sources: Capital Group, JP Morgan, RBC GAM

The post 20 Charts for 2021 appeared first on Smof Investment Manager, LLC.

The first quarter of 2020 was a period of unprecedented volatility as COVID-19 took hold and lockdowns caused global economic havoc. Risk assets rallied aggressively from their March lows as many countries learned to better manage virus spread and economies gradually started to re-open.

Naturally, COVID-related uncertainty and the lasting effects of the pandemic on the economy are common issues highlighted from the economists and strategists below.  Their viewpoints differ, but overall, a common thread is the notion that the rapid recovery we have seen since late March is not sustainable, but investors should be cautiously optimistic for the remainder of 2020.

BlackRock Outlook: BlackRock advocated for taking advantage of risk assets in strategic portfolios in late-March. The firm has since turned neutral on equities in its strategic framework after the significant rally but keep an overweight in credit. Higher spread levels make up for increased default risk. The team has downgraded U.S. equities to neutral amid risks of fading fiscal stimulus and election uncertainty, and have turned cautious on emerging markets. The team has upgraded European equities as it offers the most attractive exposure to a cyclical upswing. The team is keeping credit overweight because of a global hunt for yield and central bank purchases.

BMO Outlook: BMO MAST expects the whatever-it-takes monetary and fiscal policy actions to remain significant tailwinds for risk assets in 2020, although it does expect market volatility to remain above normal. The team downplays the fear of a second wave and does not expect another round of massive economic shutdowns. The team thinks the loonie has little upside potential as it sees Canadian growth lagging the U.S. in the next 12-18 months. The synchronized policy response of governments and central banks is unprecedented by its speed and size. 0% interest rates could push stock valuations to cyclical highs as investors are forced into riskier assets to generate yield.

Capital Group Outlook: Because this economic decline is policy driven, the team believes a solid recovery is likely as lockdowns end. Easy monetary policy, aggressive fiscal policy and zero-bound interest rates should continue to support equity markets. The recent investor stampede into cash is understandable, but investors should consider the risks of holding excessive cash and trying to find the right time to re-enter the market.

CIBC Outlook: In de la Durantaye’s baseline projection, a vaccine is expected to come in the spring of 2021. If this forecast materializes, the global economy may very well recover faster than generally expected because of the colossal efforts deployed by governments and central banks around the world, with global growth accelerating to +3.4%. This assumes that the global pandemic doesn’t take a turn for the worse. He believes the U.S. economy will recover more rapidly than generally expected. U.S. real GDP growth is projected to average +1.0% over the forecast horizon. With inflation projected to run well below target, the Fed will keep its ultra-accommodative policy stance in place over the whole forecast horizon.

Dynamic Funds Outlook: The team feels the rapid pace of recovery that has taken hold over the past few months is unlikely to be sustained. The spread, particularly in the U.S., will begin to place some downward pressure on mobility patterns and economic activity. It is too early to suggest the risk of a renewed downturn, but the team’s focus has switched to looking for pockets of economic vulnerability. Income support, depressed capital costs, and better economic momentum are working together to help raise the floor under global equity prices. Investors willing to take significant off-benchmark equity positions can reduce the valuation risk in their portfolio.

Fidelity Outlook: Timmer feels the direction the stock market may take from here is not as clear as it was at the end of March. There are some things working in favour of stocks going up—and also against them. On the plus side, earnings look better than expected so far and monetary policy has provided liquidity and support for the recovery. Indicators of internal strength in the market and investor sentiment are also holding up. And, last but not least, there is some optimism around treatments and vaccines for COVID-19. Some of the negatives include the increasing spread of the virus in parts of the U.S. and the potential damper that could put on the recovery as businesses continue to struggle; finally, there may be uncertainty with an election coming up. Overall, Timmer thinks the positives continue to outweigh the negatives.

IA Outlook: As the global economy is showing signs of re-acceleration and the main geopolitical tail risks look poised to take a turn for the better, a structural but careful risk-on strategy should perform well in 2020, according to Gignac. He advocates not overreaching for returns, carefully monitoring and managing risks and, finally, being prepared to be active, as markets should give more opportunities to add value to portfolios.

Manulife Outlook: Petursson sees an economic recovery that is enjoyed globally but perhaps at a different pace market-to-market. In general, equity market gains are unlikely to reflect the full earnings growth as P/E multiples adjust lower (as they typically do in a strong earnings recovery). He believes the trailing S&P 500 Index 12-month P/E ratio falls one or two points through to the end of 2021 to 20x-21x earnings. Despite higher inflationary pressure into 2021, he feels central banks will remain accommodative through the entire period, not looking to raise rates until well into 2022. Yield curves steepen as the recovery combined with the inflationary forces of fiscal and monetary stimulus push longer-term yields higher. Overall, Petursson believes it is a good opportunity to continue to gradually increase the equity weight in his model portfolio by 5% to 60%, bringing his asset allocation back to neutral.

PIMCO Outlook: The team believes that risk assets valuations (equity and credit) are approximately fair, after adjusting for easy financial conditions and assuming a gradual economic recovery. Nonetheless, the distribution of potential economic scenarios over the next 12 months is unusually wide. As such, the team believes investors should maintain a moderate risk-on posture in multi-asset portfolios with a focus on companies with strong secular or thematic growth drivers that are positioned to deliver robust earnings in a tepid macro environment. As always, robust portfolio diversification is critical, but achieving this requires a multi-faceted approach. Duration, real assets, and currencies all can play an important role. The team believes the next few quarters will present a great backdrop for active management as the nature and the pace of the recovery will create many winners and losers. That should provide a plethora of opportunities to add value through sector selection and tactical asset allocation.

RBC Outlook: RBC GAM’s scenario analysis suggests further upside for stocks is possible as long as investor confidence stays elevated, inflation and interest rates remain low, and earnings rebound toward their long-term trend. The base case outlook for the U.S. is for a 7.1% decline in 2020 GDP. There is evidence that the US dollar bull market has come to an end and the team believes the Euro and Yen are to benefit, while the Loonie and British Pound will lag. If faster inflation does eventually materialize, the long-established style trend of quality and growth outperforming value may finally reverse. The team has adjusted the strategic neutral weights in its multi-asset and balanced portfolios in favour of stocks at the expense of bonds. For a balanced, global investor, the team currently recommends an asset mix of 61 percent equities and 38 percent fixed income, with the balance in cash.

TD Outlook: The team has an overall neutral outlook for equities and continues to prefer equities over fixed income. It maintains a modest bias toward U.S. stocks versus Canadian. While there is no definitive way to estimate the degree of damage COVID-19 will cause to corporate and global growth, the team believes in the resiliency of the U.S. economy which should get a much needed boost from accommodative monetary policy and fiscal stimulus measures. Significant downgrades to economic forecasts have increased the probability of a short and sharp recession. The team remains defensively positioned with a neutral view to emerging markets debt while seeking attractive opportunities should they arise.

Source: IA Wealth

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The most common question I have received this year, one that I have asked myself many times, is “how can markets be up amidst the pandemic and economic backdrop?”. On May 29th, we wrote a blog titled “Markets vs. Economy, why markets are only 10-15% off their highs”, which summarized articles by The Globe & Mail and the New York Times on this very issue.

This week, I received a related release from Myles Zyblock, Chief Investment Strategist at Dynamic Funds, which aims to explain the perceived misalignment between the “fair value” of stock prices and current stock prices.

I will try to summarize his article.   Markets go up for two reasons: rising earnings (EPS) or price/earnings expansion.  The former is a very logical reason based on company fundamentals, but the latter is investor sentiment, a more psychological phenomenon.  The table below shows that rising earnings (the fundamental reason), accounts for 41% or less of market performance for time periods under one year:

Thus, when someone asks, “what’s going to happen to markets in the next 3 months?”, a psychologist is apparently better able to answer the question than a financial analyst. Even in a 5-year investment window, “sentiment” still accounts for 44% of market performance. It is not until the 10-year investment horizon mark that fundamental reasons take hold.

I will simply cite Mr. Zyblock for the conclusion:

“So, let’s return to the present day. Stocks have come off the bottom hard since the March low. It sure hasn’t been because earnings were on a tear. It was because P/E multiples expanded; that something has happened to make investors either much more optimistic about future earnings or much more willing to accept equity market risk.  Epic policy stimulus is just an educated guess about what that “something” might be. Fiscal policy makers have injected trillions of dollars into the global economy in the form of income support, loan backstops, and tax breaks. Monetary policy makers have driven interest rates into the floor, provided liquidity backstops, and have bought trillions of dollars of bonds in the primary and secondary markets. G4 central bank balance sheets have grown to more than 50% of their GDP, and the promise is to do even more.  With this much liquidity hitting the system, is it really any wonder why the stock market’s P/E multiple has responded so positively? A simple “excess liquidity” indicator, measured as money supply growth relative to GDP growth, has exploded upwards. Over time, excess liquidity has shown a strong and reasonably stable positive correlation with stock market valuations. It is hard to see a sustained or significant period of valuation compression when the policy authorities are in full panic mode. As the old Wall Street investment adage goes, ‘markets stop panicking when policy makers start panicking’.”

Please reach out to us with any questions or comments. We wish everyone a healthy and happy fall.

Source: Dynamic Funds

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1. 2020 Equity returns year-to-date

The first half the year saw a continuation of market increases until late-February, when COVID-related fears took hold of markets. After a steep decline – including the fastest 20% drawdown time of 19 business days in history – markets rallied from early-April to the present.

Here, we see market returns in domestic currency terms (YTD) and in Canadian Dollar terms (YTD C$), as of July 24, 2020. Note that “EAFE” stands for “Europe, Australasia and Far East”, and is a stock market index measuring equity performance of developed markets outside Canada & the U.S.

2 & 3: S&P 500 and international valuation measures

The chart below tracks various valuations methods for the S&P 500. Interestingly, the P/E ratio for the S&P 500 has actually increased from ~18.18 times earnings in December 2019 to ~21.72 times earnings as of June 30, 2020. This is due to declining earnings coupled with a rally in stock prices.

International equity markets remain cheaper relative to U.S. equities, though international P/E ratios have similarly risen – again due to reduced earnings & stock price rallies.

4: European COVID stimulus package

The screenshot below is as of mid-day on July 23, 2020. Commentary from Myles Zyblock, Chief Investment Strategist at Dynamic Funds, follows:

“Markets are green to start the day, particularly in Europe where many of those indexes are up by about 1%. This positive tone was set by a breakthrough agreement early Tuesday (July 21, 2020) morning between EU leaders on a 1.82 Trillion Euro ($2.1 Trillion USD) “European” budget and coronavirus recovery fund. In the details, we were told that 750 Billion Euros will be for coronavirus support (comprised of 390 Billion Euros in grants and 360 Billion Euros in loans) and 1.07 Trillion Euros will be placed towards a seven-year budget.

This is new. It is the first time the region is raising debt collectively to fund a response to a crisis. The debt issued will be in the form of a Eurobond. While the EU recovery fund disbursement is unlikely to start until 2021, national fiscal policy plus the ECB’s efforts will continue to provide the main avenues for support. Nevertheless, this is a big unifying policy step for the region and it is a large source of fresh fiscal stimulus for the year ahead”. (end of Myles Zyblock commentary)

5: Economic report card

From RBC Global Asset Management (RBC GAM), here is an overview of current positive, negative, and interesting market developments. The “interesting” category consists of items that may end up positive or negative when the dust settles.

6 & 7: Most countries are exhibiting recessionary market signals

Another RBC GAM chart. The majority of economic metrics (63%) indicate the U.S. is in a recessionary phase, with a small slice of metrics (17%) indicating the U.S. is in the “end of cycle” phase.

This chart, from Fidelity, echoes the above chart and provides international context. Global activity shows early signs of improvement from extremely low levels. Near-term sequential progress is likely to continue as coronavirus-related restrictions on routine activities are lifted. China appears to be somewhat ahead of most major economies due to its earlier shutdown and reopening. While the worst of the recession appears to have passed for the U.S. and Europe as well, activity levels remain far below normal. In addition, “second wave” risks remain present.

8: Unemployment & wages

In January’s 20 Charts for 2020, we noted that unemployment in the U.S. hit a 50-year low. As we see here, the COVID-related economic shutdown led to 50-year high unemployment levels. Wage growth also moved downward toward its 50-year historical average.

9: Inflation has decreased from late-2019 to the present day

U.S. inflation, measured by the personal consumption deflator, was at 1.6% as of November 2019. The economic shutdown and unemployment spike had a predictable effect, as inflation dropped to 1.0% as of June 30, 2020. U.S. Fed Chairman Jerome Powell stated in June that the Fed is “not even thinking about thinking about raising rates”.

10: Mitigating risk through broad diversification

We consistently return to charts like this because this lesson never gets old. The best way to optimize risk-adjusted returns is to invest in a well-diversified portfolio, both from a regional and from a sector standpoint.

11: Intra-year declines happen every year

History tells us that the majority of calendar years see at least one market pullback of 5% or more. 2019 provided a great example of this, with a -7% decline during the year but a 29% return in the end. In 2020, the S&P declined as much as -34% and currently sits at -4% as of June 30, 2020.

12: Bear (declining) markets are historically shorter than bull (rising) markets

Using data going back to The Great Depression, we’ve seen that the average bear market is 22 months and sees a -42% decline, while the average bull market has seen a duration of 54 months and a return of 166%.

Sources: Dynamic Funds, Fidelity, JP Morgan, RBC GAM

This information is provided for general information purposes only. It does not constitute professional advice. Please contact a professional about your specific needs before taking any action.

The post First Half 2020 Market Update – Charts of Interest appeared first on Smof Investment Manager, LLC.

For the visual learners, next week’s entry will compliment this week’s FAQ with charts of interest summarizing the first half of 2020.

Could you provide an overview of the last quarter? (Answer from Myles Zyblock, Chief Investment Strategist, Dynamic Funds)

Unprecedented action by policymakers and moderation in COVID-19 caseloads helped ease lockdowns and initiate the early phases of the eagerly anticipated re-opening of the economy. These developments were well received by the market and beaten up riskier asset classes soared.

All major asset classes finished Q2 in positive territory. Global equities rallied by just over 19%, with the U.S. stock market having its best quarter in decades. Emerging market bonds also rebounded to produce robust gains while corporate bonds outpaced government bonds, as they benefited from stronger risk appetite. Despite the rally in riskier assets, gold bullion remained resilient with a 12.9% rise in Q2.

With the increasing number of cases in the “sunshine states” do you expect to see another trough similar to March? (Answer from Dan Bastastic, Portfolio Manager, IA Clarington)

He believes there is enough liquidity and support in the market (2.5 years of money supply injected in 3 months) for us to not re-test the lows

• Does anticipate there will be continued volatility
• The money support is being used to bide our time until we have a vaccine (reports indicate this could be in a matter of months)

How is the current vaccine timeline impacting markets? (Answer from Myles Zyblock)

Equity markets were supported in early trading by the news that Moderna’s vaccine had induced neutralizing antibodies in its Phase I trial. The biggest beneficiaries from this news have been those companies and industries which have felt the greatest negative impact from the pandemic (i.e., “Viral Outbreak” stocks). These include industries such as airlines, cruise lines, hotels, brick-and-mortar retailers, resorts and restaurants. Those companies which investors have sought for safety, termed the “Stay at Home” stocks like grocery stores, food producers, technology providers and online retailers, were significantly lagging the broad benchmarks at the time of writing.

Weeks like this one offer a potential window into what is to come. The announcement of a viable vaccine seems like the catalyst needed to lift many deep value stocks out of their performance malaise. This rotation might also place a number of the year’s leaders into the backseat for a while. The difficult part is to know when this vaccine is likely to be found or go into production. Most experts still believe it is many months away. Yet with over 100 vaccines being developed and tested around the world, the likelihood of some form of eventual success seems fairly high.

What are your thoughts on growth prospects for major regions – North America, Europe, Emerging Markets? Any potential growth divergence expected given relative progress on COVID-19? (Answer from Myles Zyblock)

Official activity indicators for May and June started to snap back in response to epic global policy stimulus, moderating caseload growth, and reduced mobility restrictions. Europe, U.S. and Chinese auto sales were up by 41% collectively over the past two months. U.S. retail sales rebounded by 17.7% month-over-month based on the latest reading for May. A similar sharp bounce was recorded for U.K. retail spending. Employment has jumped higher, and much earlier, than expected in countries as diverse as the U.S. and Korea. Housing activity looks to be reviving. Leading activity indicators for manufacturing are coming off the bottom all around the world.

While 2020 is likely to encompass one of the deepest global recessions in history, with GDP probably down by 5% for the year, the incoming data also tells us that it might be among the shortest in duration. Of course, a lot still depends on the evolution of the virus, and people’s reactions to it, but for now the lights are turning back on for the global economy.

What are your expectations for corporate earnings growth? (Answer from Myles Zyblock)

July kicks off the period when companies will begin to report their second quarter earnings and provide any guidance that they might have about their outlook for the future. It is probably going to be a very weak quarter, with U.S. earnings down by close to 40% and global earnings off by more than 25%. These results will mark the weakest reporting period since the depths of the last financial crisis in 2008.

Then, based on the current trajectory of economic activity, we are likely to see the downward pressure on corporate earnings begin to moderate. This is not to say that earnings will boom, but the year-over-year growth rates should start to look somewhat better in Q3 and Q4. For 2020, however, EPS is likely to be 15-20% lower than what was recorded in 2019.

How supportive do you expect policymakers to remain? (Answer from Myles Zyblock)

Policy makers are doing their utmost to mitigate the negative economic effects from the global health crisis. Central banks have used a combination of aggressive interest rate reductions and liquidity injections to help stimulate activity and keep financial markets functioning as normally as possible. Fiscal policy makers have been reducing taxes, offering loan guarantees, and providing counter-cyclical income support to bridge the economic gap. These policy efforts, amounting to about $24.5 trillion dollars or 28% of global GDP, are unprecedented in their size and scope.

Yet, despite this year’s gargantuan efforts there seems to be no end to the policy intervention in sight. In recent weeks, at least seven emerging market central banks lowered their interest rates. The Canadian government extended its emergency response benefit (CERB) program for two more months. The Bank of England upsized its quantitative easing campaign by £100 billion. And, the Federal Reserve increased the menu of options for its corporate bond purchase facility from ETFs to include individual issuers that met the criteria for purchase.

Meanwhile, the Trump administration is said to be weighing a $1 trillion infrastructure program to help the beleaguered economy. China’s central bank has pledged faster credit growth. The U.K. has introduced a value-added tax cut. The International Monetary Fund (IMF) has built a $107 billion war chest to provide a potential safety net for struggling Latin American economies.

Global policy makers either do not see the recovery that is starting to take hold or have very little confidence in the strength of the recovery as it begins. Hence, they continue to pump the system full of stimulus.

Will the U.S. market outperformance vs. Canada continue? (Answer from Dan Bastastic)

• Given technology has been a major driver of the outperformance, do you expect the TSX will continue to underperform? Is it possible there will be a turnaround?
• U.S. is structurally advantaged vs. TSX
  • Look at weights among sectors
    • TSX is heavy energy, resource and financials
    • Any of these have an issue and the market as a whole struggles
• Does not mean you can blindly buy the U.S. market
  • Rather it is prudent to be selective in your sectors for both the TSX and U.S.
• This year alone:
  • Growth up over 11% and value down ~18%
  • Science related stocks up 19% and financials down 19%
  • In June the NASDAQ returned ~8% while the equal weighted S&P (normalizing for MEGA Tech stocks) is down ~11%
• For the TSX to recover we need to get through the virus and pandemic, have interest rates trend up, along with the US$ trending down
  • If/when this occurs we will see emerging markets will start to do much better
  • We link the TSX in with emerging Markets as it is the safest EM play globally
    • The TSX gives you the greatest upside with a lot less downside
• We expect the TSX to at least match the performance of the S&P when we see value come back and interest rates/inflation stabilize or increase

We are living in a world of Helicopter Money. Do you have any concerns about the inevitable inflation to pay for it? Also how does that effect the long-term GDP as it seems a lot of people are saving here rather than spending? (Answer from David Fingold, Portfolio Manager, Dynamic Funds)

• First part of the question asks about inflation & second says there is going to be deflation
• Nobody is going to pay for this debt, countries never repay their debt
• They grow their GDP which reduces debt-to-GDP ratio over time or they just default
  • Countries that can print own currency have never defaulted
• U.S. will not default, they’ve never repaid their debt, never unwound Quantitative Easing (QE), did QE from 1940-1952 and just let the bonds mature.
  • No one has ever unwound the central bank balance sheet as you do not need to, the bonds just mature.
• Can’t be any inflation as the velocity of money has gone to nearly zero
• If Fed proceeds with yield curve control which is quite possible in the next few meetings, that will lower velocity of money even more
• Inflation is an impossibility
• Bigger risk is deflation which is driven by several things
  • There’s a lot of worthless stuff out there, there’s no equity in shopping malls, office building, airlines, hotels
  • Don’t own any of these assets, as an active manager, don’t care for these asset classes
  • Don’t own any banks, so the fund is not exposed to mortgage or lease defaults

Does the U.S. election impact your investment decisions? (Answers from David Fingold and Dan Bastastic)

Fingold: The short answer to the question is no. We do not think anyone should be making investment decisions based upon elections. In the best-case scenario if the prediction you made for the election was correct, there is an interim election two years from then, and another Presidential election two years after that. It would be impossible to hold securities for the long-term if you have to take a view on politics, so we don’t do that. If we make an investment in a company, it needs to be a company that can do well regardless of who is in power. Our advice for investors who are trying to figure out who is going to win the election is don’t worry about that – just invest in good businesses.

Bastastic:

• One thing we know is it does not matter who holds the President’s seat if the executive branch and Congress are split
  • Markets and economy are not negatively impacted if you have a President who is Democrat or Republican and the Senate/Congress are opposite
  • Those are generally most market friendly types of market in the U.S.
• If you asked us three months ago if a Biden victory would be a risk to the markets, the answer would be no
  • That has now changed
  • If Democrats take Presidency, Congress and Senate you have to start discounting the tax increases, removal of regulation cuts implemented by current administration
    • These have been a huge factor in market returns and job creation over the past 4 yr
  • You need to start to accept that this may change
  • It would be prudent to be defensive heading into the fall if:
    • You think the markets are very overvalued
    • We get a Democratic sweep in the fall
    • The narrative of the final months of the election cycle has been that taxes and regulations are going up

What is your currency outlook? (Answer from Myles Zyblock)

The U.S. dollar has been softening in value since late-March. On a trade-weighted basis, it has lost about 5.5% of its value relative to the currencies of its main trading partners since March 23. It is probably no coincidence that the U.S. dollar peaked at the same time that global equity and credit markets bottomed. The dollar is considered a relatively safe-haven currency and when the desire for safety starts to wane, so too does the demand for US dollars.

The Canadian dollar is among the set of currency beneficiaries of global risk-on flows. It is considered a more cyclical currency and has therefore benefitted from improving global economic activity. More directly, the Loonie has also found support from a higher oil price and the expected improvement in the country’s terms of trade.

The Canadian dollar has strengthened by close to 7% since late March. More upside seems likely. While the pandemic has hit the country hard, the damage has been less severe than that experienced by many other countries. Fiscal and monetary support should therefore help lift Canada out of its recession relatively quickly. Meanwhile, further gains in commodity prices and a less skeptical investment mood could provide additional supports for the Canadian dollar.

How could the extreme concentration of some indices (ex: S&P 500 FAANGS) impact index returns? (Answer from Myles Zyblock)

Every so often, market capitalization weighted indexes find themselves in a situation where a relatively small number of constituents dominate the behavior of overall index performance. You don’t have to go too far back in time to remember when Nortel alone made up over a third of the S&P/TSX capitalization weighting.

Today, we find ourselves in a similar situation in some indexes, like the S&P 500, where the five largest companies now comprise about 20% of the index’s total market capitalization. Narrow breadth is always resolved in the same way. The relative outperformance of these market leaders eventually gives way to underperformance.

Timing the reconciliation is the hard part. In the U.S., there is plenty of precedent throughout the 1920s to the 1960s when weighting for the top 5 stocks hovered in the 25-30% range. Said differently, there is no iron law which says that the big cannot get even bigger.

How has market performance in 2020 differed from past years given that typically defensive sectors (e.g., real estate) have been underperforming?  (Answer from Myles Zyblock)

Naïvely adopting a low beta, or defensive, investment stance is often not as reliable in the next down-cycle as it appeared to be in prior periods. What is defensive today might not be defensive tomorrow. Today’s low beta stock or industry can morph into tomorrow’s high beta investment. This is because industry fundamentals change over time and the reasons behind each recession, or market dislocation, are almost never the same.

In the 2000 bear market, for example, Technology was one of the hardest hit sectors. It was the subject of over-investment and extreme valuations. Today, this same sector benefits from rock-solid balance sheets, is not nearly as overvalued as it once was, and has caught the tailwinds of accelerated technology adoption.

Through today’s current health crisis, we are concerned about empty hotels, empty casinos, and empty retail stores. Real estate companies, many of which have highly leveraged balance sheets, are vulnerable to an extended period of high vacancy rates. So the last few years of apparent safety that these companies have offered seems to have disappeared through the pandemic.

The benefit of owning equities has been their long-term rewarding returns. But we must not forget that they are also a relatively risky asset class. Given that the future is highly uncertain, a well-diversified equity portfolio typically offers the most reliable defense.

The market is not the economy and the economy is not the market. Why is it important for investors to recognize that? (Answer from David Fingold)

I understand the confusion because I think that the media is often telling people that the stock market is an indication of the economy, yet the stock market does not look remotely like the economy. The stock market, for instance, has a significant exposure to technology and healthcare, and the economy is very different. The economy has broader exposures to industries that simply are not publicly traded businesses.

People get confused when they see the unemployment numbers rising and the market going up. What they miss is that the market is going up because of resilient, high quality, profitable global businesses that consumers and businesses need to work with and need to do business with.

The other thing that I think confuses people is that they want to look at the market as an absolute indicator of the state of the economy and I think that is wrong. The stock market does not know good or bad, it only knows better or worse. Things were getting worse in late-February and throughout the month of March, and things have been getting better since late-March. In fact, if you were to overlay jobless claims versus the stock market, you will see that as the number of people who are claiming unemployment has fallen, the stock market has moved up. Again, that confuses people because they see a growing number of people who are unemployed, but they do not understand that we actually see green shoots. We see something that is less bad when several hundred thousand people claim unemployment this week than claimed last week. If less people are making claims, we see that as better, but it is clearly not good; however, that doesn’t matter – the stock market only likes better.

The post Q2 2020 – Frequently Asked Questions (FAQ) appeared first on Smof Investment Manager, LLC.

U.S. Fed, Bank of Canada Announce “Emergency” Rate Cuts of 50 Basis-Points

It was an up-and-down, volatile week in North American markets on the heels of last week’s steep declines.

Markets rallied on Monday on the prospect of a U.S. Fed rate cut.

On Tuesday, the U.S. Federal Reserve – attempting to stem COVID-19 / coronavirus-related market decline – announced an “emergency” rate cut of 50 basis-points. Markets largely ignored the rate cut, as coronavirus fears loomed.

Wednesday saw the Bank of Canada announce a matching 50 basis-point rate cut, again under emergency circumstances; the TSX rallied on the news. In the U.S., post-Super Tuesday results pushed U.S. markets steeply upward.

On Thursday and Friday, coronavirus panic continued with major Canadian and U.S. markets down once again.

In total, markets were a mixed bag on the week. North American markets were mostly flat with the DOW increasing a modest 1.79% and, conversely, the TSX dropping 0.54%. Most European and Asian markets were down, with the Shanghai Composite Index being a notable exception, posting a 5.38% gain on the week. Gold futures, a classic safe-haven investment, were up about 6%.

We have written extensively on the potential market effects of the coronavirus panic and how markets have reacted over a longer time frame. See our blog entries from February 26th and February 28th. Our position remains the same: maintain a well-diversified portfolio consisting of high-quality holdings. Plan ahead for scheduled and/or regular withdrawals such as RRIF payments, LIF payments, etc.

Does the CRA Owe You Money?

I recently logged onto my CRA My Account, and to my surprise – I’d never noticed this before – there was a sub-heading called “Uncashed cheques”. Curious, I clicked the link. I discovered that the CRA mailed me a cheque in 2008 that never found its way to me!

The advent of CRA’s Direct Deposit option for receiving refunds and other government benefits is still quite new, relatively speaking. Prior to Direct Deposit, all benefits and refunds were paid via a cheque and mailed to taxpayers.

Cheques mailed to taxpayers by the CRA were occasionally lost in the mail, taxpayers moved without the CRA’s knowledge, etc. As a result, many taxpayers have recently discovered they have balances owed to them by the CRA.

How Do I Check for a Cheque?

I will note from the outset that this is not something that we at Smof Investment can do for you. You must take this action on your own.

Step 1: Log on to the CRA’s My Account page (you can google “CRA My Account” and it will be the top/first search result.

If you do not have a CRA My Account profile, you’ll have to set one up.

Step 2: From the Overview screen, the right side of the page will have a list of links under the “Related Services” headline. Scroll to the bottom of this list, to “Uncashed Cheques”. Click this link.

Step 3: Any uncashed cheques the CRA has on file for you will be listed here. You’ll see the payment date, the amount and the payment type.

Step 4: There is also a column called “Generated 535”. You can generate and print a pre-populated form. On the bottom of this form, you and a witness must sign and date.

Step 5: On the uncashed cheques page, there is another link called “Instructions for requesting duplicate payments”. Click this to show a mailing address you can send the completed form to.

Step 6: The processing time is 60 days, per the CRA site. You should thus receive a fresh cheque in about 3 months.

Weekly Update – By The Numbers

Sources: Canada.ca, Yahoo! Finance, CNBC.com

This information is provided for general information purposes only. It does not constitute professional advice. Please contact a professional about your specific needs before taking any action.

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Tempered Fed Cut Hike Speculation Leads Indexes Lower

Major U.S. indices dipped to end the Friday trading session after a strong opening. The Wall Street Journal reported the coming Fed Cut would be 25 basis points; however, comments on Thursday by Fed officials inferred a larger rate cut.

New York Federal Reserve President John Williams gave a lengthy speech on Thursday – which he later walked back from to an extent – that appeared to favour aggressive rate cuts, Mr. Williams pointed to too-low inflation and the need for stimulus. Fed Board of Governors Vice Chair Richard Clarida also made his case for aggressive rate cuts.

Williams’ accommodative-sounding speech and Clarida’s comments led markets upward on Thursday, but the Wall Street Journal’s report dampened investors’ spirits as Friday wore on.

The extent to which U.S. markets are dependent on accommodative monetary policy is significant. Dennis Dick, head of markets structure at Bright Trading LLC in Las Vegas opined “this market has been dependent on cheap money and it is going to continue to be”.

Rate cut expectations, heavily expected to be 50 basis points or more until Friday, now are lowered to a 25-basis point expectation.

The refocused rate cut expectation does not preclude further easing going forward; thus, further rate cut announcements would likely fuel additional equities growth.

Bank of Canada Lowers Stress Test Qualifying Rate

The Bank of Canada reduced its five-year benchmark rate from 5.34% to 5.14%, a drop of 20 basis points. The BoC’s five-year benchmark is also used by lenders as the qualifying rate for would-be home buyers.

Initially only for high-ratio (less than 20% down payment, requiring CMHC default creditor insurance) mortgages, the qualifying rate now impacts both high-ratio and conventional (20% down or more, not requiring CMHC insurance) mortgages.

The goal of the stress test is, generally speaking, to ensure that a would-be borrower could weather a higher interest rate and/or a lower income level at mortgage renewal.

As a reminder, the stress test for insured mortgages stipulates the buyer(s) must be able to meet the servicing hurdle using the BoC’s posted five-year rate (now 5.14%).

For uninsured mortgages, the stress test calculation is measured as the greater of the lender’s rate + 200 basis points OR the Bank of Canada’s Posted Five Year Fixed Rate.

Sources: Globe Investor, Advisor.ca

This information is provided for general information purposes only. It does not constitute professional advice. Please contact a professional about your specific needs before taking any action.

The post Weekly Update – July 19, 2019 appeared first on Smof Investment Manager, LLC.

China-U.S. Trade Negotiations Update

In recent weeks, as we’ve written about, there has a been an overall increase in drama surrounding the ongoing trade dispute between China and the U.S.

Here is a more comprehensive update which summarizes the dispute; what is happening, how markets are reacting, some key developments, and finally the road ahead.

As always, feel free to contact us with questions about how the ongoing trade dispute is affecting your portfolio. We are here for you.

Accident or Not 
Whether by design or accident, the trade negotiations between the U.S. and China took a turn for the worse a few weeks ago. Were it not for the subsequent tweets, comments and actions by both countries, one could have dismissed the early-May breakdown in talks as a hiccup or simply negotiation tactics. But as it stands, it seems increasingly likely the U.S.-China dispute is not going to be resolved any time soon. Unlike last year, when China went out of its way to re-engage the U.S. after the Trump administration threatened and eventually implemented higher tariffs, Chinese officials’ responds were much more combative this time around.

Why the Surprise
The deeper issues, such as intellectual property protection, technology transfer and access, compliance monitoring of any agreement, the removal of tariffs and the definition of an “equal playing field,” were never going to be resolved within a few months. However, there was the hope that some agreement on trade might soon be forthcoming with a commitment to continue dialogue on the outstanding issues. Comments from both sides up to the end of April not only suggested that the latter was possible, but also that it was the most likely outcome. These assumptions were shattered by a single tweet as the U.S. walked away from the negotiation table – and wrong-footed a complacent market.

Market Reaction
Chinese equities sold off aggressively, dragging down emerging market equities in general. The U.S. market, on the other hand, remained surprisingly resilient, reflecting:

• Optimism that some sort of deal will be reached in the near future. Anecdotally, it is interesting to note that U.S. investors are more optimistic on a near-term outcome than investors in Asia. A recent J.P. Morgan global survey indicated that only a quarter of investors surveyed believe Phase III tariffs (i.e., tariffs on the remaining US$300 billion) will be implemented. Half of respondents still think a deal is possible, with 27% seeing a deal being struck in late June.
• The hope that the impact on the U.S. economy would be minimal and inflationary pressures resulting from the higher tariffs would be manageable in the current low inflation environment.
• The belief that the U.S. Federal Reserve put is firmly in place and any major disruption to the economy or markets will be met by interest rate cuts and possibly even renewed quantitative easing. The market is already pricing in at least 50 basis points (bps) of cuts in interest rates in the U.S. over the next 13 months, and the U.S. 10-year bond yield has plunged 30 bps in recent weeks to 2.30%, from a high of 3.26% in October 2018.*

Key Developments Since the Breakdown in Talks
All indicators are pointing to increased rather than decreased tensions:

• The threat of a 25% tariff on an additional US$300 billion of Chinese imports.
• Huawei restrictions.
• Possibility of restriction on Chinese surveillance companies.
• Renminbi weakness.
• Hawkish and non-conciliatory comments from both sides.
• Bipartisan support in the U.S. for “being tough” on China. There are huge differences as to what that implies but, ahead of next year’s U.S. election, no presidential candidate wants to be accused of “being soft” on China.

The Way Forward 
Between tweets by U.S. President Donald Trump and the lack of clear insights into the views of China’s Politburo Standing Committee, predicting the eventual outcome is a mug’s game, but given the deep-rooted differences between and frustration on both sides, especially from the hawkish camps within both administrations, the path forward looks increasingly challenged. Thus, following the developments on the dispute remains essential, especially given the profoundly different market impact of a near-term resolution versus a drawn-out and escalating dispute.

Bank of Canada Holds Key Rate at 1.75%

In a widely expected move, the Bank of Canada held its benchmark (overnight) rate at 1.75%. The reasoning provided for the decision was evidence of a slowing economy during late-2018 and early-2019. However, there were signs of improvement during Q2 2019. The BoC feels the Canadian economy’s current slowdown is “only temporary”, based on strong job figures and upticks in both consumer spending and exports.

Economists had pegged the odds of a May rate hike at less than 10% prior to the decision on Wednesday to keep the rate steady.

Going forward, economists estimate a 50% chance of a BoC rate cut by October 2019, a move that would aim to stimulate the economy.

The BoC’s next interest rate announcement is scheduled for July 10th.

Sources: CI Investments, CBC.ca, Bank of Canada, *Bloomberg

This information is provided for general information purposes only. It does not constitute professional advice. Please contact a professional about your specific needs before taking any action.

The post Weekly Update – May 31, 2019 appeared first on Smof Investment Manager, LLC.

CMHC Updates Canada’s Housing Market Risk Levels

The Canada Mortgage and Housing Corporation (CMHC) has lowered the country’s housing market from “highly vulnerable” to “moderately vulnerable” in a statement this week. The Crown Corporation reported on Thursday that an “overall easing” of price acceleration led to the lowered risk rating, which had been rated as highly vulnerable for the previous 10 quarters.

CMHC Chief Economist Bob Dugann: “Even though moderate evidence of overvaluation continues for Canada as a whole, there has been improved alignment overall between house prices and housing market fundamentals in 2018.”

Mortgage stress-tests, introduced in 2018, were a major factor in the risk rating change.

It is important to note that while the national rating dropped to moderately vulnerable, there is continued high-level vulnerability in New York, Victoria, New York, and Hamilton. These four cities did see a move toward more sustainable levels, CMHC said.

Bank of Canada Rate Update

Last week, the Bank of Canada set its key rate at 1.75% for the fourth consecutive rate announcement, on the heels of five rate hikes between mid-2017 and fall-2018.

BoC head Stephen Poloz was also quiet about future hikes, no doubt with an eye on the sudden economic slowdown in the last half of 2018 (which led to worldwide market pullbacks from July through December).

The moratorium on rate hikes helped to steady the ship, resulting in the rebound we’re currently experiencing.

While the BoC made no mention of future hikes, and indeed inferred a continuing accommodative policy in the near-future, there is a differing opinion out there. Scotiabank VP and Head of Capital Markets Economics, Derek Holt, feels strongly that a hike before year-end is likely. “We still think the [BoC] is not done with its hike cycle, and our current view is a hike by year-end”.

Time will tell if the Bank of Canada ultimately continues with its rate-hold strategy or will look to mitigate recent positive inflation reports via a rate hike later in 2019.

Weekly Update – By The Numbers

North America

• The TSX closed at 16,494, down -120 points or -0.72% over the past week. YTD the TSX is up 15.16%.
• The DOW closed at 26,505, down -38 points or -0.14% over the past week. YTD the DOW is up 13.62%.
• The S&P closed at 2,946, up 6 points or 0.20% over the past week. YTD the S&P is up 17.51%.
• The NASDAQ closed at 8,164, up 18 points or 0.22% over the past week. YTD the NASDAQ is up 23.04%.
• Gold closed at 1,280, down 11.00 points or -0.62% over the past week. YTD gold is down -0.39%.
• Oil closed at 61.87, down -1.00 points or -1.59% over the past week. YTD oil is up 35.00%.
• The USD/CAD closed at 0.745, up 0.0023 points or 0.31% over the past week. YTD the USD/CAD is up 1.66%.

Europe/Asia

• The MSCI closed at 2,154, changed 0 points or 0.00% over the past week. YTD the MSCI is up 14.27%.
• The Euro Stoxx 50 closed at 3,503, up 3 points or 0.09% over the past week. YTD the Euro Stoxx 50 is up 16.73%.
• The FTSE closed at 7,381, down -47 points or -0.63% over the past week. YTD the FTSE is up 9.71%.
• The CAC closed at 5,549, down -20 points or -0.36% over the past week. YTD the CAC is up 17.29%.
• DAX closed at 12,413, up 98.00 points or 0.80% over the past week. YTD DAX is up 17.56%.
• Nikkei closed at 22,259, changed 0.00 points or 0.00% over the past week. YTD Nikkei is up 11.21%.
• The Shanghai closed at 3,078, down -8.0000 points or -0.26% over the past week. YTD the Shanghai is up 23.42%.

Fixed Income

• The 10-Yr Bond Yield closed at 2.53, up 0.0200 points or 0.80% over the past week. YTD the 10-Yr Bond Yield is down -5.95%.

Sources: Advisor.ca, Dynamic

This information is provided for general information purposes only. It does not constitute professional advice. Please contact a professional about your specific needs before taking any action.

The post Weekly Update – May 3, 2019 appeared first on Smof Investment Manager, LLC.

Bank of Canada Holds Key Rate Steady

The Bank of Canada opted not to increase its key rate on Wednesday and cautioned “increased uncertainty” when discussing the timing of future rate increases. While future rate increases are possible, they are not imminent. Despite this announcement, the TSX finished down slightly for the week, though it remains up 2019 YTD by 11.68%.

Global growth concerns pushed markets downward to end the week. Shrinking Chinese exports, the looming Brexit conclusion, the ongoing US-China trade standoff and a poor US jobs report all conspired to create increasing headwinds as the week moved on.

2018 Tax Deadlines

The 2018 tax deadline for most Canadians is April 30, 2019. If you or your spouse are self-employed, then your return is due June 15, 2019.

Regardless of when your taxes are due, if you owe money on your return, it is due on April 30, 2019.

Let us know if you have any questions about your tax return.

Our tax checklists are available here.

Weekly Update – By The Numbers

North America

• The TSX closed at 15,996, down -72 points or -0.45% over the past week. YTD the TSX is up 11.68%.
• The DOW closed at 25,450, down -576 points or -2.21% over the past week. YTD the DOW is up 9.10%.
• The S&P closed at ,2743, down -61 points or -2.18% over the past week. YTD the S&P is up 9.41%.
• The NASDAQ closed at 7,408, down -187 points or -2.46% over the past week. YTD the NASDAQ is up 11.65%.
• Gold closed at 1,299, up -37.00 points or 0.39% over the past week. YTD gold is up 1.09%.
• Oil closed at 55.96, up 0.23 points or 0.41% over the past week. YTD oil is up 22.10%.
• The USD/CAD closed at 0.7457, down -0.0064 points or -0.85% over the past week. YTD the USD/CAD is up 1.76%.
• The MSCI closed at 2,051, down -45 points or -2.15% over the past week. YTD the MSCI is up 8.81%.

Europe/Asia

• The Euro Stoxx 50 closed at 3,284, down -28 points or -0.85% over the past week. YTD the Euro Stoxx 50 is up 9.43%.
• The FTSE closed at 7,104, down -3 points or -0.04% over the past week. YTD the FTSE is up 5.59%.
• The CAC closed at 5,231, down -34 points or -0.65% over the past week. YTD the CAC is up 10.57%.
• DAX closed at 11,458, down -144.00 points or -1.24% over the past week. YTD DAX is up 8.51%.
• Nikkei closed at 21,026, down -577.00 points or -2.67% over the past week. YTD Nikkei is up 5.05%.
• The Shanghai closed at 2,970, down -24.0000 points or -0.80% over the past week. YTD the Shanghai is up 19.09%.

Fixed Income

• The 10-Yr Bond Yield closed at 2.63, down -0.1300 points or -4.71% over the past week. YTD the 10-Yr Bond Yield is down -2.23%.

Sources: Dynamic Funds, Globe Advisor

This information is provided for general information purposes only. It does not constitute professional advice. Please contact a professional about your specific needs before taking any action.

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