The New York S&P TSX Composite index has had a strong run over the last 2 weeks. It has posted daily gains in nine of the last 10 trading sessions and has risen 6.5% over that time and is up 5.89% year-to-date. The TSX closed Friday at an all-time high of 18,460.21.

The Nasdaq closed above 14,000 for the first time on Tuesday and hit an intra-day all-time high of 14,102.04 on Friday before closing at 14,095.47. Year-to-date the Nasdaq is up 9.37%, continuing its torrid pace.

The S&P 500 is up 4.77% year-to-date and continues its march toward the 4,000 mark. Friday saw the S&P 500 hit an all-time intra-day high of 3,937.23 before closing at 3,934.83.

Most major European and Asian markets – even London’s FTSE 100 – posted weekly gains and are all positive for 2021 year-to-date.

Working from home: calculating your workspace deduction percentage

We have had several clients reach out with questions around tax deductions for employment expenses incurred while working from home throughout COVID, and specifically, how to calculate the appropriate workspace percentage.

As a reminder, there are two options for claiming home expenses: the temporary flat rate method ($2 per day worked at home, up to $400 maximum) or the usual detailed method. You can read a more thorough breakdown of these options here.

When calculating your workspace at home, you must prorate your workspace versus total home space, but you must also prorate your work time spent in your workspace within the context of a full week’s worth of hours.

For example: Jim worked from home from March until December 2020. His home is 1,300 square feet and his workspace is his living room/dining room, which is 300 square feet in size.

The first step in calculating the percentage of home expenses is to prorate the workspace by the total home space. In this case, 300 / 1300 = ~23%.

Next, Jim must consider that he is only using that workspace for 40 hours per week (his normal work week). There are 168 hours in a week (7 days, 24 hours per day). The second calculation is to divide Jim’s 40 hours by 168, giving him 24%.

So for work, Jim uses 23% of his home, 24% of the time. Multiplying these two amounts, Jim’s deductible percentage of home expenses is ~5.5%.

Using the detailed method of calculating home expenses is not worthwhile unless Jim ends up with a tax saving greater than the $400 flat rate method. In order to deduct more than $400 using the detailed method, Jim would need to have eligible home expenses of ($400 / 5.5%) ~$7,300.

A reminder to contact us if you have questions about your home use percentage or what constitutes and eligible expense. We can work with you to determine if the flat rate method or detailed method is the most applicable to your situation.

Weekly Update – By The Numbers

Sources: Yahoo! Finance, CNBC.com

The post Equity markets continue rising appeared first on Smof Investment Manager, LLC.

On December 31, 2019, the Standard & Poor’s 500-Stock index closed at 3,230.78. This past New Year’s Eve, it closed at 3,756.07. With reinvested dividends, the total return of the S&P 500 was about 18%.

The equity market had, in 2020, quite a good year. What should be so phenomenally instructive to the long-term investor is how it got there.

From a new all-time high on February 19, the market reacted to the onset of the greatest public health crisis in a century by going down roughly a third in five weeks. The Federal Reserve and Con­gress responded with massive intervention, the economy learned to work around the lockdowns—and the result was that the S&P 500 regained its February high by mid-August.

The lifetime lesson here: At their most dramatic turning points, the economy can’t be forecast, and the market cannot be timed.

This is not meant to dismiss any fears or concerns you may have had last year. Being fearful in the face of a global pandemic and a shutting down of a global economy is quite normal.

Two lessons are worth noting in this regard:

1. The velocity and upward trajectory of the equity market recovery essentially mir­rored the violence of the February/March decline.

2. The market went into new high ground in midsummer, even as the pandemic and its economic devastations were still raging. Both outcomes were consistent with historical norms. “Waiting for the pullback” once a market recovery gets under way, and/or waiting for the economic picture to clear before investing, turned out to be formulas for sig­nificant underperformance, as is often the case.

The American economy – and its leading technology companies – contin­ued to demonstrate their fundamental resilience through the bal­ance of the year, such that all three major stock indexes made mul­tiple new highs. Even cash dividends appear on track to exceed those paid in 2019, which was the previous record year.

Meanwhile, several vaccines were developed and approved in record time, and were going into distribution as the year ended. The hope is the most vulnerable segments of the pop­ulation could get the vaccines by spring, and that everyone who wants to be vaccinated can do so by the end of the year, if not sooner.

The second great lifetime lesson of this hugely educational year had to do with the presidential election cycle. To say that it was the most hyper-partisan in living memory wouldn’t adequately express it.

In this event, everyone who exited the market in anticipation of the election sacrificed investment returns. The enduring historical lesson: never get your politics mixed up with your investment policy.

As we look ahead to 2021, there remains far more than enough uncertainty to go around. Is it possible that the economic recovery – and that of corporate earnings – have been largely discounted in soar­ing stock prices, particularly those of the largest growth companies?

Yes, of course it’s possible. Now, how do you and I – as long-term, goal-focused investors – make investment policy out of that possibility? My answer: we don’t, because one can’t. Our strategy, as 2021 dawns, is entirely driven by the same steadfast principles as it was a year ago and will be a year from now: buy quality and diversify. (credit: Odette Morin & Terry Broaders)

We have been assured by the Federal Reserve that it is prepared to hold interest rates near current levels until such time as the economy is functioning at something close to full capacity – per­haps as long as two or three more years.

For investors like us, this makes it difficult to see how we can pursue our long-term goals with fixed income investments. Equi­ties, with their potential for long-term growth of capital – and especially their long-term growth of dividends – seem to us the more rational approach. We therefore tune out “volatility.” We act; we do not react. This was the most effective investment approach in 2020. I believe it always will be.

I look forward to discussing this further with you in our annual review session. Until then, let me thank you again for being my clients. It is a privilege to serve you.

The post 2020 Recap: lessons in long-term investing appeared first on Smof Investment Manager, LLC.

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 e-newsletter will include a 2021 market outlook, our favourite 21 charts for 2021, and a couple of other topical articles.

Markets Down Friday on Lockdown Fears, Rising Coronavirus Cases

Markets were down for the day and most markets were down for the week, as “third wave” cases continue to rise. The possibility of additional lockdown measures added to the daily & weekly decline. For the year, the New York S&P/TSX Composite is up a modest 2.73%.

The Japanese Nikkei 225, the English FTSE 100 and Chinese Shanghai Composite indexes are up by modest amounts as well to start the year. The major U.S. indexes – the Dow Jones Industrial Average, S&P 500, Nasdaq, and Russell 2000 – are all relatively flat but slightly positive thus far.

Weekly Update: By The Numbers

Sources: Yahoo! Finance, CNBC.com, The Globe and Mail

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 January 2021 E-Newsletter Coming Next Week appeared first on Smof Investment Manager, LLC.

Since the market bottom in March 2020, the TSX has now risen over 60%. In the process, the index erased the last remnants of the COVID-related market losses.

Canada’s tech and materials sectors have performed well through the recovery while financials and energy have struggled.

Looking forward, cheap money via low interest rates should help the index continue moving upward, though we should expect some bumps along the way.

2020: By The Numbers

Sources: TDAM, Yahoo! Finance, The Globe and Mail

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 TSX breaches 18,000 mark for the first time appeared first on Smof Investment Manager, LLC.

The S&P 500 rose by 10.7% in November and closed this week at an all-time high of 3,699.20.

The Nasdaq rose by 11.8% in November and also closed this week at an all-time high of 12,464.23. For 2020 year-to-date, the Nasdaq has risen nearly 39%.

Not to be outdone, the S&P TSX Composite posted a double-digit November (10.3%) of its own and is now in the black for 2020 YTD, up 2.68%.

There are a number of reasons for optimism that drove markets upward in November. The conclusion of the U.S. election clarified who will occupy the White House for the next 4 years. Also, several pharmaceutical companies announced their respective COVID-19 vaccine candidates had completed Phase 3 trials with strong efficacy rates.

This week, the United Kingdom became the first country to approve a COVID-19 vaccine that had been tested in a large clinical trial. The road has now been paved for the U.K. to begin a mass inoculation campaign. U.K. Health Secretary Matt Hancock expects the U.K. will receive its first shipment of 800,000 vaccines “within days” and stated that people will begin receiving shots shortly after the National Health Service receives the vaccines.

Weekly Update – By The Numbers

Source: Yahoo! Finance, CNBC.com, Dynamic Funds, CBC.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

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Yesterday, Dynamic Funds’ Chief Investment Strategist, Myles Zyblock, offered his thoughts on the Q3 Earnings results.

Earnings Rocket Past Expectations

Third quarter reporting season is effectively complete with filings from nearly 95% of S&P 500 constituents now in the books. Expectations were surpassed across the entire capitalization spectrum with a record proportion of positive surprises. Breadth of beats was +80% while both top- and bottom-line growth projections were exceeded by a wide margin. S&P 500 earnings growth still contracted but only at a -7.1% rate instead of the initial -18% estimate. Sales came in at -1.8% compared to the -5.6% target.

The small-cap segment of the equity market was the most impressive with an earnings surprise of +57% for Q3. Analysts were far too pessimistic for these names as actual S&P 600 EPS performance came in at -7.6% compared to the -48% estimate. For the S&P 500 sectors, Health Care, Information Technology, and Consumer Staples stood out as the sectors with the highest breadth of beats and were positive year-over-year for both earnings and sales.

Bottom-up consensus estimates suggested that this quarter would be the trough in aggregate earnings and the strong results certainly helped support that prediction. S&P 500 trailing earnings has fallen 14.3% since peaking in February 2020 and currently stands at $140. If estimates are met over the coming year, the Index should see +16.7% growth and a full recovery by November 2021 (see the chart of the week below).

• The strong start to earnings season reported in our preview a month ago held up to the end with results remaining heavily skewed to the upside. The breadth of beats for earnings and sales are well above average for all capitalization segments. Economic uncertainty around COVID-19 and the lack of management guidance likely caused analysts to set very low targets.
• The magnitude of earnings surprises has also been very strong with double-digit beats for all three indices. The S&P 600 stands out with a stellar +57% surprise.

Earnings Growth Came in Far Above Expectations

• Q3 2020 earnings growth targets were slashed leading up to reporting season and the final results suggest that the analyst community were far too pessimistic. Only single-digit contractions were seen in earnings compared to the staggering double-digit projections.
• A similar story is seen for the top-line as actual sales growth also fell much less than anticipated in Q3.

All S&P 500 Sectors Beat Earnings Growth Projections

• Every major S&P 500 sector surpassed earnings growth expectations in Q3. Five of them, including Health Care, Consumer Staples, Communication Services, Information Technology, and Utilities, posted positive quarterly year-over-year earnings growth.
• Almost the same story was seen for top line (sales) growth, but Materials came in slightly lower than expected. The relative order of growth for sales mirrored that of earnings in Q3 with defensive sectors posting the highest growth rates.

(End of Myles Zyblock commentary)

Weekly Update – By The Numbers

Source: Yahoo! Finance, CNBC.com, Dynamic Funds

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 S&P 500 Q3 Earnings Results appeared first on Smof Investment Manager, LLC.

U.S. Economy: Q3 GDP and Beyond

The world’s largest economy is in recovery mode. U.S. consumer spending has made an impressive comeback, manufacturing activity has firmed, and the stabilization in international markets is supporting trade. The second-quarter GDP collapse is likely to be followed by a sharp bounce higher, upwards of +25% annualized, when Q3 data is reported later this week.

The economic expansion is expected to stretch into 2021. The gathering momentum across the private sector is being supported by ongoing government stimulus. The combination of excess productive capacity and elevated personal savings rates points to the potential for above-trend economic growth, say close to 4%, over the coming calendar year.

COVID-19 is the wildcard. The key economic risk, in our opinion, is not the upcoming U.S. election. It is how the renewed spread from the coronavirus across many states feeds into behavior over the winter months. At this stage, we do not see it offering enough of a headwind to short-circuit the budding recovery, but it’s something which will require ongoing monitoring.

The Consumer is Making a Comeback

Core retail sales have more than recovered all that was lost during the early days of the pandemic. On a year-over-year basis, retail sales expanded by 9.1% in September which was the fastest pace of growth recorded since this series came into existence in 1993.

The consumer is being helped by an improving labor market. The unemployment rate has dropped to 7.9% from its peak level of 14.7% reached in April. Close to 11.5 million of the 22.1 million jobs initially lost in the pandemic have been restored. While it still has a long way to go, the labor market has made up a significant amount of lost ground over the past few months.

Trade Activity has Started to Mend

Trade was hit hard in the initial stages of the coronavirus pandemic. Exports fell by a whopping 33% and imports declined by 19% from February through to May. Both have started to recover. Firming global end-market demand has lifted exports, which are up by 21% from the May low. Imports have rallied by a respectable 20% since May, buoyed by strengthening domestic demand.

A better tone to trade signifies a recovering global economy and should help further support U.S. corporate earnings given that a growing share, now 21%, of those earnings are sourced from abroad. As a side note, the foreign exposure of S&P 500 earnings is estimated at a much higher 35-40% given that the index is dominated by large multi-national companies.

Government Activity is White Hot

According to the monthly Treasury statement, U.S. federal outlays for fiscal year-to-date have surpassed $3.6 trillion dollars. This represents an increase of about $1.2 trillion over the same period a year ago. This unprecedented spending surge has helped push the Federal Government’s deficit for 2020 to $3.1 trillion, or 16% of GDP. And the year’s not over.

Admittedly, government support has been a critical bridge for the private sector which has suffered staggering job and income losses. At the same time, it is pushing gross federal debt as a % of GDP above 100%, a level which surpasses the debt load carried as a result of WWII.

Wrapping It Up

• The second quarter was one of the weakest quarters for U.S. GDP growth recorded in the past 100 years. However, a new recovery has begun. Growth has resumed for many indicators across the consumer, manufacturing and trade sectors. This is occurring alongside the ongoing support of government policy stimulus.
• Q3 GDP is going to be released on Thursday, October 29th. The economics community expects growth of close to +30% on an annualized basis. GDP growth is likely to remain positive beyond the third quarter, albeit at a much slower pace.
• The key economic risk, in our opinion, is not the upcoming U.S. election. Rather, it is how the renewed spread from the coronavirus feeds through into economic activity. At this stage, we do not see it as offering enough of a headwind to short-circuit the budding recovery.

(End of Myles Zyblock commentary)

New Containment Measures Enacted as Cases Rise, Markets Decline

As case counts continue to rise, new containment measures were announced in the past week in renewed efforts to mitigate the spread of COVID-19:

• The measures announced yesterday remain in line with the base-case scenario, which calls for the use of more targeted restrictions rather than a return to the total lockdown of early 2020.
• The new European measures are similar to those announced by the Quebec government earlier in October: four weeks of closures of restaurants, bars, cinemas, gyms; restrictions on gatherings; while keeping most businesses and schools open. The silver lining is that this approach appears to have had some success in the province as cases have since stabilized.
• Markets are likely to remain hesitant until a date can be put on the arrival of a permanent solution to the pandemic. There is no way to know for sure when that will be, but recent news surrounding vaccine research remains generally positive as evidenced by the increased likelihood of a vaccine being available by the end of Q1-2021.

Weekly Update – By The Numbers

Source: Yahoo! Finance, CNBC.com, National Bank Investments, Dynamic Funds

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 An Update on the U.S. Economy appeared first on Smof Investment Manager, LLC.

Sources: Yahoo! Finance, cnbc.com

The post Weekly Update – By The Numbers appeared first on Smof Investment Manager, LLC.

Applications for the Canada Recovery Benefit open on Monday

The Canada.ca website has now been updated with all application details for the Canada Recovery Benefit.

How to Apply
Through CRA My Account

Amount & eligibility periods
If you are eligible for the CRB, you can receive $1,000 ($900 after taxes withheld) for a 2-week period. The first period is September 27 – October 10. Applications will open on Monday, October 12.

If your situation continues past 2 weeks, you will need to apply again
You may apply up to a total of 13 eligibility periods (26 weeks) between September 27, 2020 and September 25, 2021. You can apply for a maximum of 13 periods out of the total 26 periods available. The 13 periods do not have to be taken consecutively.

Who can apply?
During the period you are applying for:

• You were not working for reasons related to COVID-19 or you had a 50% reduction in your average weekly income compared to the previous year due to COVID-19
• You were not eligible for EI benefits
• You were present in Canada
• You earned at least $5,000 in 2019, 2020, or in the 12 months before the date you apply from any of the following sources:
  • employment income (total or gross pay)
  • Net self-employment income (after deducting expenses)
  • Maternity and parental benefits from EI or similar QPIP benefits
• You were seeking work during the period, either as an employee or in self-employment
• You have not turned down reasonable work during the 2-week period you’re applying for
• You have not quit your job or reduced your hours voluntarily on or after September 27, 2020, unless it was reasonable to do so

How to calculate the 50% reduction
The 50% reduction is based on your average weekly employment or self-employment income from either 2019, 2020, or the previous 12 months. You will need to check that you meet this criteria for every period you apply for.

Example:

2019 or the last 12 months (first item of comparison)
$26,000 (employment and self-employment income in 2019 or the last 12 months)

÷ 52

= $500 (average weekly income in 2019 or the last 12 months)

÷ 2

= $250 (50% of the average weekly income in 2019 or the last 12 months)

CRB 2-week period (second item of comparison)
$100 (employment and self-employment income for the CRB period)

÷ 2

= $50 (average weekly income for the CRB period)

The average weekly income for the CRB period must be less than 50% of the average weekly income in 2019, 2020, or the last 12 months. In this example, since $50 (average weekly income for the CRB period) is less than $250 (50% of the average weekly income in 2019 or the last 12 months), the individual would meet this criteria.

How your income affects what you keep
You may earn employment or self-employment income while you receive the CRB. But to make sure the benefit reaches those who need it most, there is a difference in how much you can keep if you earn more than $38,000 in the calendar year. This amount excludes CRB payments.

You will have to reimburse $0.50 of the CRB for every dollar of net income you earned above $38,000 on your income tax return. You will not have to pay back more than your benefit amount for that year. This will be due at the same time as your income tax return for the year. Late payments will be charged interest.

Source: Canada.ca

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