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.

Signing your contribution form is easier than ever. With our improved electronic consent procedure, you can now e-sign using your phone in as little as 30 seconds and without the need to print. Contact us anytime for more information.

There are two ways a purchase can be funded:
 

1. Pre-Authorized Debit (PAD): If we have your banking information on file, the funds can be taken directly from your chequing account. PADs take a few extra days to set up, but we can use this method right up until deadline day. As long as the request is submitted by the deadline, the investment companies will code the purchase as a first 60-day contribution, even if the funds come out of your account afterwards.

2. Bill Payment (Nominee accounts only): If you have a Nominee RRSP, you can fund your account via bill payment through your financial institution’s online banking platform. The payee is Fundex Investments and the account # will be your RRSP account number (it starts with an N and contains 9 digits).

The post The 2020 RRSP Deadline is March 1, 2021: what are your funding options? appeared first on Smof Investment Manager, LLC.

Please click here to view the full CRA details on employment expenses.

Many people, especially renters, will be better off using the detailed method.  For example, if your rent is $2,000 a month, you worked from home for 10 months, and your home-office percentage is 10%, that’s already a $2,000 deduction.

The “Flat-Rate” Method

The Canada Revenue Agency (CRA) has introduced a temporary “flat-rate” method to calculate your home office expenses for 2020 for employees who worked from home in 2020 due to COVID-19 and paid home office expenses for which they were not reimbursed. If you use this method, your employer is not required to complete form T2200 or T2200S.

The “flat-rate” option will allow you to deduct $2 per day you worked from home, to a maximum $400.  If you worked from home since March and work five days a week, you’ll be able to claim the full $400.

The Detailed Method

The detailed method is the standard method for claiming employment expenses. To use the detailed method, you need your employer to complete Form T2200 or the simplified T2200S. You must also itemize your various expenses.

Eligible expenses:

• rent paid for a house or apartment where you live
• electricity, heat, water or the utilities portion of your condominium fees
• home internet access fees
• maintenance (minor repairs, cleaning supplies, light bulbs, paint, etc.)
• supplies (stationery items, pens, folders, sticky notes, postage, toner, ink cartridge, etc.)
• employment use of a basic cell phone service plan
• long distance calls for employment purposes

If you are a commission employee, you can also claim expenses that reasonably relate to earning commission income for the following:

• property taxes
• home insurance
• lease of a cell phone, computer, laptop, tablet, fax machine, etc.

Non-eligible expenses.  You cannot claim any of the following:

• capital cost allowance
• mortgage interest
• principal mortgage payments
• home internet connection fees or the portion of fees related to the lease of a modem/router
• capital expenses (replacing windows, flooring, furnace, etc.)
• office equipment (printer, fax machine, briefcase, laptop case, or bag, calculator, etc.)
• monthly basic rate for a landline telephone
• cell phone connection, or license fees
• purchase of a cell phone, computer, laptop, tablet, fax machine, etc.
• computer accessories, (monitor, mouse, keyboard headset, microphone, speakers, webcam, router, etc.)
• other electronics (television, smart speaker, voice assistant, etc.)
• furniture (desk, chair, etc.)

Remember that whether you are salaried or commissioned, there is always the possibility that the CRA will request verification of your expense claims, so you will need to keep your receipts for 7 years, just in case. Failure to verify a claim could mean tax owing and interest charges.

Conclusion

Again, please note that we will have a specific tax checklist you’ll be able to complete for work-from-home expenses at tax time.

If you are unsure which work-from-home option is best for you, talk to us. We can help you determine how best to proceed.

Source: Canada Revenue Agency

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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

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