Market Update Q2 2018

Challenges in the quarter
Despite continued trade dispute chatter, North American equity markets finished the quarter in positive territory as investors focused on strong sales and earnings growth in the region. In Europe, political concerns in Italy bubbled to the surface as anti-Euro parties gained strength, creating concerns about more ‘exit’ talk like what we saw in Greece in 2011. Emerging markets weakened on concerns about the impact of a rising U.S. dollar on their fiscal positions. Looking forward, the market is likely to move sideways until the ‘tit for tat’ tariff policy settles.

Canada
The S&P/TSX outperformed in the second quarter, rising nearly six percent due to the increase in the price of oil. West Texas Intermediate (WTI) rose nearly 14 percent to finish the quarter at USD$74.15. Higher oil prices resulted from a lower-than-expected supply increase by OPEC and Russia and a continued draw on global oil inventories. In the coming months, attention will focus on the resolution to the North American Free Trade Act (NAFTA), and the impact on the Canadian economy of higher interest rates, stricter mortgage lending rules and minimum-wage-increases across many provinces.

The United States
There’s no doubt equity investors were reacting daily to news about tariffs between the U.S. and China or the European Union. Despite fears of potential trade wars, the S&P 500 rose nearly three percent in U.S. dollar terms. The impact that tit-for-tat tariffs between nations could have on global economic growth are concerning. Since it’s difficult to quantify geo-political chatter, until tariff measures are realized, investors would be better served to focus on the fundamentals.

Overseas
In overseas markets, international equities were down 2.3 percent in U.S. dollar terms as measured by the MSCI EAFE index. Internationally, returns were driven by trade tariff fears, Italian political instability, and a strong U.S. dollar. Setting aside the potential for trade wars, Europe and Asia’s economic outlook continues to be robust and this will likely flow through to company earnings. Combined with accommodating interest rate policies, this part of the world will likely experience strong market returns.

Central Bank Policy
In the second quarter, the U.S. Federal Reserve continued raising interest rates in increments of 0.25 percent to 2.00 percent. The U.S. Federal Reserve is expected to continue to raise its benchmark rate two more times by the end of the year, on the back of strong US economy.
The Bank of Canada didn’t raise interest rates during the second quarter and the overnight rate remains at 1.25 percent. It’s expected rates will increase very gradually with one more this year.

Looking forward
Recent market volatility, driven primarily on trade war rhetoric should subside as cooler heads prevail. Market returns are expected to be driven by fundamentals and interest rate policy. Fundamentals continue to be strong—the likely explanation for higher interest rates. In this environment, equity markets will likely be positive but may not experience the above-average returns we’ve seen in the past couple of years.

Market Update April 2018 

Challenges in the quarter

Wow! Volatility returned with a vengeance. After experiencing market pullbacks of less than five percent in 2017, we’ve already experienced two pullbacks of greater than five percent in 2018. This is still normal market activity considering 2017 and 1995 were the only two years in the past thirty without a pullback of greater than five percent. The increase in volatility was due to fears of a global trade war. However, the fundamentals of the global economy remain strong and over the long term, the capital markets will shift their focus to fundamentals and company earnings.

Canada
The S&P/TSX underperformed in the first quarter, falling nearly five percent on a broad-based sell off across most of the market. The S&P/TSX was dragged lower by concerns of a further weakening Canadian economy due to increases in interest rates, stricter mortgage lending rules, and increases in minimum wages across many provinces. Notably, the weaker Canadian dollar in the first quarter helped prop up global equity returns for Canadian clients.

The United States
There’s no doubt equity investors were reacting to the fear of a global trade war in the first quarter. The fear of a potential trade war between the U.S. and China, or other countries, drove selling pressure that resulted in the S&P 500 falling 1.2 percent in U.S. dollar terms. Looking at the numbers, the selling pressure may have been an overreaction. Bi-lateral trade between China and the United States amounts to low single-digit percentages of each country’s GDP. The tariffs would amount to a fraction of a fraction. Not to suggest the potential for a trade war is trivial but the magnitude of the reaction may have been greater than warranted.

Overseas
In overseas markets, international equities rose 0.51 percent in Canadian dollar terms as measured by the MSCI EAFE Index. Setting aside the potential of trade wars, Europe and Asia’s economic outlook continues to be very robust and this will likely flow through company earnings. With accommodative interest rate policies, this part of the world will likely result in strong market returns. 

Central Bank Policy
In the first quarter, the U.S. Federal Reserve saw a change in leadership with Jerome Powell taking over the helm from Janet Yellen. Jerome Powell continued Yellen’s rate hike policy in the first quarter by increasing the overnight rate once by an increment of 0.25 percent to 1.75 percent. The U.S. Federal Reserve is expected to continue to raise its benchmark rate another two or three times by the end of the year.
The Bank of Canada continued its interest rate increases from last year by increasing overnight rates by 0.25 percent to 1.25 percent. It’s expected rates will increase very gradually with one more increase this year.

Looking forward

Recent market volatility driven primarily on trade war rhetoric will subside as cooler heads prevail when it becomes evident there are no clear winners—only clear losers. Market returns are expected to be driven by fundamentals and interest rate policy. Fundamentals continue to be strong, likely resulting in higher interest rates. In this environment, equity markets will likely be positive but may not experience the above average returns we’ve seen in the past couple of years. 

2018 Federal Budget Summary

The Liberal government delivered its third federal budget on February 27. While you’ve probably seen plenty of media coverage, I thought you’d appreciate an overview related to your investments and taxes.

The budget had no new personal or corporate tax rate changes. Instead, the big news was the passive investment measures for corporations. Here’s an overview of some of the proposals:

Business tax measures

The government is particularly concerned with the rising number of business owners who hold passive investments inside corporations, benefitting from a tax deferral advantage instead of distributing the assets from the corporation and personally investing. Rather than following through with their stringent 2017 proposals, it appears the government listened to the 21,000 submissions and simplified and narrowed their approach. They propose two new measures that will apply in taxation years that begin after 2018:

  1. For federal tax purposes, the first $500,000 or small business limit of active business income is taxed at a reduced rate called the small business tax rate, which the government has proposed to reduce from 10.5% to 10% for 2018. Any active income above this $500,000 small business limit is taxed at the higher general business tax rate, which is 15% for 2018. The amount of active income eligible for the small business tax rate will be reduced by five dollars for every dollar of passive investment income earned by a corporation and its associated corporations, above $50,000 in a given year. This means the small business limit is reduced to zero if $150,000 of passive investment income is earned in a year. ($500,000-(excess of $50,000 x $5)). Any active income earned above the small business deduction, as reduced by this calculation, is taxed at the higher general business tax rate.
  2. Passive investment income is taxed at a high rate within a corporation with a portion of the tax refunded to the corporation when the passive investment income is paid out to shareholders. Currently, a corporation can pay out dividends from its active income and still claim a refund—providing a tax advantage. The government is changing the rules by restricting the ability of a corporation to obtain a refund of taxes paid on passive investment income while distributing dividends from active income.

The taxation of passive investment income isn’t changing, just the ability to benefit from the small business tax rate and claim the refundable tax. In terms of investment choices within a corporation, tax efficiency and tax deferral continue to be important considerations.

Personal Tax Measures

Mineral Exploration Tax Credit for flow-through shares extended for another year.
Registered Disability Savings Plan (RDSP)
Where contractual capacity is in doubt for an adult entering into an RDSP with no provincially/territorially recognized legal representative; a parent, spouse or common-law partner can be the plan holder. This temporary measure was set to expire at the end of 2018 and the budget extends it by five years to the end of 2023.
The Medical Expense Tax Credit is extended to include eligible expenses incurred for service animals that are specially trained to perform tasks for a patient with severe mental impairment.

As you can see, the announced proposals can have significant implications particularly for certain business owners and professionals. I hope you found these highlights helpful.

 

If you’d like to discuss these or other federal budget initiatives and how they affect your financial strategies, please don’t hesitate to contact me.

Market Update Q3 2017

 

This past quarter exemplifies what you as an investor should consider regarding your portfolio. We’ve seen tensions increase in the North Korean peninsula and the Middle East and ongoing drama from the United States. You’d be forgiven if you thought the increased drama had negatively affected global equity markets. Equity markets can move up or down each day for many reasons but over the long term, market valuations tend to return to their fundamentals—and the fundamentals during the past three quarters have justified markets moving higher.

 

Canada


Oil prices advanced throughout the quarter by nearly twelve per cent to US$51.7 per barrel. A strong economy and a rebound in commodity prices helped S&P/TSX Composite earnings grow at nearly 32 per cent. Nine of ten sectors saw positive earnings growth in the third quarter, which helped the S&P/TSX Composite Index gain 2.9 per cent.

 

The U.S. is expected to produce 10 million barrels of oil a day by next year, which will offset recent increases in global oil demand. As a result, oil will likely average in the high US$40 range for the rest of the year.

 

The United States


U.S. corporations are reporting better year-over-year sales and earnings results. Employment continues to improve with a falling unemployment rate, recently at 4.4 per cent as of the end of August. This implies wage growth in the second half of 2017. Higher wage growth coupled with low gasoline prices means U.S. consumption is in a strong fundamental position.

 

Since U.S. consumption accounts for three quarters of U.S. economic output, the U.S. economy is on the right track. As a result, prospects for equities should be good for the rest of the year. The benchmark S&P 500 Index gained 4.0 per cent in the second quarter, in U.S. dollar terms, or slightly negative at -0.1 per cent in Canadian dollar terms, reflecting improved company results.

 

Overseas


In overseas markets, international equities rose 0.7 per cent in Canadian dollar terms as measured by the MSCI EAFE Index. Brexit considerations aside, the European economic outlook has improved. Asia is showing improvement in its regional economies and stock markets—suggesting the growth we see is truly global in nature.

 

Central Bank Policy


In the second quarter, the U.S. Federal Reserve did not tighten interest rates after raising them twice by increments of 0.25 per cent to 1.25 percent in 2017. However, they announced they will begin to reduce the $4.5 trillion balance sheet starting in October. The U.S. Federal Reserve is expected to continue to raise its benchmark rate another time by the end of the year.

The Bank of Canada began tightening its interest rate policy to 1.0 per cent by announcing two rate increases of 25 basis points each in July and September. As a result, the Canadian dollar rallied nearly four per cent versus the U.S. dollar. It’s expected rates will increase very gradually going forward. The recent increases were significant changes considering Canada hasn’t seen a rate increase since September 2010.

 

Looking forward


We continue to believe the U.S., Canadian, and international economic environment will improve over what it was a year ago but it bears repeating that a positive economic environment doesn’t necessarily mean better returns. While we may be confident equity markets will deliver another year of positive returns, market volatility is likely to remain through the rest of 2017, driven mainly by headline news and politics.

 

As always, if you have any questions about the markets or your investments, I'm here to talk.

 

Photo from I'd Pin That

Market Update - Q2 2017

2017 Q2 Market Update

Challenges in the quarter

This past quarter exemplifies what investors should consider regarding their portfolios. We’ve seen tensions increase in the North Korean peninsula and the Middle East, and continued drama from the United States. You would be forgiven if you believed the increase in drama had negatively impacted global equity markets.

 

Equity markets can move up or down for any and all reasons on a daily basis. However, over the long term, market valuations tend to return to their fundamentals—and the fundamentals over the past two quarters have justified markets moving higher.

Canada

Starting in Canada, oil prices declined throughout the quarter by nearly nine per cent to US$46 per barrel. Concerns about the business operations of Canada’s largest subprime lender, Home Capital Group, and its impact on Canadian banks, helped the S&P/TSX Composite Index fall 2.4 per cent through the quarter.

 

Oil is likely to average in the high US$40 range for the rest of the year as the U.S. is expected to produce 10 million barrels of oil a day by next year. This will replace 80 per cent of OPEC’s production cuts discussed in November 2016.  

The United States

U.S. corporations are reporting better year-over-year sales and earnings results. Employment continues to improve with a falling unemployment rate, recently at 4.3 per cent, which implies wage growth in the second half of 2017. Higher wage growth coupled with the lowest gasoline prices we’ve seen in 2017 means U.S. consumption is in a strong fundamental position.

 

Since U.S. consumption accounts for three quarters of U.S. economic output, the U.S. economy is on the right track. As a result, prospects for equities should be good for the rest of the year. The benchmark S&P 500 Index gained 2.6 per cent in the second quarter in U.S. dollar terms or 0.2% per cent in Canadian dollar terms, reflecting improved company results.

Overseas

In overseas markets, international equities rose 2.6 per cent in Canadian dollar terms as measured by the MSCI EAFE Index. Brexit considerations aside, the European economic outlook has improved. Asia is showing improvement in its regional economies and stock markets—suggesting the growth we see is truly global in nature.

Central Bank Policy

The U.S. Federal Reserve continued to tighten its interest rate policy, raising its benchmark interest rate to 1.25 per cent in June. This marks the second rate increase this year and the fourth in two years since the Great Recession, which confirms the strength in the U.S. economy. The U.S. Federal Reserve is expected to continue to raise its benchmark rate another one or two times this year.

 

It appears the Bank of Canada is preparing to hike its benchmark interest rate supported by a strengthening Canadian economy. While it’s expected rates will increase very gradually, it’s a significant change since Canada has not seen a rate increase since September 2010.  

Looking forward

We continue to believe the U.S., Canadian and international economic environment will improve over what it was a year ago but it bears repeating that a positive economic environment doesn’t necessarily mean better returns.

 

While we may be confident equity markets will deliver another year of positive returns, market volatility is likely to remain through much of 2017, driven mainly by headline news and politics. We continue to advise a balanced approach to asset allocation matched to your individual goals.

 

As always, if you have any questions about the markets or your investments, I'm here to talk.

 

(Photo from IdPinThat)

Market Update - Q1 2017

2017 Q1 Market Update - Pixabay.com

 

Considering the year began with such uncertainty, equity and fixed income markets performed exceptionally well in the first quarter. Investors overestimated the magnitude of market volatility that would ensue from an Obama to Trump transition of power and markets shrugged off the political drama and took equities higher.

 

Challenges in the quarter


This past quarter exemplifies what investors should consider with regard to their portfolios. There are many sentimental reasons to fear the stock market, including recent examples like Brexit, Grexit, the Fiscal Cliff, the Debt Ceiling, the election, and the budget. Markets can be swayed over the short term by daily headlines.

 

Equity markets can move up or down for any and all reasons on a daily basis. However, over the long term, market valuations tend to return to their fundamentals—and the fundamentals over the past two quarters have justified markets moving higher.

 

Oil prices


Starting in Canada, oil prices seem to have stabilized through the first quarter to nearly US$50 per barrel, bringing less volatility for Canadian stocks. The S&P/TSX Composite Index gained 2.4 per cent factoring in dividends through the quarter. Oil prices are expected to remain near their current level, which has multiple implications.

 

First, stable oil prices are positive for the Canadian energy sector and Canadian stocks overall. Secondly, as oil prices remain a strong influence on the Canadian dollar, stable prices should translate into a stable dollar with an average exchange rate near its current US$0.75.

 

The United States


South of the border, the newly appointed Trump administration added a new element to conversation–and not just for talk shows! Putting politics aside, companies are reporting better year-over-year results on sales and earnings. Unemployment continues to fall.

 

Economic growth continues to improve. In short, the U.S. economy is on the right track. And with it, come prospects for equities through the remainder of the year. The benchmark S&P 500 Index gained 6.1 per cent in the first quarter including dividends, in U.S. dollar terms, or 5.3 per cent, in Canadian dollar terms, reflecting improvements in company results.

 

Overseas


Overseas markets showed healthy gains with international equities up 6.6 per cent in Canadian dollars as measured by the MSCI EAFE Index. Brexit considerations aside, the European economic outlook has improved, akin to that of the United States. On the other side of the world, Asia is showing improvement in its regional economies and stock markets—suggesting the growth we see is truly global in nature.

 

Central Bank Policy


This quarter marked the third time in two years, and since the Great Recession, that the U.S. Federal Reserve raised its benchmark interest rate. The Bank of Canada didn’t and hasn’t followed suit as the Canadian economy hasn’t performed as strongly as the U.S. economy.

 

The U.S. Federal Reserve is expected to continue to raise its benchmark rate another two or three times this year. The environment is meeting the conditions of low unemployment and stable inflation, allowing the Fed to act.

 

Looking forward


We continue to believe the U.S., Canadian and international economic environment will improve over what it was a year ago but it bears repeating that a positive economic environment doesn’t necessarily mean better returns.

 

While we may be confident that equity markets will deliver another year of positive returns, market volatility is likely to remain through much of 2017—driven mainly by headline news and politics. We continue to advise a balanced approach to asset allocation matched to your individual goals.

 

As always, if you have any questions about the markets or your investments, I'm here to talk.

(Photo from IdPinThat)