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Monthly Archives: January 2018

Frank Mueller

Weekly Update – January 26, 2018

“There is a very easy way to return from a casino with a small fortune: go there with a large one” – Jack Yelton

TSX Down for the Week

The Toronto Stock Exchange’s S&P/TSX composite index rose on Friday by 35.21 points (0.22 per cent) and finished at 16,239.22. The financials sector was the lone loser on Friday, as the other nine of 10 main groups ended higher.

On the week, the TSX was down 114.24 points (0.70 per cent), as the Canadian market continues its recent trend of being outpaced by the U.S. markets. It certainly isn’t paying to be overweight in Canadian equities these days.

The Canadian Dollar rose 48 basis-points to sit at 81.25 cents (as at 3:50pm PST) versus the U.S. Dollar, as the Greenback softened.

Oil prices hit three-year highs on Friday, with Brent Crude gaining 10 cents (USD) to finish at $70.83 USD per barrel. Earlier on Friday, it hit $71.28 per barrel before pulling back.

West Texas Intermediate (WTI) jumped 63 cents per barrel to finish at $66.14 USD per barrel.

Gold dropped $14.20 USD an ounce on Friday (down 1.04 per cent), and finished at $1,348.70 USD an ounce.

All Three Major U.S. Indexes Set Record Closing Highs for Friday, and the Week

This week’s close capped the best four-week run for the three main U.S. indexes (NASDAQ, Dow Jones Industrial Average, S&P 500) since 2016. This week’s gains were spurred on by strong earnings reports, along with a softening U.S. dollar, which is benefitting exporters and multinationals.

The Dow Jones Industrial Average (DJIA) gained 223.92 points (0.85%) on Friday to close at 26,616.71, yet another record close. For the week, the DJIA was up 544.99 points (2.09 per cent).

The S&P 500 gained 33.62 points (1.18 per cent) Friday to close at 2,872.87, a gain of 62.5 points (2.23 per cent). Fourth quarter earnings for the S&P 500 has been estimated at 13.2 per cent, with 79.7 per cent of the 133 companies who have reported earnings so far beating expectations.

Finally, the NASDAQ jumped 94.61 points Friday (up 1.28 per cent), to close at 7,505.77, a gain of 169.39 points or 2.31 per cent.

U.S. Treasure Secretary Steven Mnuchin, while in Davos, Switzerland for the 2018 World Economic Forum, took a position opposite to the traditional U.S. position on the Greenback. He stated, “obviously, a weaker dollar is good for us (the U.S.) as it relates to trade and opportunities”.

His comments drove the Greenback to three-year lows on Wednesday. Interestingly, he made this comment only a day after U.S. President Trump – also in Davos for the 2018 WEF – called for a stronger Greenback.

Everyone knows that this growth won’t continue unabated forever; however, those with appropriate U.S. exposure in their portfolios are certainly benefitting in the short run. If you have questions about your portfolio’s allocation, let us know, and we can give you an updated outlook on your portfolio & adjust where necessary.

Weekly Market Wrap-Up

North America
The TSX closed at 16239, down -115 points or -0.70% over the past week. YTD the TSX is up 0.19%
The DOW closed at 26617, up 545 points or 2.09% over the past week. YTD the DOW is up 7.68%
The S&P closed at 2873, up 63 points or 2.24% over the past week. YTD the S&P is up 7.44%
The Nasdaq closed at 7506, up 170 points or 2.32% over the past week. YTD the Nasdaq is up 8.74%
Gold closed at 1349, up -7.00 points or 1.28% over the past week. YTD gold is up 2.98%
Oil closed at 66.24, up 2.71 points or 4.27% over the past week. YTD oil is up 9.63%
The USD/CAD closed at 0.8125, up 0.0126 points or 1.58% over the past week. YTD the USD/CAD is up 2.16%

Europe/Asia
The MSCI closed at 2234, up 37 points or 1.68% over the past week. YTD the MSCI is up 6.23%
The Euro Stoxx 50 closed at 3647, down -2 points or -0.05% over the past week. YTD the Euro Stoxx 50 is up 4.08%
The FTSE closed at 7666, down -65 points or -0.84% over the past week. YTD the FTSE is down -0.29%
The CAC closed at 5529, up 2 points or 0.04% over the past week. YTD the CAC is up 4.07%
DAX closed at 13340, down -95.00 points or -0.71% over the past week. YTD DAX is up 3.27%
Nikkei closed at 23632, down -176.00 points or -0.74% over the past week. YTD Nikkei is up 3.81%
The Shanghai closed at 3558, up 70.0000 points or 2.01% over the past week. YTD the Shanghai is up 7.59%

Fixed Income

The 10-Yr Bond Yield closed at 2.66, up 0.0200 points or 0.76% over the past week. YTD the 10-Yr Bond is up 10.83%

Sources: Globe Advisor, Dynamic, Reuters, Yahoo! Finance

Anthony Sabti

14 Charts to Kick Off 2018

As we enter 2018, we would like to provide you with an overview of financial market results from the past 12 months, and to offer insights into some of the investment themes that may influence your investment portfolio over the coming year.

Several inquiries have come in concerning the current valuations of markets, where we are in the market cycle, and how to tackle current issues like NAFTA, interest rates, and tax reform. For this year’s outlook, we decided on a more visual approach and we hope that the graphics below will provide some guidance on these issues.

You will quickly notice that there are both optimistic and pessimistic charts. This was done purposely to provide a balanced view of the present investment landscape. Capital markets are complex and there are many data points to consider. Unfortunately, the situation cannot be simply summed up as “good” or “bad.”

Please feel free to contact us for elaboration on anything discussed in our newsletter.

 

#1: 2017 Market Recap. All major asset classes rose in 2017. Equities outperformed fixed-income by a wide margin. Global markets (U.S., Europe) outperformed our domestic one (TSX).

 

#2: Every major bank and investment firm releases an annual market forecast. Below is the forecast from the TD Wealth Asset Allocation Committee (WAAC). Given current valuations and growth prospects, TD suggests maintaining U.S. equity content, decreasing Canadian equity, and increasing International equity. Although not included here, RBC Global Asset Management’s (RBC GAM) forecast has a very similar outlook.



#3: Also from TD Wealth, below is a summary of the opportunities and risks weighing on markets.



 

#4: NAFTA Renegotiation Scenarios. Courtesy of RBC GAM, this table plots four possible outcomes to the NAFTA talks and the potential impact on the North American economy.

#5: Also from RBC GAM, a table summarizing the impact of Trump’s proposed tax reform plan. The key takeaway is that markets have already “priced in” the positive impact of the tax plan.

 

#6: How does the current bull market compare to previous ones? Since 1929, the S&P 500 has had 10 market corrections (defined as a 20 per cent drop or more). The last correction was the global financial crisis in 2008. Markets bottomed out in March 2009 and we have been in a bull market since. From both a duration and return standpoint, this is the second longest bull market on record.

Also note that the average length of a bear market is only 24 months compared to 54 months for a bull market.

 


#7: How expensive is the U.S. market? If the previous slide provided you with cause for concern, this one is reason for optimism. Despite a 295% run-up since March 2009, the S&P 500 is not as expensive as you might believe. Price/Earnings (P/E = current stock price over the predicted next annual earnings period) is a very basic market valuation metric. The 25-year average P/E for the S&P 500 has been 16x and the current P/E is 18.2x.

 

#8: Consumer Confidence and the Stock Market. This is the investor psychology chart. Notice how peak consumer confidence tends to precede a recession? The time to invest is when we’re anxious about markets. The time to stay put is when we’re euphoric about them.

#9: S&P 500 intra-year declines and calendar year returns. The “short-term noise” chart. Despite average annual intra-year declines of 13.8%, the S&P 500 has had positive returns in 29 out of 38 years.

#10: Canadian and U.S. debt ratios and the labour market. Canadian households are more indebted than the U.S., but our labour market is healthier.

 

#11: Cryptomania. The meteoric rise of cryptocurrencies. The Crix cryptocurrency index grew by 38x in less than a year. Most analysts have defined this growth as a classic bubble, eclipsing all previous historical bubbles like the Nasdaq in the 90s, Gold Spot in the 70s and 80s, the Nikkei in the 70s and 80s, and even the Tulip bubble of the 1630s!

We were going to warn against trying to purchase into such a speculative asset class, but it seems the market has done this for us. As of the time of writing, the index has fallen 35% from its high on January 7.

#12: Impact of a 1% Rise in interest rates: On January 17, the Bank of Canada increased its key interest rate by 0.25% for the third time in six months. When rates rise, bond prices fall. The chart below plots the impact of a 1% rise in rates. It assumes a parallel shift (every part of the yield curve moves by 1%). UST stands for U.S. Treasuries (U.S. Government Bonds).

#13: Global Purchasing Manufacturing Index (PMI) for Manufacturing. The PMI is one of many gauges of economic strength. A PMI score of over 50 represents expansion of the manufacturing sector when compared to the previous month. A PMI reading under 50 represents a contraction. Every major developed nation had positive manufacturing data in the last half of 2017.

#14: Finally, the “what do I make of all this?” chart. Diversification and asset allocation are terms used endlessly in our industry, but that’s because they work. The preceding 13 charts have shown that there is both positive and negative data and it is near impossible to make (successful) big bets or major tactical changes on a year to year basis.

This final chart ranks the best to worst performing asset classes (from top to bottom) since 2003. As you can see, there is no discernible pattern. The grey box is asset allocation and shows you that a diversified portfolio will never be the best, never be the worst, but generally be “good enough” in the long-term.

Overall, we believe there are more positive takeaways than negative ones. Improving global growth and the continuation of accommodating monetary policy are two key drivers that should create an upward bias in equity markets. That doesn’t mean we will never experience a correction, particularly in the U.S., but it does suggest it could be shorter-term in nature.

I would like to close by wishing you a very happy, healthy New Year and to thank you for the continued opportunity to work with you as your financial planner. If you have any questions about your portfolio, or would like to discuss any changes, my team and I are more than happy to help.

Sources: IA Clarington, TD Wealth, J.P. Morgan AM, RBC GAM, Crix

Frank Mueller

Three Lesser Known Benefits of the RRSP, and One Cautionary Tale

The deadline to make an RRSP contribution for the 2017 tax year is March 1, 2018. Most of you are familiar with the basic mechanics of the RRSP and its use as a long-term retirement vehicle. You are also likely aware of the RRSP Homebuyer’s Plan (HBP) which allows you to withdraw up to $25,000 from your RRSP for the purposes of buying your first home.

The RRSP also offers other, more immediate advantages. If you are a parent, student or recently laid off employee, here are three ways you can benefit from an RRSP contribution:

Parents: An RRSP contribution will increase your Canada Child Benefit (CCB). Every parent with children under the age of 18 receives CCB payments from the federal government. For each child aged 0-5, there is a maximum benefit of $6,400. For each child aged 6-17, there is a maximum benefit of $5,400.

The benefit amount is calculated based on the family income for the previous tax year and it is subject to clawback starting at the $30,000 mark. Here’s the clawback table (click to enlarge):

For example, a family with 2 children and total household income of $120,000 is subject to a 5.7 per cent CCB clawback on each additional dollar of income. Therefore, when someone in that household makes an RRSP contribution, they are not only saving taxes at their marginal tax bracket (28-40 per cent), they are also increasing their CCB payment for the next year by 5.7 per cent!

Students: Similar to the Homebuyer’s Plan, with the Life Lifelong Learning Plan (LLP) you can withdraw up to $10,000 in a calendar year twice in a five-year period for the purposes of attending a qualifying educational institution.

Employees: Have you recently been laid off or lost your job and been given a severance package? This severance will be considered standard income, and therefore, it will be taxable in full. However, room-permitting, you can contribute some or all of your severance into your RRSP to avoid paying taxes on it.

In addition, for every year prior to 1995 that you worked with the employer you’ve just been laid off from, you get an additional $2,000 in RRSP limit to help mitigate the tax implication of your (potentially large) severance payout.

Bonus Coverage: A Cautionary Tale

Do you have a pension through your work? Does your workplace pension function as your primary retirement income vehicle? That’s great… as long as the company remains afloat. But if the company files for bankruptcy, some or all of your pension may be at risk.

Imagine having what you feel to be a solid retirement plan, with multiple income streams lined up: Canada Pension Plan, Old Age Security (for now), and your workplace pension, perhaps some rental income or some small investment income. Now, imagine up to half that income disappearing virtually overnight. It’s not impossible.

For a very recent example, take the downfall of Sears Canada. Long-time workers and retired pensioners alike were delivered the news that Sears Canada entered bankruptcy protection on June 22nd, 2017. Now these long-serving, loyal employees and retirees will see their pensions slashed by about 19% at a minimum. That figure could also increase in the future.

What is the lesson here? From the perspective of the saver, the lesson is simple: do not rely on any one income stream at retirement, no matter how seemingly foolproof. As much as you are able to, diversify your savings and save for your retirement using a tax-sheltered vehicle such as the RRSP.

You will get a tax savings on your subsequent return, your RRSP will grow in a tax-sheltered environment, and most importantly, you have control of your RRSP. So take action, as even a small amount now makes a big difference later.

If you have any questions about these tips, please don’t hesitate to reach out to us.

Next week, we will send out an RRSP deadline reminder to all eligible clients.

Sources: Dynamic Funds, Canada.ca

Anthony Sabti

New CPP Rules: Higher Premiums, Greater Benefits

Starting in 2019, the CPP will be expanded over a seven-year phase-in period. This means that today’s workers and employers must make higher contributions to the plan to shore up the income security for future generations. It has mass market implications for pre-retirees, and also for owner-managers of Canadian businesses.

Current Program: Under the current CPP rules, the plan’s objective was to replace 25 per cent of employment income to a maximum of approximately $51,000. The maximum CPP benefit is now $13,110, although most people do not receive the maximum. The average CPP benefit is approximately $8,000 per year.

New Program: Once fully in place, the CPP enhancement will increase the maximum CPP retirement benefit by about 50 per cent. In today’s dollar terms, the enhanced CPP represents an increase of nearly $7,000, to a maximum benefit of nearly $20,000.

What’s the cost now? Currently, the CPP premiums amount to 9.9 per cent of contributory earnings, when both employer and employee contributions are counted. Individual employees contributed up to a maximum of $2,564.10 annually in 2017, and their employers contributed an equal amount. These numbers are based on maximum contributory earnings of $51,800. Those who are self-employed must contribute both portions: that’s a maximum of $5,128.20 per year.

The premium changes: Proposed enhancements to the CPP would increase the premium rate by an additional two per cent (one per cent for employers and one per cent for employees) as well as increasing the maximum insurable earnings. As a result, more money will come off the top of workers’ pay, leaving less for voluntary contributions to self-funded sources like RRSP or TFSA.

A study conducted by the Fraser Institute estimates that a middle-income family (income ranging from $77,839 to $110,201) will pay an additional $2,250 per year on average.

 

Sources: Advisor.Ca, Dynamic Funds, Department of Finance

JoAnne Provost

MSP Premiums Cut in Half for 2018

As of January 1, 2018, the BC Medical Services Plan (MSP) premiums will drop by 50 per cent for all British Columbians. The NDP government plans to eliminate these premiums over the next four years.

The premium for an individual making more than $42,000 per year goes from $75 per month to $37.50 per month. The full rate table is here (click the image to enlarge):

Sandrine Extier

Year-End Statement and Tax Receipt Mailing Schedule

Every institution has a slightly different mailing schedule, but it will generally follow the table below. The year-end statement comes first (generally at the end of January or early February). The year-end statement will include the remainder of year RRSP receipts, T4RSPs, and Capital Gain/Loss reports.

First 60-day RRSP receipts, T3s, T5s, and RESP T4As generally follow in separate mailings in February and March. Below is the full mailing schedule:

 

Source: CI Investments