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Frank Mueller

Weekly Update – January 5, 2018

“Every accomplishment starts with a decision to try” – Anonymous

New Year, Same Rally

The Toronto Stock Exchange’s S&P/TSX composite index dropped 63.50 points (0.39 per cent) on Friday to finish at 16,349.44. Resources weighed on the TSX on Friday, with oil, gold, copper and other metals pulling back on the day.

However, the TSX enjoyed a gain of 0.9 per cent on the week as the extended market rally continued into 2018.

Statistics Canada announced the December jobs numbers, with 79,000 new jobs being added. One caveat, however, is that most of them were seasonal, part-time positions. However, Canada’s unemployment rate of 5.9% in November was a full percentage point lower than in November 2016.

Retail sales data, housing starts, and consumer confidence levels were all higher year-over-year as well.

U.S. Crude Oil dropped by 42 cents USD per barrel to finish the week at $61.59 USD.

Gold dropped by $1.30 USD per ounce on Friday, and finished at $1,320.30 per ounce.

The Loonie rose by 56 basis points on Friday to finish at 80.61 cents to the Greenback, a rise of 0.6989 per cent.

U.S. Markets Hit More Record Highs

The S&P 500 rose 19.08 points (0.70 per cent) on Friday to close out the week at 2,743.07.

The Dow Jones Industrial Average (DJIA) rose above 25,000 for the first time ever on Thursday, and jumped by 220.74 points (0.88 per cent) on Friday to finish at 25,295.87.

NASDAQ also had a good day on Friday, with a gain of 58.64 points (0.83 per cent).

Some encouraging global economic data helped to propel markets upward. US unemployment figures for November – like Canadian unemployment – were lower than a year prior.

2017 Market Recap

It was, in some ways, a strange year for the Canadian investor. Early in the year, Canadian markets were relatively flat, while south of the border, U.S. markets were (and still are) very hot. Overseas markets advanced. However, as the Canadian dollar appreciated relative to the Greenback, U.S. and many overseas gains were mitigated.

As the year progressed, the Bank of Canada raised rates twice, and the Fed also raised rates. The BoC raising rates led to a dampening of fixed income returns. Luckily, the TSX rebounded late and was able to post a decent, if unremarkable, 6% increase on the year.

Most major international indexes posted double-digit returns; in fact, even factoring the appreciating Loonie, global markets outpaced Canadian markets.

So, what is the lesson here? In our opinion, this information reinforces the benefit of sound diversification, not only between equities and fixed income, but also regional diversification. Canadian investors have the reputation of being the most biased toward domestic markets, and, at least in 2017, the Canadian investor who invested heavily in Canada at the expense of other regions certainly missed out on some significant gains.

If you have questions about your asset allocation or would like to come in for a review of your portfolio, please let us know!

2017 Market Recap: By The Numbers

North America
The TSX finished at 16,209, up 6.0% for 2017
The DOW finished at 24,719, up 25.1% for 2017, or 17.0% in $CDN
The S&P 500 finished at 2,674, up 19.4% for 2017, or 11.7% in $CDN

The NASDAQ finished at 6,903, up 28.2% for 2017, or 19.9% in $CDN
Gold finished at $1,303 USD per ounce, up 13.1% for 2017
Oil finished at $60.42 USD per barrel, up 12.5% for 2017
The USD/CDN finished at 0.7955, up 6.9% for 2017
The CDN/EUR finished at 1.5089, up 6.8% for 2017

Europe/Asia
The MSCI World finished at 2,103, up 20.1% for 2017, or 12.3% in $CDN
The MSCI EAFE finished at 2,051, up 21.8% for 2017, or 13.9% in $CDN
The MSCI EM finished at 1,158, up 34.3% for 2017, or 25.7% in $CDN
The FTSE 100 finished at 7,688, up 7.6% for 2017, or 10.3% in $CDN
The DAX finished at 12,918, up 12.8% for 2017, or 20.4% in $CDN
The Nikkei finished at 22,765, up 18.9% for 2017, or 15.3% in $CDN

Sources: Globe Advisor, TD, Yahoo! Finance

Frank Mueller

Weekly Update – November 24, 2017

“This would be a much better world if more married couples were as deeply in love as they are in debt” – Earl Wilson

TSX Posts Modest Increase on the Week

The Toronto Stock Exchange’s S&P/TSX composite index, helped by broad gains, finished up on Friday by 33.79 points (0.21 per cent) to finish the week at 16,108.09. For the week, it was up 0.7 per cent (87.93 points) over last Friday’s finish at 16,039.26.

The energy and financial sectors gained on Friday.

Gold prices jumped this week overall, although it fell on Friday by $4.90 USD per ounce to $1,287.30. The $11.70 USD per ounce was good for a 0.92 per cent week-over-week increase.

U.S. light crude oil closed at a two-year high mark of $58.95 USD per barrel, while Brent crude oil gained 31 cents USD to finish at $63.86 USD per barrel. OPEC countries have once again been dancing around a potential supply cut, but nothing has been set in stone.

The Loonie gained 2 basis points on Friday, and stood at 78.68 cents USD as of Friday at 3:03pm PST. On the week, the Loonie dropped 25 basis points from last Friday’s finish of 78.93 cents to the Greenback, a drop of 0.32 per cent.

U.S. Markets See Dow Jones, S&P 500 Break Mini-Losing Streaks; NASDAQ Jumps

Black Friday, the famous shopping day that immediately follows the U.S. Thanksgiving – and for all intents and purposes, signals the green light for holiday shopping – meant a half-session on Wall Street. All of the Dow Jones Industrial Average (DJIA), S&P 500 and NASDAQ posted gains on Black Friday.

U.S. Thanksgiving Thursday saw three things: football, turkey and online shopping. According to Adobe Analytics, U.S. shoppers spent nearly $3 Billion online on Thursday.

Some heavyweight online retailers saw boosts on Friday, as optimism over the holiday shopping season is expected to bode well for 4th Quarter Earnings. Bricks & mortar stores with strong online presences fared quite well on Friday.

The Dow Jones rose 31.81 points (0.14 per cent) to finish at 23,557.99; the S&P 500 rose a modest 5.34 points (0.21 per cent) to finish at 2,602.42; the NASDAQ jumped 21.80 points (0.32 per cent) to settle at 6,889.16.

Lastly, the CBOE Volatility Index (VIX), dropped to a 3-week low of 9.67.

Canadian Household Debt Levels Highest Amount 35 Developed & Developing Countries

According to the Organization for Economic Cooperation and Development (OECD), Canada’s household debt ranks as the highest among 35 developed & developing countries that are monitored by the OECD. Read our blog post on the subject here.

Sources: Globe Advisor, Yahoo! Finance, Adobe Analytics, CNBC.com

Frank Mueller

OECD: Canadian Household Debt Levels Highest Among 35 Developed/Developing Nations

According to a recent report by the Organization of Economic Cooperation and Development, aka the OECD, Canada now has the highest household debt level per GDP in the world.

Canadian household debt is now greater than the national GDP, at 101% of GDP. As a brief refresher, GDP, or Gross Domestic Product, is the total of all goods and services – essentially everything – that is produced by a country; that is, everything produced within a nation’s borders.

The gap between Canada and the next-highest country on the list (South Korea), is roughly 8 per cent, as South Korea’s Debt-to-GDP mark of 93 per cent.

Economic powerhouses United Kingdom and United States post Debt-to-GDP levels of 88 per cent and 80 per cent, respectively; meanwhile, Germany’s Debt-to-GDP is below 60 per cent.

Why does this matter, you might ask? After all, this means that Canadians are spending money and driving the economy! This is only partly true. Yes, spending is good (to an extent); however, spending at this level can be risky.

Think about it like this: when stock markets like the TSX, S&P 500, NASDAQ, etc are increasing (recovery and expansion periods of the economic cycle), carrying debt is helpful. Debt allows companies the liquidity needed to purchase inventory, make capital investments (new bricks & mortar locations) and hire employees. But when the market starts declining and recessions hit, the companies that have over-extended themselves generally are hit the hardest.

Increasing interest rates heavily affect companies that are carrying debt, as all debt has a set interest rate. Revolving credit, such as lines of credit and credit cards, generally has an interest rate set as “prime + some additional amount”. So, when revenues start to decrease, during contractionary periods, while debt payment requirements begin to increase, companies carrying heavy debt loads can find themselves with a cash crunch.

The average family, in many ways, is synonymous with an average company, in that they have revenue (net income), they have debts (mortgage, car loan, line of credit, etc) and they must ensure they have liquidity to make it all work. The risk to families is camouflaged when things are going well, everyone is employed, and rates are low; however, the risk presents itself when rates increase (as they have twice since July), the economy slows down, and perhaps one – or both – of the family breadwinners suddenly find themselves out of work.

With all of this said, it is no surprise that the OECD has pointed out that such high indebtedness levels across the country is a risk to the economy. It is also no surprise that the soaring Debt-to-GDP has been linked to the red hot real estate markets across the nation.

The OECD stated in their report: “research points to a number of links between high indebtedness and the risks of severe recessions.” We are only about a decade removed from the U.S. housing crisis and resulting “Great Recession.”

Former British Prime Minister Sir Winston Churchill famously said: “Those who fail to learn from history are doomed to repeat it.” So, how can we learn from the past?

One of the most important things a family can do is create a budget. The budget must be feasible, it must be achievable, and it must allow for some fun.

A good budget should include some liquid savings account for emergency funds, travel funds, and the like. This way, when that emergency strikes, and you need cash in a pinch, there is a pool of money ready to deploy. Many people who do not have an emergency savings fund have to resort to drawing upon a line of credit. This will add to your debt load in a hurry.

If you do not have a budget in place, we can work with you to create one that is customized to your unique situation. If you have an interest in getting a budget on paper, please don’t hesitate to let us know!

Sources: CNBC.com

Frank Mueller

Weekly Update – October 20, 2017

“I am proud to be paying taxes in the United States. The only thing is I could be just as proud for half of the money” – Arthur Godfrey

TSX Rises for 6th Straight Week

The Toronto Stock Exchange’s S&P/TSX composite index rose by 39.22 points (0.25%) on the day to close at 15,857.22. This represents a gain of 50.05 points (0.50%) over last week’s 15,728.32 finish.

Gains came from across the board, as 9 of the 10 major Index Sectors posted gains.

Brent crude jumped nearly a dollar per barrel to settle at $57.17 (USD) per barrel, as post-hurricane inflation continued to rise.

The Loonie was roughly even for the week, until the U.S. Senate passed their budget resolution on Thursday. On Friday, the CAD dropped by 82 basis points (1.09%) to finish at 79.22 cents USD as the Greenback surged in reaction to the budget resolution.

U.S. Markets Rise on Tax Cut Optimism, Encouraging Q3 Earnings Reports

On Thursday the U.S. Senate passed a budget resolution that raised optimism President Trump will be able to get his tax-cut blueprint put into effect. On Friday, the major U.S. Indices were up on this optimism.

The Dow Jones Industrial Average (DJIA) spiked 165.32 points (0.71%) to finish at 23,328.36. For the week, the DJIA was up a full 2%. Like the TSX, the DJIA advanced for the 6th straight week.

The S&P 500 was up 13.07 points (0.51%) to close 2,575.17. For the week, the S&P 500 was up 0.86%.

The NASDAQ jumped 23.99 points (0.36%) on Friday to end the week up 0.35% at 6,629.05. The NASDAQ has now posted gains 4 weeks running.

Consumer confidence, as well as strong Q3 earnings calls thus far – 70% of S&P 500 companies so far have posted Q3 earnings that beat street expectations – means continued positive movement is expected, say analysts.

Q3 earnings, overall investor optimism, and the budget resolution passing all worked to put downward pressure on Gold (a classic safe-haven asset). Gold dropped by $8.20 USD per ounce on Friday to finish at $1,281.80. This represents a loss of $24.30 (1.86%) USD per ounce compared to last Friday’s finish of $1,306.10 per ounce.

OSFI Makes Uninsured Mortgage Stress Test Official

As first mentioned on our Weekly Update for July 28, 2017, the OFSI made the Uninsured Mortgage Stress Test official this week. The changes take effect January 1, 2018 (looks like we nailed the date on this one!).

You can read our original post on the subject here.

The biggest change to the original proposals is the stress test rate to be applied. Originally, the stress test rate was proposed to be the mortgage rate the borrower had access to, plus 200 basis points (2%). So, a rate of 2.50% would result in a stress test qualifying rate at 4.50%.

However, the final 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, currently 4.89%.

So, the minimum stress test rate will therefore be 4.89% (if rates are unchanged from today until January 1, 2018), and will be higher if bank’s increase their lending rates.

WEEKLY MARKET WRAP-UP

North America
The TSX closed at 15,857, up 50 points or 0.32% over the past week. YTD the TSX is up 3.80%.
The DOW closed at 23,329, up 457 points or 2.00% over the past week. YTD the DOW is up 18.04%.
The S&P closed at 2,575, up 22 points or 0.86% over the past week. YTD the S&P is up 15.01%.
The Nasdaq closed at 6,629, up 23 points or 0.35% over the past week. YTD the Nasdaq is up 23.15%.
Gold closed at 1,282, down 29.00 points or 1.84% over the past week. YTD gold is up 12.65%.
Oil closed at 51.66, up 0.24 points or 0.47% over the past week. YTD oil is down 1.07%.
The USD/CAD closed at 0.79, down 0.0100 points or 1.25% over the past week. YTD the USD/CAD is up 6.48%.

Europe/Asia
The MSCI closed at 2,033, up 9 points or 0.44% over the past week. YTD the MSCI is up 15.97%.
The Euro Stoxx 50 closed at 3,605, changed 0 points or 0.00% over the past week. YTD the Euro Stoxx 50 is up 9.54%.
The FTSE closed at 7,523, down 12 points or 0.16% over the past week. YTD the FTSE is up 5.32%.
The CAC closed at 5,372, up 20 points or 0.37% over the past week. YTD the CAC is up 10.49%.
DAX closed at 12,991, down 1.00 points or 0.01% over the past week. YTD DAX is up 13.15%.
Nikkei closed at 21,458, up 303.00 points or 1.43% over the past week. YTD Nikkei is up 12.26%.
The Shanghai closed at 3,379, down 12.0000 points or 0.35% over the past week. YTD the Shanghai is up 8.86%.

Fixed Income
The 10-Yr Bond closed at 2.38, up 0.1000 points or 4.39% over the past week. YTD the 10-Yr Bond is down 2.86%.

Sources: Globe Advisor, Yahoo! Finance, Dynamic Funds

Frank Mueller

OSFI to Make Conventional Mortgage Approvals More Difficult

As we mentioned in our Weekly Update for July 28th 2017, the Office of the Superintendent of Financial Institutions (OSFI) released a set of proposals that would serve to tighten up the conventional mortgage market. The objective of these proposals is to protect would-be home buyers from over-extending themselves during our current low-rate environment against further rate increases; additionally, the measures look to protect banks from creditor default risk.

On a more basic level, the proposed measures have been put forth to protect the economy overall. Canadians owed an average of $1.67 per $1 of disposable income, according to a debt-to-income report released by Statistics Canada in December of 2016. The Bank of Canada, as well as many of the “Big 5” banks, has been vocal about household debt levels. The Bank of Canada has also raised concern over inflated house prices in major Canadian markets such as Toronto, Vancouver, and recently including Victoria and Hamilton. Rising rates and an uptick in unemployment could lead to increased mortgage defaults.

How Would It Work?

The counteractive proposal for uninsured, conventional mortgages would require potential buyers to qualify for their mortgage using a new stress-test qualifying interest rate. Where the high-ratio stress-test rate is simply the Bank of Canada’s 5-year fixed rate (recently raised to 4.84%), the conventional stress-test rate would be the street rate offered by the lender plus 200 basis-points (2%).

So, let’s say you have a mortgage rate offered by your bank or credit union for 2.85%. When qualifying, your bank/credit union would use the stress-test rate of 2.85% + 2.00% = 4.85%. The logic is simple: if you can qualify – and afford – your payments at a rate of 4.85% in this case, then surely, you’ll be able to absorb an interest rate hike of 25bps (as we’ve experienced twice now in the last 3 months).

Of course, it’s important to remember that the borrower would only be exposed to the increased rate when their current mortgage term expires.

What’s the Bottom Line?

Analysts believe that if enacted, prospective borrowers would lose about 20% of their purchasing power. For instance, if without the stress-test, a borrower could qualify for a $1 Million mortgage, when using the stress-test, the same borrower would only qualify for an $800K mortgage.

If enacted, this proposal would look to cool the overheated Canadian real estate markets with a more precise, surgical approach, rather than the more broad-based interest rate hikes (which affect the economy overall due to cost of borrowing, the effect on the Canadian dollar, etc).