President Obama was re-elected Tuesday with a comfortable enough margin but the US remains divided. The focus has now shifted to the much talked about ” Fiscal Cliff”. January 1 is the day when mandatory spending cuts and tax hikes will simultaneously hit, unless a comprehensive deal is worked out between the White House and Congress. The Democratic President and the Republican House of Representatives need to find a compromise to avert the fiscal cliff that would drive the U.S. economy back into recession next year and increase the jobless rate.
In the meantime, the global economy is recovering but at a very slow pace. The third round of Quantitative Easing is certainly welcome and helps support liquidity for the much needed recovery. Going forward, it will be essential for President Obama to focus on exports, overhaul tax and spending policies, and invest in infrastructure.
Why do you need to know all of this?
This macroeconomic uncertainty explains the volatility we are experiencing. The good news is that inflation remains low, stocks have rallied significantly in the past few weeks, for the most part remain undervalued, and dividend yields are quite attractive. In fact, 56% of dividend paying companies in the S&P 500 currently pay a higher dividend yield than the US 10-year treasury yield and 52% of dividend paying Canadian companies pay a higher dividend yield that the Canadian 10-year bond yield. Many of these companies can be found on the Aristocrats index which is made up of large cap, blue chip companies that have followed a policy of increasing dividends every year for at least 25 consecutive years. Yes, every year, in good and bad times.
Companies paying 3-4% dividends with undervalued valuation means that it should not be too difficult to achieve a 6-7% total return even with all the certainty. We are indeed in a “sweet spot” and most investors have not yet recognized the opportunity.
Please remember that equity investment returns are closely tied to corporate earnings growth and the price you pay for those earnings. Historically, over the long term corporate earnings have been fairly stable and have grown along with productivity gains and inflation. Stock valuations though are more volatile than earnings since they are influenced by investor sentiment, which swings between optimism and pessimism.
The bottom line is that markets will most certainly remain volatile. A lot of opportunity is created with volatility. Use the fiscal cliff debate in the next few months to your advantage. Pick defensive equity funds at attractive prices for the long-term and get paid through their dividends while we wait for the recovery.
YOU FIRST Financial Turns 20!
Terry and I started YOU FIRST Financial on November 1st 1992. We had the name registered and started operating from home. A lot has happened since then. We moved to a downtown office in 1997 and we now have four dedicated, smart and competent employees and over 700 wonderful clients. Thank you for your trust and confidence over the years. It is a pleasure to come to work everyday knowing that we will meet with you and help you make sound financial decisions. We truly enjoy what we do and to make a difference in people’s financial lives.
Is your will and power of attorney up to date? Do you have all your estate affairs in order? Don’t delay!
My wonderful 92 year old father passed away last month after a short illness. I now see first hand the importance of having your estate affairs in good order. Review your will periodically and ensure that your have power of attorneys (POA). Things can change quite rapidly and it makes a big difference for those left behind. Gather all your documents such as life insurance, pension, investments, RRSP, RRIF and bank account statements and keep them in one place with your will and POA. Show your spouse and one of your children where these documents are located. Make it easy for them. We can also help you make that inventory if you need help. Just ask us and make sure to add our business card where your important documents are located. We will be there when the time comes to help your love ones.
Wishing you all a fabulous fall. Stay safe and well!