Over the past year, equity investors would be hard pressed to find anything to complain about. Even without dividends, the S&P 500 is up 24%, the TSX has risen 19% and global equities are up 18%. Even better, periods of market weakness have proven shallow and short. Just look at the S&P 500, with six occasions that witnessed the index pull back more than 2.5%, the depth of the damage maxed out at 5%, and were often over in the span of a couple weeks. This has certainly emboldened investors to buy the dips in the market. Naturally, one of these pullbacks will develop into something more material, but, so far, the buyers of the dips have been rewarded and continue to come back in. Recency bias will bite them at some point. The TSX and global equities have similar patterns.
Category: Weekly Insights
‘Tis the season for tax-loss selling: an annual rite of passage for both seasoned investors as well as investing neophytes. When the days get darker and the mornings a little chillier, something curious begins to occur—that reluctance to sell those losing positions that didn’t work out flips to a willingness to discard those biggest losers almost as if price become irrelevant.
So far in 2021, the S&P 500 and the TSX are both up about 25%. A truly remarkable year for equity markets that were fueled by everything from fiscal spending, MONEY PRINTING, economic recovery, the retreat of a pandemic, and a sprinkling of inflation. Making this year even more remarkable is the breadth of the advance. This is NOT just Microsoft, Apple, and Shopify pushing their respective market cap-weighted indices higher. In fact, year to date, Microsoft is ranked 74th among the S&P 500 and Apple is way down the list at 314; Shopify is 56th out of the TSX’s 230 current index members. In other words, this market advance is much broader than many of years past.
There is little doubt that at the core of most every Canadian’s portfolio is a healthy allocation to dividend-paying equities. And for many good reasons. Dividends enjoy preferential tax treatment, notably Canadian dividend-paying companies. Bond yields had been declining since the 1980s, enticing more investors to harvest cash flow from equities instead of bonds. The volatility of dividend strategies has been less than the overall market and the returns have been comparable. Cash flow, better taxation, returns, and less risk… that’s like a four of a kind in the investment world. Not to mention, when investors have ventured into growth pockets in the Canadian market, the experience has not been great. With memories of Nortel, Encana, Biovail, Potash, and Research in Motion, there has been enough boom/busts to make any investor return to the warm comfort of their dividend payers.
For months now, the U.S. Federal Reserve has been hinting that the ‘taper’ of its quantitative easing (QE) program would begin, and last week the hints turned into an operation plan. Monthly bond-buying programs that are running at $120 billion per month will be reduced by $15 billion per month. The Bank of Japan has not been adding to their balance sheet for months now, and in October the Bank of Canada announced the end of its QE program. At the same time, forecasts for overnight interest rate hikes for most developed nations continue to be brought forward. The emerging markets have already started with nine countries having raised rates in the past three months. The monetary stimulus punchbowl hasn’t been pulled away yet, but it is being drained.
Once again October proved to be a volatile month, this time to the upside as markets shrugged off earlier concerns. In this edition of the Investor Strategy we have:
- Market recap and near term outlook
- Market cycle still healthy and holding steady
- Inflation remains sticky
- Portfolio construction – a new section focused on a framework to help advisors think about, analyze and manage multi asset portfolios. In future instalments we will add our recommended tilts and dive into popular asset allocation topics. Such as:
- Where does bitcoin fit?
No, this is not a homage to one of the great hard rock bands of all-time, but we will do our best to work ‘welcome to the jungle’ into this Ethos. Instead, we are talking about little ‘g’ and little ‘r’ – two of the most important inputs for market valuations. In fact, little ‘g’ n’ little ‘r’ are so powerful, they could even justify current market valuations and provide a cautionary cue for the coming quarters. But first, when it comes to valuations for the market, price-to-earnings (PE) is certainly the more common measure. PE is a quick and easy gauge for valuation, especially contrasting with historical levels. For example, the S&P 500 is trading 21x earnings, that is high based on the long-term historical average of 16x. But this is lazy math. Price divided by earnings, whether trailing or better yet, estimates for the next 12-months, hardly encapsulates the value of a company or market. It ignores growth of those earnings in future years, variability in those earnings, leverage, or returns available in competing investments. Not implying investors should ignore PE ratios, but there are limitations.
Inflation sucks. It is essentially a tax on those consuming goods or services, as things simply cost more. Even worse, it is a regressive tax given lower income/wealth consumers tend to spend a higher portion of their income. Now, if you are sitting comfortably on your nest egg and not spending too much, should inflation worry you?
The market advance over the past year has truly turned a lot of heads, in a good way. After the initial bear and bounce triggered by the Covid-19 pandemic, markets went on a phenomenal run. The rollout of vaccines driving the re-opening trend in the economy helped, as did the continued emergency monetary and fiscal support policies. And what a run. During this advance, consumer spending pivoted much more to durables such as vehicles, homes, and technology.