Blockbuster Day Of Economic News Yesterday

First of the day, was U.S. GDP, which slowed to an annualized growth rate of 2% and would have perhaps been somewhat lower if consumers were not busy buying recreational goods and vehicles (at a 17% clip).

Interesting, when just the day before, the Conference Board's index of consumer confidence (forward looking) hit a four month low. Is that it for the U.S. consumer?

As expected, the U.S. Federal Reserve dropped the Fed funds rate by 1/4%. However they also suggested that they are done for now. Although, that will of course be dependent on future economic data, but the easing of trade and Brexit concerns (at least on the surface) has given Fed Chair Powell some breathing room, perhaps. This morning though, Chinese officials are apparently suggesting that they don't see a long-term deal happening with President Trump at the helm. So the saga continues. I can't say that making crucial investment decisions has been made any easier.

The Bank of Canada left rates unchanged. However, thy were decidedly down-beat about their outlook: "In today's updated projections, we are forecasting both exports and business investment to contract in the second half of this year and to recover only moderately in the next two years."

This morning the August Canadian GDP data came in at a lower than expected 0.1% rate of growth and while we have to wait for September's data (not sure why it takes Stats Can so long to get to it) until we see full Q3 results (in another month!), it would appear that somewhere around a 1.3% annual growth rate is in the cards. Hardly impressive (especially with inflation outpacing economic growth). 

So why is the BOC sitting on its hands? My guess is that Canadians have just too much debt and they are reluctant to encourage them to take on any more: "the recent strength in many housing markets across the country is a reminder that we will be carrying high levels of debt for a long time, despite a constructive evolution of vulnerabilities".

In the end, they are "mindful that the resilience of Canada's economy will be increasingly tested as trade conflicts and uncertainty persist". 

Well that does not help us much in making those crucial investment decisions, does it?

With 2% and falling growth in the U.S. , 1.3% and falling growth in Canada, 1.1% and falling growth in the Eurozone and China's economy growing at about 17 year lows (and Hong Kong is in recession), there is not a great deal of opportunity (at the moment) to get the balanced portfolio close to it's multi-year averages: up to it's 6-7% annual average growth rate, without taking on mountains of additional risk (stock markets at their highs = big risk in the short-term).

That time will definitely come (long-term investors will benefit), but in the interim, protecting your capital should be your first priority.  

Hope Island!

(with an assist to my coach, Greg Wood of Sandler Training)

Hope just does not get us to where we want to be. Action does.

Hope is not a high growth strategy.

As applied to the world of wealth and investment management, "hoping" that everything will work out in the end, hoping that stock market prices will go up (and your investment portfolio with them) is likely to end in disappointment if you do not have an actionable strategy. You need a plan. You need a plan to set your goals and take the appropriate steps to get to your goals, with long-term thinking. 

You also need to take risk (because risk - free returns, after taxes and commissions are running below the level of the increase in your cost of living), but that risk needs to be managed and mitigated as best as is possible.

There is plenty of risk and uncertainty abundant in the world today: Trade wars are in full impact mode, as our friend and well-known economist David Rosenberg reminded us on Friday: "Anyone who simply looks at this as a trade conflict is not looking at the forest past the trees. This is an economic war on an epic scale...this is a battle for economic supremacy".

China's economic growth has slowed to the lowest level in 27 years. Germany has slipped (or is about to slip) into recession. The U.S. economy will likely show annualized economic growth for Q3 at about 1.8%:

Which will put the full year ending at Q3 at about a 2% growth rate. The trend is clear, it is down and to the right and shows only signs of gaining momentum in that direction.

And the U.S. Federal Reserve will likely drop it's Fed Funds rate by 1/4% after its interest rate decision making (FOMC) meeting which ends Wednesday. They will not be doing this because the U.S. economy is showing signs of growth. Clearly, trade wars are the main destabilizing force.

Even the CEO's are uncomfortable. CEO's are not paid to sit around and hope. They have to prepare their companies for economic slowing.

And guess what? They are not hiring: job cuts are up about 28% in 2019. The highest since 2015. This may not be good for the employment growth data that will be released on Friday of this week: expectations are for about only 85,000 new jobs and a jump in the unemployment rate to 3.6 -3.7% (both lagging economic indicators). The slowing trend continues.

Meanwhile, we are about halfway through earnings season and the blended (actual plus estimated) results for Q3 are for a decline of 3.7% annual growth rate. This would be the third consecutive quarter of negative growth.

With share prices at record highs, I would suggest that there is a great deal of hope built into share prices: "trade optimism", lower interest rates.

However, behind the scenes, the picture is probably not so hopeful. Slowing economic growth, political problems, negative earnings growth, falling business and consumer confidence.

Hope won't protect your financial plan. Mitigating risk will. At High Rock we manage risk first, for the long-term. We don't chase short-term returns, that is gambling. We are stewards of wealth, not gamblers.

Wealth And Estate Planning 101

If you don't have a will (or an updated will), get on it. 

Especially if you have children who are not yet adults: you want to make sure that if something happens to you and possibly your spouse (at the same time) that they do not become wards of the state and incite some seriously harsh custody squabbles.

And then of course there are the financial issues.

If you have non-registered assets, they will pass through the estate. A non-registered investment portfolio of $1,000,000 will cost $14,500 in probate fees plus legal and administration costs and as Bianca reminds me, all the headaches that come with probating a will (especially when it comes to financial institution compliance).

You can avoid probate by making your non-registered portfolio joint (with a an expected survivor or survivors) which means that it passes directly to the survivors and remains outside of the will. However, if there are multiple survivors, that may make it extra complicated as to how the survivors deal with the assets. Money does have some unfortunate consequences on human emotions.

If you have life insurance, of course, that will pass directly to your primary beneficiaries or contingent beneficiaries (who are secondary beneficiaries if something should happen coincidentally to the primary beneficiary). If you are still young enough (so that the costs are not too astronomical), this may be worth thinking about. Then you just spend your non-registered assets (less tax for you to pay in retirement, because they have already been taxed) before you leave the planet and your beneficiaries get tax free money when you do depart.

Then there is your registered money: RRSP's, RRIF's, LIF's, LIRA's and your TFSA's. Make sure that you assign a beneficiary and perhaps contingent beneficiaries. As TFSA's grow over time (as opposed to RRIF's, LIF's and LIRA's which you will have to draw down), there will likely be substantial amounts to be inherited (no tax consequences to the beneficiaries). To ensure a smooth, tax efficient transfer of a TFSA to a spouse, you want to make sure that you designate your spouse as a successor holder (you can only designate your spouse) which means that your TFSA can roll into their TFSA and continue to be sheltered.

Wealth planning is not only about building your wealth, but also how to best utilize it with the least possible tax consequences  for your ultimate use or for your beneficiaries.

Make sure that you use a registered Certified Financial Planning (CFP) professional to get you the highest standards of planning assistance.

Special thanks to High Rock's CFP professional, Bianca Tomenson, for input in this blog.

As Cash Flows Into Money Market Funds...

Bank of America declares "the end of the 60-40" standard portfolio (Market Watch article).

Apparently, "in a research note published by Bank of America Securities, titled The End of 60 - 40, portfolio strategists Derek Harris and Jared Woodard argue that "there are good reasons to reconsider the role of bonds in your portfolio" and to allocate a greater share toward equities."

"The relationship between asset classes has changed so much that many investors buy equities not for future growth but for current income, and buy bonds to participate in price rallies" according to Harris and Woodard.

Not only is money flowing into money market funds but also into bond funds while investors exit the volatile equity market.

Apparently, with 1100 global stocks paying dividends with better yields than global government bonds (where there are billions of dollars of negatively yielding bonds), there is an argument for a larger weighting of equities in a balanced portfolio.

I would argue that adding the double edged risk of equities:

1) dividends are not guaranteed

2) equity prices can be very volatile

Is only going to add potential risk to a portfolio, especially if, as I / we (at High Rock) have been suggesting, that we are at or near the end of the economic expansion cycle (in the cash into money market fund graph above, growth in money market funds grows around the time of recession) that began in 2009. Note (below) what happens to dividend growth in times of economic slowing / recessions:

To a degree, the Bank of America folks are not entirely wrong, but what portfolios need more of are non-correlated assets as opposed to the traditional 60-40 mix. Assets that are not necessarily going to be as volatile as global equities or global government and investment grade corporate bonds, as we have seen lately, that drives investors to put more money into cash equivalent (money market) assets. 

Clearly, this circles back to my blog from last week: Alternatives To Volatile Stocks. 

For almost 5 years, High Rock has been working with clients to find them assets with more income generation that helps to reduce risk in a portfolio. If you can add legally obligated income streams (from Canadian High Yield bonds), it takes out the risk of the potential for reduced dividend payments from stocks.

We manage risk first.

Alternatives To Volatile Stocks

With machines dominating the stock market: see the Economist article (Oct. 5 edition) entitled "The Stock Market Is Now Run By Computers, Algorithms and Passive Managers" amid the economic and political landscape that produces such a staggering array of news upon which all these machines a programmed to react too, it is no wonder that there are growing numbers of stock market skeptics defying the "stock market cheerleader crowd".

That and the fact that global stock markets have shown little growth over the past 2 years, might be cause for some concern:

There is a relatively non-correlated asset class that we (at High Rock) specialize in: Canadian High Yield Bonds. In fact Paul (who manages the portfolio for our clients and a fund for Scotiabank: Advantaged Canadian High Yield Bond fund, AHY.un) may be one of the best managers in the country in this asset class as AHY.un was given the status recently as the best performing C$HY fund over 2,3,4 and 5 years.

High Yield was once upon a time given the less than aesthetically pleasing handle of "junk" bonds, back in the 1980's when it was a relatively new asset class.

However, these less than investment-grade bonds (rated below BBB) have attributes that put them well above common stocks on a corporations capital structure:

and importantly, they have little correlation to stock markets and almost no correlation to movements interest rates:

In times of stock market volatility, when a 1 standard deviation move in the S&P 500 leaves you with about a 12% vulnerability to stocks (see chart at the top of the page), $CHY (circled), leaves you vulnerable to only about a 4% move. If the cash yield (interest income) on our HY portfolio is generating better that 7% annually, you are very well paid to sit tight. The annual dividend income on the S&P 500 at about 1.86%, can be wiped out in a single day with the current levels of volatility. That won't happen in C$HY. And, as we saw in 2008, dividends can be cut by corporations. The coupon on the HY bond is fixed. You will get paid the interest that you are owed.

In 2018, when stocks were recording big annual losses, C$HY was the best performing asset class. AHY.un (with Paul at the helm) was right in the mix:

and of course, as it says on the slide, past performance is not a guarantee of future returns. However, at High Rock, we work darn hard to get the best possible risk-adjusted returns for ourselves and our clients. 

Sometimes, it can be worth looking into the alternatives. You might just find that this asset class makes sense for your portfolio. It has done well for our clients.

This is in no way a solicitation to purchase this security, merely an example of an alternative asset class. Any decision to invest should be made in consultation with an adviser that fully understands your objectives, time horizon and risk tolerance. We are always happy to advise.