So, happy new year. You made it. Now what?
A few of the things you’d be wise to expect in 2017.
(1) All mortgage rates increase as yields swell in the bond market. This train’s already left the station. The Fed hike two weeks ago was the precursor to two (maybe three) more this year, which has already shot US home loans higher and caused several Canadian banks to move. Since rates are set in the bond market, it’s largely irrelevant what the Bank of Canada does. If you can lock in, do it. Go long. The lowest costs in your entire lifetime are now in the past.
(2) The flip side of higher rates: preferreds continue to ascend, giving not only a fat divvy but a capital gain for those smart enough to buy when it was suggested here. Get an ETF full of rate-reset preferreds, not perpeptuals or too much US exposure. As the cost of money rises so will capital values, and meanwhile they pump out a 5% dividend with a tax credit, further increasing the effective return. Why would anyone put money in a GIC for 2% and pay tax on 100% of the gain when these things exist?
(3) Right wing populist Brexist-Trumpism continues to spread, hitting France and Germany. Financial markets missed the significance of this twice in 2016, thinking people could not possibly be so thick and myopic. But they were. They want walls, barriers, homogeneity, and a return to 1958 when things were so great. Inflation jumps as a result. Corporations become less efficient. The flow of capital and cheap labour is disrupted. Free trade’s less free. Prices and wages rise. Commodities come under pressure. The good news is markets now expect it – as the events of the night of November 8-9 showed.
(4) In Canada, T2 hopes legalizing weed makes a stoned nation forget the economy. Good idea. It will not be a banner year for the frozen north, given that commodities are likely to perform less well, NAFTA may come under attack, federal spending will balloon the deficit, new punitive taxes will emerge on the 1%ers and there’s the combo of epic household debt (65% of it mortgages) and failing demographics. This year there are more wrinklies over 65 than kids under 15. And Millennials now constitute the largest segment of society. They all want condos. And mortgages. God help us.
(5) Stock markets outperform every real estate market in Canada. Vancouver is expected to see a double-digit price decline during 2017, taking Victoria and the rest of BC with it, which will leave a single urban centre in positive numbers. But this will last only so long as listings in Toronto are severely constrained. How long? See below.
(6) Oil supplies surge as Trump turns on the fracking machine. No matter what OPECers do to curtail production, American energy companies, many of them steeped in expensive debt, drill, inject and pump and suck like crazy, all in the name of US self-sufficiency and economic expansion. Global supplies climb. Crude, some say, will be below $40 in 2017. Ouch for Alberta, and the Canadian landscape.
(7) It’s a year when timing equity markets proves impossible. Again. Trump is wholly unpredictable. The man Tweets national policy in the middle of the night, without consultation nor buffer. Timing failed in 2016 (freaked-out investors sold off in February then missed the giant Canadian rally; they sold off again pre-election and watched the Trump Bump pass them by). Here we are with a crazy president and a bull US market long overdue for a correction, so the odds mount that a pullback is coming. Investors who react to this will lose big. It will be short-lived. Those with a steady hand and a balanced portfolio do well.
(8) The bull does not die in 2017. Equities react as the Trumpians let ‘er rip. Corporate regs are slashed, rolling back many safeguards put in place after 2009. Taxes are reduced, especially for businesses. Climate change is ignored as King Coal resurrects. Energy sector profits bounce back. Protectionism helps foster more inflation and a budding wage-price spiral. The US federal deficit soars again on stimulus infrastructure spending and reduced corporate revenues. The deplorables laud this as an investment in the future. It isn’t. Stocks love it anyway.
(9) Despite rate creep, the Moister Stress Test and a crappy Canadian economy, there’s a steamy spring housing market everywhere in Canada that a listings drought remains. Seven years of extreme markets have convinced most homeowners prices will rise forever and, besides, who can afford to move? Meanwhile, inexperienced buyers rush in to ‘beat’ higher mortgage rates. Many will regret this by Christmas, where listings start to pile up and prices moderate. 2016 was the year of peak house. By the end of 2017 we all wonder how that was not obvious.
(10) Toronto stocks do not gain 21%, as they did in 2016. It becomes evident that was a unique opportunity, when equities caught the wave created by a doubling in oil prices that looked impossible last winter. If there’s one lesson investors needed to learn it’s that you never exit an asset class. Set the correct weightings within a diversified portfolio, and stick to them, rebalancing no more than twice a year.
(Bonus) This blog is hacked by a shadowy cabal of Russian cats, who manage to steal all deleted comments and publish them on Wikileaks. Readership increases to four billion.