Entries from December 2017 ↓

Year of the pooch

1. The cost of money goes up in 2018. A lot. The Bank of Canada will increase its benchmark rate three times, likely on March 7th, May 30th and September 5th. A fourth increase is possible, according to people who should know, like RBC. Lock it up.

2. The Fed goes three times, too. At least. That will bring to eight the number of quarter-point jumps in roughly 24 months, taking the rate from zero to 2% or more – with further increases expected in 2019 and 2020. Our central bank has followed the US one more than 90% of the time over the past few days. ‘Twill continue

3. Five-year, fixed-rate mortgages will hit 4% in 2018. The benchmark central bank mortgage rate will be more than 5.5%. Newbie real estate buyers will have to qualify at the higher of that, or the contract bank rate plus 2%. Ouch.

4. The stress test, B20, will crater sales and depress prices for at least first three months of 2018. There’s no point predicting anything past that. This is too fluid a situation as rising rates and tighter regs do battle with the house-horny loins of the Mills, who now compose the largest demographic. God help us.

5. There’ll be a serious federal budget in March. If you have money, you will not like it.

6. In politics, Kathleen Wynn is toast, Trump will be thumped in the mid-terms, T2 moves further left to out-jig Jag and Bill Morneau will refuse to do the ethical thing.

7. People who bought houses in Toronto in the Spring of 2017 will insist it was never meant to be an investment. They will lie.

8. BC’s leftie government mistakenly brings in a speculation tax while doubling the one on foreign buyers. The stealth collapse in Lower Mainland detached real estate values accelerates.

9. Growth, interest rates, inflation, corporate profits and the wealth gap all spurt. US unemployment sinks to 1946 levels while stock markets leave 2017 records in the dust. Bitcoin is a failed footnote.

10. A middling, boring, pedestrian balanced portfolio, after doing 8.5% in 2016 and 11% in 2017, does peachy in 2018.

11. Oil looks to be in for a bumpy year as US production bloats, OPEC dithers and Canadian prices sag. Poor Alberta. Taxes, deficit, unemployment, government spending up. Houses and jobs down. Big year for Jason.

12. Trending real estate markets: Montreal and Halifax. Mills are about to kill off the PQ, and people in NS actually have a life (and a house).

13. In the Year of the Dog this pathetic blog will celebrate its tenth birthday, counting more than 3,000 incredibly accurate, prescient and manly posts plus 700,000 weird comments. Of course, canines will continue to be celebrated here as a sacred species, held up as role models. Non-judgmental. Loyal. Forgiving. Happy to sleep anywhere that’s safe and smells vaguely like old socks. And, yes, that’s Bandit up there.


Carnac the Magnificent

DOUG By Guest Blogger Doug Rowat

I frequently read New York Times columnist Jeff Sommer. He writes on investment strategies and regularly points out Wall Street’s fallacies. And it’s that time of year, of course, when Wall Street analysts are mandated by irrational convention to trot out their forecasts for the year ahead. However, as Sommer highlights, these forecasts are mostly garbage:

Since the start of 2000, The Standard & Poor’s 500-stock index has ended in negative territory in five calendar years (2000, 2001, 2002, 2008 and 2015) and has been virtually flat once (in 2011). But while a handful of individual forecasts have, from time to time, predicted mildly negative years for stocks, the Wall Street consensus in every single year since 2000 has predicted a rising market.

Consider the calamity of 2008. … The S.&P. 500 fell 38.5% in the course of those 12 months…the forecast for 2008 was unusually bullish, calling for a rise of 11.1 percent. Wall Street missed the mark by 49 percentage points that year.

So, on that note, let’s pretend that we’re the exception to the rule and do some self-congratulating on our 2017 predictions. Truth is, we had many more hits than misses (btw, you can confirm that we actually made these predictions by going to www.turnerinvestments.ca). We predicted further upside for the S&P 500 (but, in fairness, did underestimate that upside) noting that Fed interest rate hikes would not even come close to derailing the bull market (they obviously didn’t), we predicted oil at US$60/barrel by year-end, which we nailed exactly, and our Canadian preferred share forecast was also spot-on:

We continue to believe that the preferred share market will sustain its momentum in 2017 and we maintain our 18% weighting in most client portfolios. The year-end yield for the sector of 4.9% also remains compelling.

Preferred shares ended 2017 up almost 13% on a total-return basis, which includes that juicy dividend.

Some of our misses included predicting more volatility under a Trump administration with the potential for several equity market pullbacks. Amazingly, volatility, as measured by the CBOE Volatility Index, was down significantly y-o-y in 2017 and spent much of the second-half near record-low levels—but, with a president willing to praise white supremacists, who would’ve predicted a year with LESS volatility?

Despite a reasonably good showing for our own predictions, we still recognize that short-term calendar-year forecasts are mostly bunk. So, the absolutely best recommendation that we can make for 2018 is the same one that we made for 2017—maintain a balanced and diversified portfolio:

Trump’s victory was a reminder that the unexpected is a constant feature of capital market investing and also a reminder of the importance of maintaining a balanced portfolio, which permits upside even when it’s not forecast. Remarkably, the S&P 500 traded lower for nine consecutive days just prior to the election as Trump rose in the polls and concerns over Hillary Clinton’s email scandal grew.

Indeed, even on election night, as it became certain that Trump would win, Dow futures were lower by more than 800 points. Clearly, a Trump victory was going to be a market disaster. However, by the end of trading the next day, the S&P 500 was actually higher by more than 1% and the ‘Trump rally’ continued throughout the rest of the year. The S&P 500 gained 5% from election day to year-end including dividends and finished the year up 12% overall. This is why we build balanced portfolios: because we know what we don’t know. As well as we forecast, the unexpected will always occur.

Indeed. I believe that equity market fundamentals remain favourable for 2018 and that the positive momentum will continue. But what do I know? To paraphrase Kirk Lazarus from Tropic Thunder, I’m just a market dude playing a market dude disguised as another market dude.

My best advice for the coming year: ignore my prediction. Resist the urge to massively overweight equities, and stay balanced and diversified.

And, finally, staying balanced: also good advice for tomorrow night.

Doug Rowat, FCSI® is Portfolio Manager with Turner Investments and Senior Vice President, Private Client Group, Raymond James Ltd.