Tremendously wet

DOUG By Guest Blogger Doug Rowat

Hurricane Florence barreled into the Carolinas last week causing widespread damage and significant flooding. As the category 4 hurricane approached, Donald Trump helpfully alerted the locals to the hurricane’s dangers by noting that it would be “tremendously wet”. Trump doesn’t always have a firm grasp of the obvious (you shouldn’t stare directly at the sun during an eclipse, for example) but, of course, in this instance, he was correct, with the ‘wetness’ causing some US$20–25 billion in damages.

We’re now, in fact, entering the heart of Atlantic hurricane season, which runs each year from June to November with peak season occurring right about now. And each decade the hurricanes get more plentiful and more damaging. For example, according to the North Atlantic hurricane database, or HURDAT, in the 1920s, there was only an average of 4.2 hurricanes per year. In the 2000–09 decade, by comparison, the average shot up to 7.4 per year. And virtually all of the most damaging hurricanes have occurred since 2000 (see table below).

Wrath! Every hurricane season results in ominous images in the financial press

Source: Bloomberg

Now the increase in hurricane severity and frequency is a result of global warming. But before the climate-change deniers clog the comments section, keep in mind that I don’t particularly care why they’re occurring more frequently or increasing in strength—my only concern is their possible effect on equity markets. Based on the prevalence of hurricane coverage in the financial press at this time each year (like the example above) you would think that hurricanes have enormous market impact. It’s now become an annual tradition to have a steady stream of terrifying satellite images and hurricane-tracker graphics come across the Bloomberg feed. In the end, Florence didn’t quite live up to the hype, despite the best efforts of this weather reporter:

In a few decades perhaps, more numerous and more massive hurricanes will actually influence equity markets, but for now, and historically, they matter little. Below I examine the 15 most damaging hurricanes in history and the performance of US equities three months and 1 year after. While challenging and often devastating for the areas struck, for the US stock market, hurricanes amount to sound and fury signifying nothing.

While hurricanes always make the financial news, they don’t actually impact markets

Source: Bloomberg, National Oceanic & Atmospheric Administration, Turner Investments. Total return shown. Damages not adjusted for inflation.

The reason, of course, is that as damaging as hurricanes are locally, in the context of the overall US economy, they’re a drop in the bucket. Last year’s Hurricane Harvey, for example, the costliest hurricane in US history with an estimated US$125 billion in damages, still only amounted to about 0.6% of the US$19 trillion total US economy. So, while it may suck to be invested in, say, the insurance sector after a bad hurricane season, the market quickly recognizes that the impact on the overall economy is minimal and, ironically, the hurricanes may even provide economic stimulus as the rebuilding process begins (new houses, infrastructure, cars, etc.). So, equity markets quickly brush off hurricane season focusing instead on bigger issues such as overall corporate profitability, which does, in fact, meaningfully affect market direction.

Hurricanes make for great lead stories on the nightly news, but with the exception of short-term commodity traders and isolated sub-sectors, they—no matter how “tremendously wet” and powerful—don’t affect the market.

Scary, eye-of-the-hurricane satellite images can be quite misleading.

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


Lights out

The noose tightens. Days ago we told you about the mess higher mortgage rates are making of things. Families pay more to service mortgages than ever, and after a few years during which loan-to-debt ratios dropped, we fell off the wagon. Once again we’re snorfling up borrowed money, making history, setting the scene for a momma of a reset down the road.

So here’s TD. It just raised its one-year mortgage rate by a stunning thirty basis points. Yeah, that may not sound like a lot. But it is. At 3.34% it’s now breathing down the neck of the best 5-year mortgage rates, so one more option for borrowers is effectively gone. More importantly, it tells you the trend. Up.

Short-term loan rates are swelling along with the yield on short bonds. They, in turn, are growing because the Bank of Canada will be jacking its benchmark rate in a month – by a quarter point. The current odds of that happening are north of 80%, and it’s not out of the question we could see a jump in December, as well (especially if Trump lets us back into a trade agreement).

The prime rate soon will be just a few man-bun hairs less than 4%. By this time next year it’ll be at least 4.5% and possible a quarter point higher. We have not seen this level for well over a decade, and it effectively eliminates the “emergency rates” thing in place since 2009.

This is a big deal for the kids buying real estate (or wanting to) for the first time. Gone are the 2% and 3% locked-in, half-decade-long mortgages that have been around since they discovered acne and urges. Combined with the B20 stress test, it means they have to qualify at 5.34%, or two per cent higher than what their bank is offering – whichever is greater.

Soon that Bank of Canada benchmark mortgage rate will be 5.6%. Next year it will pass 6%. Haven’t seen that for a decade, either. Frankly,  I don’t know why anyone would be buying now, knowing what’s coming.

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Despite that, Barry’s thinking about it since he’s moving to a new jobs as a hated civil servant in that puffed-up place called Ottawa.

“I’ve been reading your blog for ten years now, and you saved me from the mistakes of rent-to-own schemes and listening to the buy-now-or-buy-never crowd. I have recommended your blog to several others, who generally don’t want to hear that their real estate purchases may have set them back financially, and argue that since they’re going to stay in their houses forever, it doesn’t matter (which you have repeatedly refuted. of course).”

Okay, MSU over. What’s the issue?

“I don’t often hear you comment on the Ottawa market. I will be moving there for work by November (in time for the horrible winter) and when I looked recently at condos and other properties for rent or for sale, I was staggered by how much more expensive Ottawa had become since the last time I looked about two years ago – this includes outlying areas such as Barrhaven and Orleans.

“My situation – 51, single, defined benefit pension plan, maxed out invested TFSA (stands at about $70,000 right now) and about $100,000 in savings (which I know I should invest). I got a late start to investing and savings due to some health issues, which have passed. My annual income is now a little over $100,000. I have never owned a property. The banks’/other institutions’ ‘buy or rent’ calculators seem to indicate I should buy, but then again, they are in the business of selling mortgages.  I would appreciate your insights on the Ottawa market and what would be best to do.”

That’s easy. Ottawa is a more stable market than most, thanks to all that government money sloshing around. There are almost 150,000 Trudeau employees in the National Capital region, thanks to a 12% hiring binge, and that’s enough to keep real estate less volatile that in, say, Vancouver where most people are private sector and/or nuts.

So the average Ottawa house costs about $433,000 and the typical condo is $276,000. Sales this year are close to identical with those recorded in 2017, and prices haven’t moved one centimeter when inflation’s factored in despite an 18% drop in active listings. So, this place lags the rest of urbanized Ontario in price increases, and will prove to be more resilient when conditions deteriorate.

The answer to your question: buy if it lowers your housing costs because there is no real reason to expect capital gains. Therefore real estate is shelter, not an investment. Given your pitiful level of savings and investments ($170,000 at age 51 is not cool), it means buying would hollow out your liquid assets, saddling you with mortgage payments, and put you on the hook for condo fees, property taxes, higher insurance and utility charges. Can you rent for less than that (including the lost investment potential of your down payment)?

Of course you can. Have you learned nothing from this pathetic blog? Besides, you’re single. Not even a spouse to nibble away at your resolve. And given the fact you haven’t lived in Ottawa before, plus the job is untested and may not work out, why would you throw all of your limited resources into a property? Move there. See if you like being in a  place where it snows every night, where major roads are shut down routinely so elected poohbahs can rush by in black Yukons, and everyone feels superior to Toronto.

Meanwhile, Barry, get serious about investing. When Doug Ford becomes PM your pension might be as secure as Toronto council.

About the picture...

“I love the blog, I share it with all of my moister friends and boomer parents regularly. Sufficient suckup?”

Yes, that passes. Continue.

“My girlfriend is a student and has a decent amount of OSAP, probably more than she needs, today she asked me if she should invest it. Curious what your thoughts are on that? I’ve been a long time blog reader and can’t recall you writing anything on the topic before. Thanks, Shea. PS: In hopes of you replying I attached a photo of my dog Stanley having a snooze, he likes to be tucked in.”

OSAP money is loan money and she’s got to start paying it back after a six-month holiday. The average loan rate currently is 3.5-4%, and it’s non-deductible. So, Shea, the answer is no. Your GF would have to assured of a pre-tax return of 7% consistently in order for this to make sense, and in the short-term, that’s not a given. So why doesn’t she just pay the loan back instead of keeping funds she doesn’t need?

But yes, Stanley rocks.