Money & politics


RYANBy Guest Blogger Ryan Lewenza

It is well known and generally accepted that you shouldn’t discuss money, politics and religion. Today I’m going to flout general convention and discuss the first two – money and politics. Garth advised me to “wear a helmet” when I told him this week’s topic so this might get interesting.

I see a number of important political events in the near-term, which could impact the equity markets, hence this week’s topic.

The first and potentially most impactful is the fast approaching US mid-term elections. Normally, the run up and conclusion of the US mid-terms has been very positive for the US equity markets in the fourth quarter. This is because markets hate uncertainty and as the elections results pour in and the outcome becomes known, markets typically rally.

Historically, the fourth quarter has been the strongest quarter for the equity markets with the S&P 500 up 4.1% on average in Q4. However, markets tend to rally even more in the fourth quarter of US mid-term election years with the S&P 500 up 7.7% on average. This is one factor supporting our call for a late-year rally.

S&P 500 Quarterly Performance in Mid-term Election Years

Source: Bloomberg, Turner Investments

Now why this election outcome could be even more consequential than normal is if the Democrats take back the House and Senate. This combined with the potential for a damaging report from special counsel Mueller over President Trump, Russia collusion and/or obstruction of justice. To be clear, I’m not insinuating that there is anything nefarious between Trump and Russia. I just don’t know. But often when there’s smoke, there’s fire.

And from my perspective, a case could be made over obstruction given things like: 1) Comey claiming that Trump advised him to “let Flynn go”; 2) the actual firing of FBI Director Comey who was investigating Trump and potential Russian contacts; and 3) that Trump lied on Air Force One when he quickly drafted a response regarding Trump Jr., Manafort, and Kushner’s meeting with some Russians that the meeting was over Russian adoption policies rather than getting dirt on Clinton. Again, to stress, I’m not making a call, rather stating some of the facts and what Mueller could report on.

If there is damaging evidence of collusion/obstruction and the Democrats also take back the House and Senate, it increases the odds of impeachment, which could lead to a market sell-off. I still believe the odds of impeachment are low, but they do increase if these two events unfold.

From an investment perspective, we don’t invest around ifs, and there are a lot of them here, so we’ll just have to see how this all shakes out in the coming months.

Next up is the Italian budget and the escalating tensions between Italy and the EU. The new Italian government, a coalition of the anti-establishment party Five Star Movement, and the right-wing party The League, released a controversial budget, increasing spending on welfare and pensions while cutting taxes. If passed, it would result in a larger-than-expected deficit of 2.4% over the next few years and increased borrowing. This would, in turn, add to Italy’s already high debt-to-GDP ratio of 132%.

Concerns from the EU of a higher structural deficit is setting up a potential conflict between the Italian government and EU officials. The likely outcome is a reworking of the budget and a compromise between the two, but a showdown cannot be ruled out, and a potential short-term sell-off. Worse yet, the Italian government may use this as leverage to justify an exit from the EU, which would have major ramifications for the EU economy and stock market. I see this as a remote possibility but nothing surprises me these days.

Italy’s Fiscal Situation Is a Mess

Source: Bloomberg, Turner Investments

Finally, that brings us to the morass known as “Brexit”. What a mess! The UK exit date from the EU is fast approaching, with the UK scheduled to leave the EU bloc on March 29, 2019. Theresa May has been unable to sell her Brexit plan, known as the Chequers plan, to her government and people, let alone the EU. The plan calls for a “soft exit” where essentially Britain would remain tied to the EU in the trade of goods, but would be free to do what it wants on services.

EU negotiators have rejected this separation of goods and services, as this would be the equivalent of the UK having their cake and eating it to. The EU is basically saying “they are either in or they are out” and they cannot cherry pick the things that they want. The concern is that nothing gets resolved by March 29 and everything falls into no man’s land, with no direction or clarity. This would not be good for the global economy and equity markets.

Politics can play a big a role in the economy and financial markets. As I outlined there are a number of critical political events on the horizon, which have the potential to have a big impact on the financial markets. Often the bark is worse than the bite on these issues and things get worked out in the final hours (e.g., NAFTA), but we’re monitoring these important events closely given the potential for a negative outcome.

Ryan Lewenza, CFA, CMT is a Partner and Portfolio Manager with Turner Investments, and a Senior Vice President, Private Client Group, of Raymond James Ltd.



Most major banks hiked mortgage costs this week. Not a huge surprise. It’s interesting, though, that the jumps were in their ‘best, discounted’ rates, not the posted ones. For example, at RBC the five-year fixed popped up 15 beeps to 3.89%. At BMO the best fiver also rose, but sits at 3.59%.

Of course, this is not the qualifying rate. That’s where the stress test comes in. In order to borrow funds you must prove you can handle payments at the offered rate +2%, or the stress test rate of 5.35% – whichever is greater. A borrower at RBC, for example, would need the ability to carry the loan at 5.89% in order to get funded.

Wow. Seventeen months ago you could scoop a five-year in the 2% range. No test. The increase is positively Herculean. Or, as they say in Washington, Kanyesque.

Do not discount the market impact. Things are getting s-l-o-w everywhere. Sales have pooped out in Vancouver, Victoria, Edmonton, Calgary the flat places where they grow stuff and even into the mighty GTA. The condo market in Toronto is comatose. Showings no longer mean sales. DOM is growing. Do not believe anyone who tells you otherwise. Those little hairs on the back of realtor necks are terrified. They sense what happens next.

The mortgage stress test is determined by the banks’ posted rates. At RBC the five-year is 5.34%. The first bank to jump above that (today – October 12th) is Scotia, now at 5.44%. If the Bank of Canada ups its benchmark rate 12 days from now (looking like a slam-dunk), everything may escalate by another quarter point.

Even-higher rates should have been in place for a few days, but the bankers have been holding off. No wonder. Their mortgage business is plunging. As discounted rates rise, it’s tougher for people to leap over the stress test hurdle. In most markets sellers have not yet adjusted their prices low enough to meet the reduced credit limits of borrowers. So this standoff has resulted in historically-awful affordability numbers and falling sales. The only way out is for the cost of money to fall (ain’t going to happen) or for prices to tumble (it’s coming). In the meantime, keeping your Audi A7 lease current and your desk fee at Re/Max paid is no picnic.

Some people think the temporary stock market kerfuffle or erupting bond yields will spook central banks into non-action. Maybe, they pray, we’re at the top of the rate curve.

Ha. Fat chance. The Fed has increased eight times, or just about half the number in the usual tightening cycle. Our guys have moved only four times. Meanwhile the North American economy keeps growing and inflation along with it. The cost of living increase is now circa 3% in both countries – at the top of the central bank target. With unemployment in America at a 50-year low and competition for workers now a considerable challenge for companies, wages are going up. Meanwhile Trump is busy slapping tariffs on imports, driving up their cost and adding more inflation.

So central banks aren’t done yet. Not even close. Thankfully bond yields have backed off a little this week (giving some relief to stocks), but we’re in a world where the cost of money will keep creeping up and will never go down until the next recession looms (at least two years out). But even in  a downturn, we’re not returning to 2% five-year mortgages nor is the stress test about to disappear. The real estate party is over, despite what your BIL with fourteen pre-con condos says.

And now the bank regulator that gave us the test is mousing around the rules for equity-based mortgages. This simply means the regulator’s much more concerned about a borrower’s ability to pay than how much net worth they might have. So it doesn’t matter how fat the down payment is on a property or how much equity a renewer may have, it’s all about income.

Expect the banks, therefore, to become even tougher. And also remember that if you’re renewing an existing loan (so many people are this year) and switch lenders, you’ll have to go through the stress test and prove you can handle the payments at 5.34% or above.

Finally, be aware that in a rising rate environment, getting out of a mortgage can be worse that dealing with your ex-spouse.

So there you go. Harder to get a home loan. Stress-test-miserable if you try to switch. Punishing if you leave.

[email protected] won’t have to dress up to be a witch this year.