With 2019 behind us I wanted to point out the difference in performance of the Canadian TSX and US markets S&P 500. This talks about the importance of having a purpose behind investing and while not all years will work out in the desired way, it proposes that having a less cookie cutter portfolio may be a way to go. It is how I invest my client’s money.

The US S&P 500 was up 28.9% in 2019 not including dividends while the Canadian TSX was up 19.1% in 2019 not including dividends.

There are economically fundamental reasons for this:

  • US has favourable consumer debt as measured by the debt to income ratios
  • US is less resource oriented
  • US is more insulated from global trade
  • The US has a system that promotes growth, innovation and protects intellectual rights
  • I have the ability to get US exposure in the form of a Canadian investment which negates the reporting of foreign holdings
  • I have the ability to currency hedge the US assets at a negligible cost

Most of our portfolios are focused on the US for the core of their portfolio with a bit of German stock while we keep the fixed income portion insulated against moving interest rates and focus on securing any required cash flows.

I believe until the economics or investment fundamentals change that this will continue until the US becomes too expensive or the landscape changes where other countries will benefit more than the US.

For thoughts on the coronavirus please see the section on China below.

Canada

The prices producers pay improved year over year which was a good rebound given that much of the year showed negative numbers. We want an increase in prices but a steady one and not too high. A negative change will indicate a lack of buying or excess in inventories that could indicate lower demand and slowing economic growth. Last month was a good number. Building permits were particularly weak with Ontario showing the largest year over year decline. Canadian full time employment is choppy but showed a good rebound. Retail sales rebounded to a healthy level but has more heavy lifting to do.

Germany

Retail sales have been softening for much of the last 12 months. Construction seems to be back on solid footing, manufacturing is rebounding but factory orders still seem weak. GDP growth is weak and under 1% when I would like to see it in the 2% range. Inflation is also at 1.5% when I would like to see it closer to 2%. They are still one of the most fiscally sound economies in Europe and if economics head south, this is where I want to be. If things improve then they will benefit from their large export economy.

United States

After seeing a rise in US jobless claims there has been a steady decline. The high in December was still low and it is believed that anything under 300,000 of weekly jobless claims indicates an economy that is still growing and needing employment. We are not seeing a spike in inflation which would first start to be seen from prices or wages. Since employment remains good but stable and inflation remaining in a desired range there is little desire for the fed to raise rates. The risk is for growth outside of the United States to slow and this will cause slowing growth inside of the US which may pose risk to lower interest rates. While I don’t see this as the likely scenario it is something to watch. Retail sales had a very healthy December.

China

No matter the economic data that came out over the last month, the markets will be driven by the impact of the coronavirus as China has quarantined two cities that are important parts of the economy. The ability to contain the virus will be one factor with the other factor being the ability to find an antiviral drug that is effective for treatment. The virus has so far infected more people than SARS and MERS however the death rate has been relatively low. SARS had a death rate of closer to 9% and MERS was closer to 25%. The coronavirus has a death rate of closer to 2%. The economic fallout will continue to be calculated as Disney has closed the Shanghai Disney, flights have been cancelled which affects airlines, cruise lines are cancelling voyages and the demand for oil to China has seen a decline with the reduction in transportation of goods and people. This is one that I am watching closely however the fear is likely larger than the reality as we’ve seen in the past. Any major sell-offs in the markets as a result of coronavirus are likely to be viewed as a buying opportunity however new developments will dictate the actions.

Our biggest strength is seeing how all the different aspects play into a family’s financial well being. The markets are only one factor. Financial planning is the cornerstone of any conversation.

Trevor Dale is licensed to discuss and deliver on solutions for investments, insurance and mortgages. Give us a call for a free consultation.

Until next time.

Trevor Dale, CFA