Monthly Debrief November 2022
Our Monthly Debrief video is a summary of all the information that we would like to share with you in an effort to provide an update.
Leanne Mamchur (00:02):
All right. Welcome to this month's monthly debrief for the month of November. I'm Leanne, and this is all the information that I've read or listened to, analyst or heard from portfolio managers throughout the month that I thought that I might be able to share with you. But before we jump in, I just wanted to give a nice shout out to Dan Nikita from our commercial team who organized the fall cleanup for Well Springs. So these are a bunch of c I B CERs that all participated. And if for those of you that don't know, this is Fabian right here. And so he works on our team, and I participated in the Southern one. So this is the northern location. It was a lot of good time to be outside. It was right before the snowfall, which was nice. We did a lot of breaking and just cleaning up their garden beds and that type of thing. And so it was nice to get out and about, and I really appreciated Dan. All right, so now into the not so friendly news. Unfortunately, this is the US recession risk indicator, and I'll just
Move out of the way, but
These are 12
Variables that have historically
Forecasted a looming recession.
Leanne Mamchur (01:10):
And overall, right now
Leanne Mamchur (01:12):
Leanne Mamchur (01:13):
Is currently signaling recession,
Leanne Mamchur (01:15):
Which we knew was coming, but it's always harder to take a look at and hear. And so one of the things that when it's market timing like this and what have you wanna resist the impulse to buy high and sell low. So right now, we would be selling low if we were to change our market mix at this time. So you can see
Leanne Mamchur (01:36):
This chart, and basically the chart is the red line is the world index in Canadian dollars. So that represents
Leanne Mamchur (01:43):
The market. And
Leanne Mamchur (01:45):
Then the gray areas are when investors or individual investors would've gone into the market or would've stayed out of the market or sold out of the market. And so you can see right down here, this is the
Leanne Mamchur (01:59):
Leanne Mamchur (02:02):
Period or that big dip
Leanne Mamchur (02:03):
That we saw in 2009, and you can see how many investors during that time period were fearful and sold out. And then you can also
Leanne Mamchur (02:15):
See that during big market upticks, we recently saw how many investors are actually putting money into the market
Leanne Mamchur (02:24):
And buying high. Now the best course of action is really consistent investing, but this chart really illustrates the behavioral side of things and how difficult it is to stay on course. All right, so turning to the next slide here. This is a confidence indicator. Now, one of the things that we're noticing as well is
Leanne Mamchur (02:45):
That confidence arm is really, really low. So you can see right at the tail end there, it's showing how low confidence is consumer sentiment. And what that is is a contra
Leanne Mamchur (02:58):
Indicator. And so when confidence gets this low, it tends to be an indicator of potentially an increase coming from here. So you can see past decreases in confidence in this chart and then the respective increases that were to follow. All right, so let's take a look at strategies for times like this. I reworded this a little bit. And so our advice is just remembering that investing is long term. Stay steady and know that patience is rewarded. Fight your emotional response to react. Now is not the time to change your asset mix due to your fears. Try not to cherry pick asset classes or stocks and don't attempt to time the market. Look less is kind of a good strategy for times like these as well. And so that reduces your stress and including even reading less. And that might seem counterintuitive when everything is going on.
It is right now, but that would be the strategy that we would be suggesting. All right, I like this analogy. I heard it, I'm not sure where I heard it, but your portfolio is very much like a bar of soap. So you can think of it as the more you touch it, the more you touch it, the more you touch it, the smaller it gets. And that is an indication of just trying to stay invested as opposed to timing it. So I liked that analogy. It's a good visual and so I thought I would use it there. And so economics. So let's turn our attention to economics. The risks rose, as I said, the probability of recession has increased due to aggressive monetary policies. Bank of Canada's increasing the rates, the confidence, our confidence, business owner confidence has is hurting. And also there's geopolitical instability.
The yield curve is now deeply inverted, which is a good leading indicator for recession. Now, before it was just slightly inverted, which means that the short term rates are actually paying more than the long term rates. And that because of the increase this month in rates, that has increased in severity. And so that a yield curve inversion is pretty much a predictor of recession in the next 24 months. And so that's over a two year period. And so it's not necessarily imminent, but it is something that we're keeping our eye on. In Canada, gdp, which is the economic growth of the economy, it remains positive, but the economy is showing cracks. Contradictory indicators that we're seeing are employment is staying strong, but we have productivity that is a little bit reduced, meaning that there's more that there's an equivalent amount of workers, but maybe each worker is working just a tad bit less.
And so then our productivity or our growth as an economy isn't improving. All right? Demographics. Demographics are in fact changing our spending habits. The younger generation are focusing on reduced ownership and a reduction of clutter and things like that. And so they're less consumer and they're limiting their consumption. And so by 2035, approximately 70% of all consumers will be millennials and Gen X or Gen Z, sorry, I'm Gen X
Leanne Mamchur (06:39):
You can see the month of after October 15th, all the way to November 15th. Well, this is as of November 4th, and so you can see it's still bobbing around. We had a little bit of reprieve in the last little bit, but then it came off again.
Leanne Mamchur (06:53):
And so it's really just bobbing around that bottom. So let's take a look at how that looks over the monthly
Leanne Mamchur (07:00):
Figures, cuz the last one was the daily figures.
Leanne Mamchur (07:02):
And so this is the
Leanne Mamchur (07:03):
Monthly figures. And so you can see very much that Bob right at the very, oops, sorry,
Leanne Mamchur (07:09):
I can never get this pointing right, but right at the very end here you can see this bobbing. And so it's bobbing back and forth. And so you're going to see some more volatility. Equities. The hardest hit areas surprisingly, are quality companies. So our managers are investing in good quality, low to no debt companies, resilient earnings, high amounts of cash, and those companies have come off. But during a recession, that's where the companies should be resilient because they have these types of things, they're great businesses to own, and the great businesses are down, which represents a buying opportunity. The earnings have not yet indicated that recession is here. So you expect to see earnings reducing. And so it's more difficult to maintain those high earnings as the growth in the economy continues to slow. Earnings tend to be on a leg, you have to remember.
So then if you look back to 2009, by the time the earnings troughed in May of 2009, the market had already climbed 35%. So you cannot wait for those earnings to come back. But we are anticipating earnings to be dropped or analysts to revise their predictions down. So lots of the damage is already done. The price damage, typically we're seeing a decrease or a down of about 28%. Now we're already down 25% in the s and p 500 down markets typically last one to one and a half years, and we're around 70% already into that as well. Markets now are pretty much down to fair value again, which represents a very nice upside. And your upside has been increasing. There's opportunities here. There's opportunities comings. So when we're start seeing those earning misses, that's maybe going to be the last leg of this downturn. And then what's going to happen is the things that were beat up first, like small companies and mid-cap companies and perhaps even private equity, you're going to see that coming out.
So that might represent an opportunity to get into those market classes, and that's where your portfolio management team comes in as far as making those calls or making those tilts in the direction that we anticipated going. All right, so confidence. I was talking about consumer confidence a little bit earlier. I had a chart. There's lots of damage being done, which means that many people are just sitting in cash and there's a lot of inflows out right now of investments and into cash as well as GICs. Neither one of these asset categories keep up with inflation. So it's not really a strategy for long term success, but it is sometimes they're very useful to make you comfort, comfortable so that you can stomach what's to come. And so then changing during these times wouldn't be necessarily what I'd recommend, but we're seeing some fun flows in there.
Investors sentiment or the feelings of investors are really low. And when all hope is lost and your optimism is down, this can be an indicator that's preceding a turnaround. Equities continue to be the best bet against inflation or an inflation hedge. Now turning our attention to fixed income in credit markets, diversifying benefit of fixed income. So when you have a diversified portfolio, you'll have alternatives. You'll have your equities in various asset or various geographies as well as fixed income. And fixed income should operate opposite to your equities. When the market is like, let's say the market is going down in your equities, your fixed income could, should keep your portfolio afloat. This is what failed in 2022. And pretty much in fixed income, it's been the worst market in the last 40 years. It's erased all the gains since 2018. But silver lining going forward, the outlook is quite good.
Bond market is very much oversold and we're seeing some opportunities here. Now, one thing to keep in mind is duration or the length of those bonds. It's not really anymore the time to be short. Your duration and duration, again, it's just the length of the bonds. But because we're anticipating that your rates are eventually going to be dropping, we are being patient in adding high yield exposure because we are not yet seeing the spreads widening. So as they're still at long term averages and during a recession, we should see those spreads increasing. So we are anticipating a little bit more increase. And so we're being patient in adding into the high yield space at this time. So onto interest rates. So both the Federal Reserve in Canada and the Federal Reserve in the US or the Canada Yeah, Federal Reserve, basically they both increased by different amounts, but they both had increases this month.
And so Canada increased by 0.5. Now, the market consensus for this increase was 0.75. And so this was a nice little surprise and kind of pre from all those surprises to the negative. So it was a little bit of a surprise to the positive. The US Fed or the Federal Reserve grows by 0.75% and the market is now assuming a peak of over 4.25%. And so the long run rate though in the US is expected to land around 2.6%. Both are expected. Both reserves are expected to continue to increase rates over the next 12 months. Canada, we're only anticipating another 0.75 perhaps, and in the US just a tad bit more at 1.5, but we're gonna start to see those cuts as they get inflation under control, we're gonna start to see those cuts. Higher rates impact businesses and consumers. That's the point. They're trying to get inflation and trying to slow down the economy.
And so then when businesses and consumers are now buying things higher rates are impacting, the prices are impacting the cost of borrowing. And so it's more expensive for consumers and they just have less spending ability because they're, all of their debt payments are higher, and so they're going to likely cut back on their spending. Inflation. We are expecting around 4% by mid next year. Indicators are suggesting the worst has passed, but it's sticky, it's stickier than we would like it. So interestingly though, the, there's a labor shortage going on in lower paying jobs and we're not seeing wages increase to size the disconnect in the lower paying jobs. So there is this continued disconnect as there, there's more demand for the labor supply that exists. And so normally price would be that corrector, but it's not working like that. Partly due to businesses outlook. They just don't the or they just don't want to have that increase because it's harder to take away a wage increase.
And this is actually helping inflation. This is positive for inflation and also because typically a wage increase in the lower income area tends to translate into increased spending. So this is a positive for inflation. So this month also, I attended the Calgary CFA Society's annual Oil and Gas Forecast Breakfast, and frankly, it was quite positive sentiments. Companies look very disciplined in their spending. There's lots of dividends as well as lots of share buybacks, and they're really quite flush with cash comparatively to where they were in the past. There's a possibility though, that oil and gas continues to be used as a weapon of war, and the energy security will increase as we move forward in importance. There might be a premium stuck onto these assets for geopolitical risks. Okay. Oh, there's another inflation slide. I'm just gonna check down here. Not seeing wage. This is, you know what?
This is the repetitive slide, so my apologies. One mistake there. Okay, so onto tax considerations, trust reporting rules. So this was an article that I read and it was by McLennon Ross, and basically it was written on October 11th, and they pointed out three concerns that they have with some of the proposed changes to taxes. So I thought I would share these concerns with you. Now, trust reporting rules is something that we have been talking about a little bit in these sessions, but beginning in 2022, most trusts need to file regardless of whether they're active or not. And the trust returns are due at the end of March. There's going to be additional disclosures on the settlers, on the beneficiaries addresses, phone numbers, all these types of things that you never used to have to do that. Now you're going to have to, and also caught in this, and I mentioned this last time, is bear trusts.
Bear trust is where potentially you might not even think that you have created a trust. And examples of this is a parent puts a child joint just for convenience. And so say for instance, they're an elderly parent, they want to avoid probate costs or they want to just allow like they're in an old folks home and they want their son to be able to go to the bank and do things on their behalf. And so the parent puts the child on joint on the account with the clear intention that the account is meant for the parent. And so then in essence, you created a bear trust. Another example is a parent co-signing on an asset. So a child qualifies for financing. That would never cross my mind, but that in fact is a bear trust as well. And also there's this mismatch timing of commercial transactions.
So sometimes the payment is made, but then the title, there's a delay in the title transfer. And so then in between those periods of time, you could in fact have a bearer trust. And the problem is, is now bearer trusts have the same reporting requirements as all the other trusts. So ordinary, ordinary people may inadvertently create a trust and failure to file a trust return may result in a $2,500 fine, which is no small potatoes. The next one that they pointed out was reportable transactions. Now the reportable transactions, this is where you have a transaction that CRA is mandating that you have to report it. And so this is even the advisor or whomever knows about the transaction, they have an obligation to report it. Now they have increased the definition of these and they have increased it to quite a broad definition and have increased the number of transactions.
For example, avoiding the deemed disposition on trust property such as indirectly transferring property to another trust. That could be a strategy, but this is something that's quite aggressive and needs to be reported. There's very large penalties for taxpayers even up to a hundred thousand and their advisors and their promoters for strategies like this. So you have to be really, really careful and maybe even getting second opinions on it because CRA is having these types of things on their radar are right? And so there's also an expansion, and this is the third one, but this is an expansion to the general anti-avoidance rule. So GAR compliance. And so this is basically trying to get it whereby, so this is transactions or what have you, or tax reporting that is in fact compliant if you look at the letter of the law, but yet it's deemed to be kind of on the abusive side or on the aggressive side.
So some of the changes proposed is that the tax benefit definition to situations of future benefit start. So the tax benefit definition is expanded to include deferral situations. So currently at this moment it is GAR can only apply if you have a tax benefit and if it's a deferral, you haven't actually realized your tax benefits yet. But this is a proposed change. The other one is that it may also apply when taxpayers elect to minimize taxes by choice. And so this is a very tricky one because sometimes you have these strategies put in place so that you can minimize your taxes. You could either pay a dividend or you could pay a salary, that type of thing. And so then this is a very tricky one. And finally, the primary purpose now before for GAR to apply, it had to be the primary purpose was to have tax avoidance.
Now they're looking at changing it to only one of the purposes. So it could be multiple purposes, but one of the purposes was to avoid taxes. Now, all of this has to do with taxes. And of course, I'm not an accountant, and so I would urge you to talk to your tax professional if you feel as though any of these might impact you. All right, So overall, basically all of these are basically increasing the uncertainty of tax filing. And actually one thing that I should put that was in the article in the notes was that the caveat for the trust rules and when it does not apply is lawyer general trust accounts, graduated rate estates. And so when somebody passes trust, that exists for less than three months. So that could actually solve the business transaction one if it's less than three months, and also trust that hold less than 50,000 in deposits.
And so some of those joint accounts that are smaller in size, they might not get caught up in this. And so I would urge you to talk to your tax professional about any of these that you think might come across your plate. So that was it for my monthly debrief. But before we get into the disclaimer, I just wanted to share my Halloween pictures because of course, Halloween was during this period of time. And so I had to admit I really liked the makeups on my oldest daughter and she just loved the fake blood