As the days get shorter and the air gets crisper, we're gearing up for the upcoming U.S. election, now less than 30 days away. In this edition of our monthly newsletter, we dive into corporate investing strategies under the new tax rules from the Federal Government, offer tips to navigate market volatility, and share some fantastic fall activities to enjoy. Let's make the most of this season together!

Monthly Markets Report

Key Insights

September, typically a challenging month for equity markets, turned out to be positive for North American equity investors. The Bank of Canada (BoC) cut rates for the third consecutive time, while the U.S. Federal Reserve (the Fed) lowered the Federal Funds Rate for the first time since 2020, by a notable 50 basis points (bps), signaling potential further rate cuts.

The third quarter saw significant gains across most asset classes, with only a few exceptions like energy, food, and related assets. Despite a mid-summer growth scare, markets rebounded strongly due to improved data and decisive actions from central banks. Major equity and bond markets performed well, with notable gains in the S&P/TSX and S&P 500.

Let’s dive into more details:

Canadian Economic Insights and Outlook:

Canada’s inflation rate fell to the Bank of Canada’s 2% target in August. Today, StatsCan released that inflation in September fell further to 1.6%. GDP grew by 0.2% in July. Growth is driven mainly by the public sector, with private economic activity remaining weak. Service sector has been leading the growth, however, construction and transportation sectors declined. The recession risk in Canada has increased due to a significant rise in the unemployment rate, though mitigated by surging immigration. All of these data increase the likelihood of a larger rate cut by the BoC in their next meeting, scheduled for Wednesday of next week.

U.S Economic Insights and Outlook:

The U.S. Federal Reserve began its monetary easing with a 50-bps rate cut, aiming for a “soft landing” to lower inflation without causing a recession. Retail sales rose in August, unemployment dropped to 4.2%, and inflation remained sticky with higher-than-expected increases in consumer and producer prices. The economy grew at an annual rate of 3.0% in Q2, driven by consumer spending, business investment and annual wage growth increased by 4% year-over-year. The strength and resilience of the US Economy is creating doubts over the Federal Reserve’s easing policy strategies. US Recession chances downgraded from 40% to 30% over the next 12 months. Key factors include improved economic indicators and reduced inflation pressures. The US Presidential election race is close, with low odds of a single-party sweep, suggesting continued legislative gridlock and market stability.

International Economic Insights and Outlook:

Eurozone: Inflation fell to 1.8%, below the ECB’s target, indicating a potential end to the inflation struggle. Mixed economic signals from regions like Germany and Japan, with challenges in industrial sectors and energy transitions creating market volatility.

China’s Economic Stimulus: In response to declining economic growth, China has introduced a stimulus package aimed at lowering borrowing costs and supporting the housing sector. While this may offer short- to medium-term opportunities, long-term challenges remain.

Geopolitical Tension: Geopolitical tension in the middle east is resulting in major uncertainty in the Oil and equity markets overall. Saudi Arabia announced an increase in oil production starting December, adding downward pressure on crude prices. This move could further depress gas prices and alleviate inflation concerns.

Rate Cut Implications for Portfolios

Lower interest rates in Canada and the U.S. should boost corporate earnings and equity markets. Canada's S&P/TSX Composite Index (TSX) could benefit significantly, with 40% of its equities being interest-rate-sensitive. In contrast, these sectors make up only 20% of the U.S. S&P 500 Index (S&P), suggesting a smaller impact from falling rates in the U.S.

Canadian interest-rate-sensitive equities offer attractive dividend yields, which may draw income-seeking investors away from U.S. equities as bond yields drop. Despite some signs of weakening consumer strength, the U.S. economy remains relatively strong with a 4.2% unemployment rate, better than Canada’s 6.6%. This strong job market supports consumer spending, creating a positive backdrop for U.S. equities as year-end approaches.

Portfolio Strategy: Monitoring Opportunities

As mentioned in our previous Perspectives, given the current economic uncertainties, we are maintaining a defensive portfolio posture. This includes focusing on quality and fundamentals and maintaining healthy diversification across asset classes, industries, and regions.

Opportunities & Trends we are closely monitoring:

US Equities Historical Performance during Easing Cycles: Research shows that U.S. markets typically see strong gains following the first Fed rate cut, with average annualized returns of 20% within 12 months. Key sectors include Consumer Staples, Healthcare, and Tech.

Fixed Income: Anticipation of deeper interest rate cuts makes high quality bonds attractive. Emerging Market Debt is also shows potential for outperformance.

Equities: A cautious approach with a tilt towards defensive and Value-oriented holdings is recommended, considering September’s volatility and potential buying opportunities.

Technology and Broader Market: Earnings growth is becoming more broad-based, with sectors like Health Care and Financials showing strong performance alongside Technology.

Valuation Opportunities: Small and mid-cap stocks are currently undervalued compared to the S&P 500, with forward P/E ratios of 0.80x and 0.78x respectively. This undervaluation has persisted for three years, suggesting potential for growth.

Technical Analysis: Equity markets are showing strong performance indicators, with key indices breaking out of consolidation patterns and seasonality providing a tailwind into early 2025. Top sectors include Industrials, Financials, REITs, Utilities, and Healthcare.

Market Performance – Sept. 30, 2024
Index	1 Month	3 Months	YTD	1 year	3 Years	5 years
S&P TSX	3.2%	10.5%	17.2%	26.7%	9.5%	10.9%
S&P 500	2.20%	4.60%	24.90%	36.00%	14.30%	16.40%
NASDAQ	2.70%	1.30%	23.90%	37.20%	10.30%	18.30%
MSCI EAFE	1.0%	6.0%	16.10%	25.00%	8.30%	9.2%
MSCI Emerg. Mkts	6.80%	7.50%	19.90%	26.20%	2.90%	6.60%
MSCI World	1.70%	4.70%	20.1%	30.1%	9.60%	11.7%
FTSE Canada Bond Univ.	1.9%	4.70%	4.30%	12.90%	-0.13%	0.50%

Click here to access all market returns.

Investment Feature

In this section, we educate the reader on different investments. We discuss and elaborate each idea over a couple monthly editions. This section is not to be taken as specific investment advice.

Structured Notes: A Fascinating Investment Idea!

As discussed earlier, there are two broad types of Structured Notes:

Types of Structured Notes:

1. Principal Protected Notes (PPNs)

2. Principal At-Risk Notes (PARs)

Following our discussion on Principal Protected Notes, let's explore the fascinating world of Principal At-Risk Notes and how they can help you navigate the ever-changing market landscape.

Why Choose Principal Protected Notes?

Principal At-Risk Notes are innovative financial instruments that offer a predefined level of principal protection while providing opportunities for enhanced income and growth. These debt instruments are linked to an underlying reference asset, such as an equity index or stock portfolio. Here’s why they might be right for you:

• Yield Enhancement: Potential for higher returns compared to traditional investments.

• Return Potential: Increased return opportunities linked to diverse assets.

• Contingent Principal Protection: Some level of protection at maturity.

• Diverse Reference Assets: Access to a broad range of underlying assets.

• No Currency Exposure: Avoid direct currency risk if the asset is foreign-denominated.

• Liquidity: Potential to sell through a daily secondary market.

Investor Advantages

These notes are ideal for investors who:

• Want to enhance their long-term equity strategy and can handle some downside risk.

• Seek innovative fixed-term investments that are less correlated with traditional portfolio risks and returns.

• Desire upside participation linked to various asset classes in different market scenarios.

• Aim to receive interest payments tied to the performance of underlying assets.

Ready to explore how Principal At-Risk Notes can fit into your investment portfolio? Buckle up and let's dive in!

Structured Notes can offer varying levels of principal protection, categorized as follows:

Barrier Notes: These notes protect your investment up to a pre-set "Barrier Level." If the market drops but stays above this level, your principal is fully protected. For instance, if a note has a -25% barrier and the market drops 20%, at maturity your principal is protected. But if the market declines 30%, your return would be -30%.

Buffer Notes: These notes offer protection up to a "Buffer Level." If the market falls but remains above this buffer, your principal remains intact. For example, if a note has a -25% buffer and the index drops 20%, at maturity your principal is protected. If the index declines 30%, your return would be -5%, representing the loss beyond the buffer.

Key Takeaway

Structured notes provide additional diversification to an investor’s portfolio. While GICs give full downside protection, but take away a lot of the return potential, Structured Notes provide some downside protection to investors without compromising much of the returns. In fact, there have been issues of structured notes which enhanced market returns and can also provide attractive monthly yields, all while providing some downside protection. For instances, there have been issues of structured notes that provide monthly coupon of over 10% annualized and there have also been issues that provides annual interest payments of 20%, all contingent to the terms of the structure. Structured Notes can also be looked as an alternative investment solution and is highly flexible and customizable according to an investor’s needs and preferences. Structured Notes are just another arrow in our quiver that helps our efforts to provide bespoke investment solutions to our clients.

CIBC Smart Advice Feature

Thinking of gifting a down payment? Here’s what you need to know!

This month’s Smart Advice Feature, we discuss gifting funds to children to help them with home purchases.

Learn why gifting down payments to help younger people buy homes is on the rise in Canada.

Here are four key tips from CIBC to help you navigate this process:

• Understand the Rules: Ensure you know the legal requirements for gifting a down payment, including documentation and tax implications.

• Communicate Clearly: Make sure both parties understand that the money is a gift with no expectation of repayment.

• Consider the Impact: Be aware of how the gift might affect the recipient's financial situation and future borrowing capacity.

• Plan Ahead: Start the process early to ensure all paperwork is in order and to avoid any last-minute issues.

Read the full article here.

Financial Planning Feature

Corporate Investing vs Personal Investing.

As you know, the capital gains rules have changed and seems more penalizing for professionals and investors who invest within their corporations. This raised many questions on whether it still makes sense to invest corporately. Let’s investigate the details!

New Tax Rules:

• As of June 25, 2024, the capital gains inclusion rate requires corporations to include two-thirds of their capital gains as taxable income.

• For individuals, only half of the first $250,000 of annual capital gains is taxable.

Investment Decisions:

• Business owners need to choose between investing after- tax corporate income within their corporation or withdrawing it, paying personal taxes, and then investing personally.

• The decision impacts the effective tax rate on investments and the overall financial strategy of the business owner.

Below article conducts detailed research and found there are still plenty of advantages to invest through one’s corporation. When business income that’s earned in your corporation is used as starting capital for investment, you may ultimately have a lot more cash in your pocket with corporate investing than personal investing, due to the lower tax rates on corporate business income that leave funds for corporate investing. Please consult us or your Financial Planner and Accountant to review your own situation.

Read the full article “Just leave it! Corporate versus personal capital gains investing."

Fun Feature

As the vibrant city of Toronto gears up for November, there’s no shortage of exciting events and activities to look forward to. From festive events and cultural experiences to cozy indoor fun and scenic outdoor adventures, the city has something for everyone. We found this great article that details all the events happening in Toronto and thought it would be great to share with you so that you can plan a fun time with your loved ones.

Read the article “20+ Things To-Do This November 2024” .

Pharus Corner

The Pharus Corner is a special feature with the purpose to keep you apprised of relevant updates on our Team, what’s going on in our lives and about upcoming events that we wish to host for you. In this issue, we will show a recent example of a client situation and how a simple solution made a great difference.

Mortgage Life Insurance Discussion

Last month, while complete a holistic financial plan for a client, we found out that the couple had a Mortgage Life Insurance for $750,000 on a $900,000 mortgage and paying a monthly premium of $424.

The couple also has 2 young children and are both self employed professionals. Since they are young and relatively healthy, we were able to offer them a $1,000,000 Term Insurance policy to each of them, for a total of $2,000,000 at a monthly premium of $198.

As a result, not only is the couple saving over $200 per month, they also have the right coverage to not only cover their liabilities but also the future of their family and children.

This prompted us to write a detailed article on Mortgage Life Insurance vs Term Insurance.

Read the full article “Mortgage Creditor Insurance vs. Term Life Insurance: A Comprehensive Analysis”.

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