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The 12 variables used to forecast Recessions are currently “signalling caution,” says Jeffrey Schulze, CFA.
Speaking Wednesday in Toronto at Franklin Templeton’s mid-year outlook, Schulze — Managing Director, Head of Economic and Market Strategy for Clearbridge Investments — told financial advisors and media that as of May 2024, the 12 variables he tracks have “historically foreshadowed a looming recession … the overall dashboard [shown below] is currently signalling caution.”
Three indicators — Job Sentiment, Money Supply and Yield Curve — have been flashing red since the end of 2023 and continue to be, as you can see in the above chart taken from a presentation made available to attendees. The only green light is Credit Spreads, while the other eight — which include Housing Permits, Jobless Claims and Profit Margins — are all a cautionary yellow.
However, stock valuations do not appear to be too stretched at present. The composition of major stock indexes, such as the S&P500, support higher P/E ratios, Schulze said. “Less-volatile defensive and growthier sectors are typically rewarded with higher multiples. These groups make up a near-record share of the S&P 500 today.” As you can see in the chart below and in the higher purple line of the graph, these Defensive stocks include Tech, Consumer Staples, Utilities, and Health Care.
However, Schulze did note a “troubling” record-high concentration of the largest S&P500 names by market weight. As you can see in the chart below, the five largest-cap components now account for more than a quarter (25.3%) of the index, which is “the highest levels in recent history … While this dynamic can persist, history suggests that a reversion to the mean will eventually occur with the average stock outperforming in the coming years.”
In fact, the combined weight of the so-called Magnificent 7 tech stocks now exceeds the combined market weight of the stock markets of Japan, the U.K., Canada, France, and China!
However, “after behaving fairly monolithically in 2023, the performance of the Mag 7 members have diverged substantially so far in 2024,” Schulze said. A slide of the “Divergent 7” showed Tesla down 28.3% and Apple flat, while the others were higher, led by the 121.4% surge in the price of Nvidia this year.
A key driver of the Mag 7 outperformance has been superior earnings growth, Schulze said, but “this advantage is expected to dissipate in the coming year, which could be the catalyst for a sustained leadership rotation.”
Companies that grow their dividends are overdue to start outperforming. “Over the past year, dividend growers have trailed the broader market to a degree rarely seen over the past three decades … Past instances of similar underperformance have been followed with a strong bounce-back for dividend growers.”
A positive for markets is the “copious” amount of cash sitting on the sidelines and being readied to deploy on buying stocks. After the October 2022 lows, investors flocked into money market funds with a net increase of US$1.5 trillion, or 32%, Schulze said: “Should the Fed embark upon its widely anticipated cutting cycle later this year, investors may reallocate. This represents a potential source of upside for equities.” Continue Reading…
Note that while the full 2500-word article at MoneySense is aimed at Seniors, it is not technically my monthly Retired Money column, which is typically shorter. And this short summary here at Findependence Hub is only a third as long: hopefully enough to entice readers to hop over to MoneySense for the full article.
So below, I offer only a small fraction of the full column and some of the major links. This is an important topic both for seniors and those who hope to be financially independent seniors one day, so do take the time to click on and read the full article at MoneySense.ca, linked above.
It was a bit of an eye opener researching and writing this piece but it appears to be the unfortunate reality of the technological world we all now inhabit. It’s overwhelming and the situation is unlikely to improve any time soon.
In the past MoneySense has covered such topics as getting scammed through e-transfers, phishing, crypto schemes, identity theft and more. There’s financial fraud in general that targets bank accounts, credit cards and potentially every other aspect of your financial life. My feature attempts an overview of most of them from a Canadian perspective, with a few new scams I hadn’t known about before researching this article. (Example: “smishing,” which is sort of phishing in the form of text messages on smartphones.)
A.I. is exacerbating the spread of Frauds on all platforms
As I note at the top of the full column, it’s a sad fact that the rise of Artificial Intelligence (A.I.) has exacerbated this problem. While anyone can be prey for technology-linked schemes to separate you from your money, seniors need to pay particular attention, seeing as they tend to have more money to lose and less time to recoup it.
According to Equifax, Fraud is the top crime perpetrated against older Canadians. Sadly, many seniors fail to report these crimes to the police because they feel shame or embarrassment about being duped by scamsters.
Identity Theft
Identity theft is particularly worrisome for seniors, if not the rest of us. As Equifax puts it, “a scammer may try to get information such as a bank card or personal identity number, credit card number, health card number, or a driver’s license or Social Insurance number. They can then apply for credit cards, take out loans or withdraw funds in the person’s name.”
Inflation continues to be the biggest near-term driver for equity markets, given its influence on central bank decision-making regarding interest rates. Inflation rates have moderated from their peak levels; however, they remain above the 2% targets set by the Bank of Canada (BoC) and the U.S. Federal Reserve (Fed).
U.S. and Canada Inflation
As of April 30, 2024
Equity markets entered 2024 with six to seven U.S. interest rate cuts priced in over the course of 2024, with the first cut expected in March. Clearly, that did not happen. Both central banks have remained on hold, which has contributed to higher rates across the yield curve. That number has since moderated to only three cuts, and the timing of the first cut has now been pushed out to June in Canada and even later in the United States.
The effect of “higher for longer” interest rates has been particularly painful for interest rate-sensitive market sectors such as utilities and communication services. Nonetheless, pockets of the market that were expected to continue to grow have continued to advance, undeterred by the yield curve shifts.
Buoyed by hopes for a pivot in monetary policy as inflation trended closer towards the central banks’ targets, Canadian equities had a strong start to the year, although they paled compared to the ongoing boom in U.S. equities, where a large portion of the gains were derived from mega-cap information technology and related names with less representation in Canadian markets.
Mind the lag
Although decelerating, the economy continues to show sufficient resilience, with customer spending remaining robust since the reopening of economies after the global pandemic-induced shutdowns. Fiscal stimulus has moderated since the immediate aftermath of the pandemic outbreak; however, fiscal policy continues to operate at odds with monetary policy. Labour strength and wage gains have further reinforced this view, fuelling fears of lingering inflation and the potential for a higher-for-longer rate environment. Continue Reading…
The term “wellness” — including emotional, physical, and mental wellness — is finding its way into more and more conversations these days. However, there’s one aspect of general wellness that is often overlooked despite its significant impact: financial wellness.
Given the current economic environment, financial concerns among Canadians are one of the largest sources of stress. According to a recent study by FP Canada, forty-nine per cent of Canadian adults have lost sleep because of financial worries, which may impact their overall wellness.
Just like physical and mental wellness, there is no one formula to create financial wellness for everyone.
Luckily, there are strategies we can all take to improve our financial wellness. It starts with acting in the present while planning for the future. The path to financial wellness is a personal journey, and a qualified financial advisor can help you take the first step and make important progress.
Prioritizing financial wellness for today
Before working on your financial wellness, it’s important to ask, “What does financial wellness look like for me?”
It can be as simple as creating (and sticking to) a budget or making a realistic and actionable plan to pay off your current debts. Your path to financial wellness can even begin by getting a better understanding of a familiar term: tax.
Whether we like it or not, tax is inevitable, and it impacts nearly every financial decision we make. Therefore, gaining an understanding of your tax situation can provide you with confidence and can help improve your financial wellness.
Depending on your circumstances and stage of life, contributing to your Registered Retirement Savings Plan (RRSP) or First Home Savings Account (FHSA) are two options that may help you prepare for your future, while also reducing your taxable income, meaning you’ll get taxed less come tax season.
Being knowledgeable about the different types of accounts (including RRSPs, FHSAs and Tax-Free Savings Accounts), as well as tax deductions and tax credits available to lessen your tax liability, can also help build financial knowledge and reduce financial stress.
Planning financial wellness for the future
Part of financial wellness is proactive planning so you can feel comfortable and confident in your future. Saving is an important part of building a strong financial future, but financial wellness goes beyond that. Continue Reading…
In the quest for financial stability amidst major life milestones, we gathered wisdom from Finance Experts to CEOs, compiling twelve diverse strategies.
From establishing a safety net to applying the 50-30-20 budgeting rule, these professionals share how they’ve successfully built and maintained emergency funds while pursuing family formation and homeownership.
Establish a Safety Net
Adopt Frugal Living Practices
Set Achievable Saving Goals
Automate Savings Allocation
Implement Disciplined Saving
Live Below Your Means
Reduce the Temptation to Spend
Diversify Income with Side Hustles
Maintain Emergency Fund While Home Owning
Strategize with Automatic Transfers
Manage Spending, Build Runway
Apply the 50-30-20 Budgeting Rule
Establish a Safety Net
As a seasoned finance expert, I understand the critical importance of establishing and maintaining emergency funds, especially when navigating major life milestones like family formation and homeownership. Here are some strategies I recommend for achieving financial security while pursuing these goals:
Building the Safety Net: We suggest a reserve that equals three to six months’ worth of living costs, which acts as a buffer for matters like falling sick, fixing a car, or losing employment. You can begin by making small deposits into a high-interest savings account and then building on it gradually. Save everything!
Goal-Oriented Saving: After setting up an emergency fund, the next step is to save towards your dream house. Consider putting money into Fixed Deposits or Recurring Deposits, as they have guaranteed returns and help inculcate discipline, too. Remember to stay consistent! — Arifful Islam, Finance Expert, Sterlinx Global LTD
Adopt Frugal Living Practices
My husband and I have built and maintained emergency funds by continuing to employ financial tactics we had to use early on in the pandemic, when COVID-19 lockdown-related issues resulted in his salary being temporarily reduced and my hours being cut back.
We were adamant about the need to continue adding even a small amount to our emergency fund since we had purchased a home only the year before. Thanks to friends’ and family’s experiences, we were well aware of the ever-present chance of a home-related emergency.
We decided on a two-pronged approach: We lived beneath our means by greatly curtailing our travel, cultural, and dining-out budget, finding free and low-cost alternatives to enjoy closer to home, as well as cooking new items at home.
We also became savvy consumers. We started comparison shopping for budget items, both big and small. Our biggest savings came from comparing car and home insurance companies: When we switched to a new company, we saved over $700 a year.
The strategy I followed for building my emergency fund took a decent amount of time. My plan was to cover three to six months of living costs. I was well aware that saving that much money would take time. So, I started with simple goals like saving $10 a day.
I somewhat understood that the savings goal depends on income and expenses. So, I tried to cover essential expenses first, rather than transferring all my income to savings. I paid off costs such as housing, utilities, transportation, food, and credit-card/loan payments before anything else. Then, I added up my monthly spending and multiplied it by six months. I got the estimated total amount I need to save as an emergency fund.
I decided to keep my funds in a high-yield savings account. These types of accounts are convenient to access and offer good interest rates. As a result, your funds will grow gradually. However, I suggest choosing banks and credit unions insured by the National Credit Union Administration (NCUA) or the Federal Deposit Insurance Corporation (FDIC).
Last but not least, it is better to use a direct deposit service to transfer your money into your bank or savings account. Contact your bank and activate the direct deposit service. It would be wise to split direct deposits and put a certain amount in your emergency fund and the rest in your checking account. — Loretta Kilday, DebtCC Spokesperson, Debt Consolidation Care
Automate Savings Allocation
I’ve always prioritized building an emergency fund because it’s crucial for my family’s financial security and peace of mind. Early in my career, I adopted a simple yet effective strategy: automate and allocate.
I set up automatic transfers from my business income to a separate high-yield savings account every month. Initially, I aimed to save at least six months of living expenses, which I gradually expanded to cover an entire year.
Treating this fund as untouchable for everyday expenses became a safety net that allowed my wife and me to comfortably pursue family goals like buying a home. To balance this security with growth, I also invested in low-risk, highly liquid bonds and money market funds for a portion of the emergency fund. — Michael Sena, CEO and Lead Analytics Consultant, Senacea Ltd.
Implement Disciplined Saving
Building and maintaining an emergency fund has been a cornerstone of ensuring my family’s financial security, especially as we pursued significant goals like family formation and homeownership. From my experience, the key has been a disciplined, proactive approach to saving, paired with a clear understanding of our financial priorities and potential emergencies.
Initially, I established a strict budgeting process where setting aside money for an emergency fund became a non-negotiable monthly expense, similar to mortgage or utility bills. I targeted saving at least three to six months’ worth of living expenses, a common benchmark that provided a safety net capable of covering unexpected events such as medical emergencies or job loss.
To stay disciplined, I automated the transfer of funds from our checking account to a high-yield savings account specifically designated for emergencies. This automation ensured that the savings occurred without requiring active management on my part each month, reducing the temptation to skip or divert these funds toward other uses. Choosing a high-yield account also helped the fund grow faster through interest, maximizing the efficiency of our savings.
As our family grew and our financial situation evolved with goals like buying a home, we reassessed our emergency fund needs regularly. For example, when planning for homeownership, we increased our emergency savings target to account for potential home repairs and maintenance, which are typically more costly than many renters anticipate. This adjustment was crucial in maintaining our financial security after transitioning to homeownership.
Throughout these phases, maintaining open communication about our financial goals and progress has been vital. Regular discussions with my spouse ensured that we were both aligned on our savings goals, understood the reasons behind them, and could track our progress together. — Michael Dion, Chief Finance Nerd, F9 Finance
Live below your Means
The secret to building wealth is living below your means. You need to be clear on the income coming in and the expenses going out. Pay yourself fi rst. The results of compound interest are powerful.
As your income increases, lifestyle inflation creeps in. Lifestyle creep occurs when an individual’s standard of living improves as their discretionary income rises and former luxuries become new necessities.
Avoid the urge to spend more as you make more. Instead, save more. Invest the difference. As you get a raise, give yourself a raise. Increase your 401(k) contribution. Add to your emergency fund. Your future self will thank you. — Melissa Pavone, Director, Investments CFP, and CDFA, Oppenheimer & Co. Inc. Continue Reading…
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