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…
For all of the headwinds and bad press for the Canadian economy, you’d think that the stock market was in a tailspin. But surprisingly, that’s not the case. The TSX Composite and TSX 60 are threatening to make new highs, eh. That’s as U.S. stocks make new high after new high. Given that, balanced portfolios and all-in-one asset allocation ETF portfolios are sailing. Canadian stocks are better than you think.
I am back after a week off. Late in March, I was driving to Florida and I had to change my Sunday morning travel plans, leaving early from Knoxville to make it to Clearwater for fun in the sun and taking in some Blue Jay spring training games.
My $2500 Jays Jersey – true story
Here’s the poster child for poor-performing big-dividend Canadian stocks.
A good summary of the struggling Bell Canada (BCE). Investors might have to wait 2 or 3 years to see that debt under control – and the dividend covered. Rate cuts would/will help the cause. Bell has been a victim of poor to unfair regulation, increased competition and higher borrowing costs.
Even perma Bull Brian Belski of BMO is cautious so say the least. From a Globe & Mail piece:
“We believed sentiment was resoundingly negative and becoming worse. As we approach the end of the first calendar quarter of 2024, we maintain the view that analysts and investors remain overly cautious – fundamental metrics such as earnings, valuation, and operating performance in several areas are showing definitive signs of troughing.
There has been a lot of negative sentimenet towards the Canadian economy, and we likely transfer that emotion to our opinion of the Canadian stock market.
And while the big-dividend space in Canada has been struggling, or at least lagging, the TSX Comp and TSX 60 is on a very nice run. Here are the 5-year returns.
Quite often, stocks like to climb that ‘wall of worry.’ That’s why market timing simply does not work. The markets can have a mind of their own, and they are forward looking. It would be like planning your day’s activities based on next week’s weather forecast.
That’s a total return of over 60% over the last 5 years, and 118% over the last 10 years. Hardly struggling.
Vanguard VDY vs the market
And while the big divs are struggling thanks to the higher rate environment, this long-term chart shows investors have still been rewarded, handsomely.
The returns are almost identical from VDY inception, just over 10 years ago. And surprisingly, from 2020 (when the world changed with the first modern day pandemic that unleashed an inflationary period) VDY is outperforming the market.
There may be another lesson here in consistency and staying the course. That said, readers will know that I am a big fan of the broader Canadian Wide Moat stock model, compared to an exclusive big-dividend model. And look to the more-moats option that includes lower-yielding grocers, railways plus picks of Brookfield and Couche-Tard.
In ETF form the wide moat model follows closely to the BMO Low Volatility ETF – ticker ZLB. That may be Canada’s best option for covering the Canadian space. It has much more sensible sector allocation, and that has contributed to the market beat. I promise to update the returns for the ZLB post shortly.
Another low-volatility stock model
Norman Rothery tracks some wonderful Canadian portfolio models at the Globe & Mail. Here are the current holdings for his market-crushing low-volatility stock portfolio.
ATCO, BCE, Bank of Nova Scotia, CN Railway, Canadian Utilities, Dollarama, Enbridge, Fortis, Great-West Lifeco, Hydro One, Intact Financial, Metro, Power Corp, Pembina Pipeline, Rogers Sugar, Royal Bank of Canada, Sun Life Financial, TD Bank, Waste Connections, TMX Group.
That is a very good stock mix, and with lots of overlap to the wide moat and BMO Low Volatility models. I will be adding Waste Connections as a “pick” for the wide moat model.
More Sunday Reads
At MoneySense Jonathan Chevreau is getting ready to convert his RRSP to a RRIF. That’s mandated of course, at age 71. A Canadian then has to start receiving payments at age 72. If you miss the conversion, your RRSP will be liquidated and you’ll likely face a massive tax bill. Jon provides a very good RRIF overview in that post. 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…
Becoming debt free is, for many people in the country, virtually a dream. It’s basically impossible if we’re barely living from paycheck to paycheck, and the debts we accumulate aren’t always unavoidable. However, there are definitely a few things that we can do as individuals to reduce our debts and eventually become debt-free.
In fact, it’s a life goal for many people to just get rid of their debts. Once that happens, they can finally enjoy a life of financial security and be more free with their hard-earned money. So without further ado, let’s take a look at some simple life changes you can make to become debt-free.
This all starts by actually looking at your incoming and outgoing money and creating a budget. Start by looking at what you spend your money on, where you can cut down, and also look at how much you’re paying in subscription fees. A lot of people bleed money because they’re not aware of how much they’re actually spending, and this can be an incredibly dangerous habit.
Aim to actually pay off your debt
Lots of people will see the long debt repayment terms and just let it go. They’ll wait several years just to pay off something, and in that time, they’ll have paid a huge amount of interest that could’ve been avoided.
So aim to actively pay off your debt. Reduce expenses from other places (such as entertainment costs) and put all of that into your debt. 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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