Shortly after Donald Trump was elected, I sold some of my Canadian index (XIU) holdings in Canadian dollars and bought a small-cap stock index in the U.S. called the Russell 2000, in U.S. dollars.
The Russell 2000 is a stock market index that represents the 2,000 smallest publicly traded stocks in the U.S. I purchased the ETF IWM, which tracks the Russell 2000, at $240.
What are small companies?
Small companies are those with a market value between $300 million and $2 billion. These companies are underrepresented in major indexes such as the S&P 500.
Reading the writing on the wall
I usually don’t let politics influence my investment decisions, but sometimes you have to read the writing on the wall.
In this case, Donald Trump made it clear that he:
Wanted to reduce taxes
Wanted lower interest rates
Wanted to increase tariffs
More precisely, he intended to impose a 25% tariff on Canadian goods. It would have been irresponsible for me to ignore this information and do nothing.
Reducing Canadian Exposure
My decision to sell the Canadian index was partially motivated by fear. Donald Trump’s clear stance on imposing tariffs on Canadian products signaled potential trouble for the Canadian economy and currency. Based on this, I decided to reduce my Canadian exposure and increase my U.S. exposure.
Why Small-Cap Stocks and Not Large-Cap?
Since much of my wealth is already invested in the S&P 500, which represents large corporations, I thought diversifying by market capitalization would be beneficial. Continue Reading…
Top investment executives told a webinar held Wednesday morning that investors should not mix Politics and Investing. Even so, while market observers at Franklin Templeton view the upcoming U.S. election as essentially a “toss-up” they seem to believe that a victory or sweep by the Republicans’ Donald Trump would be more positive for stocks than a Kamala Harris win.
Grant Bowers, portfolio manager and Senior Vice President for Franklin Equity Group, said “it’s a 50/50 tossup for the presidential winner. Both candidates are well known so it’s not surprising” there’s been little market volatility in the runup to the November 5th election. Generally, he’s bullish no matter the outcome. The economy did well in Trump’s first term while a Harris victory would be a continuation of Biden policies. The real differences are on tariffs, fiscal policy and regulation. “The most likely outcome is a split government” but there would be more volatility if there is a sweep by either party.
Of course, it’s quite possible that investors won’t know the official outcome for several weeks. If the process of counting votes drags on and there are legal challenges like there were in 2020, investors can expect more protracted volatility.
Sonai Desai, Chief Investment Officer for Franklin Templeton Fixed Income said the U.S. economy is set to do “quite well. I agree there’s a reduced probability of Recession: that’s not our baseline for a while.” If there’s a Republican sweep and broader tariffs measures introduced by Trump, “that might limit the Fed’s appetite for massive rate cuts.” Her baseline is that even with a Republican sweep, there won’t be a literal imposition of tariffs: that didn’t happen in 2016, so “I don’t think we will get the full range of cross-the-board tariffs.” Either way, the mighty U.S. consumer will “continue to consume and I don’t see that changing with the Election.”
Clearbridge’s Jeffrey Schulze
In the very long run, of course, any short-term market volatility from elections is likely to be a blip, which is why Franklin Templeton tells clients not to mix investing and politics.
In an analysis released early in October, Clearbridge Investments Head of Economic and Market Strategy Jeffrey Schulze, CFA, showed the following annual returns for the S&P500, all positive for equities no matter which party wins and whether or not they get full control or are in a divided government. Based on that, the best outcomes for investors would be a Democratic president with a Divided Government or Full Control by a Republican president.
“We view a Trump win, likely coming in a sweep scenario, as net positive for equities as it preserves favorable corporate tax treatment and builds on tax elements that expired,” Schulze wrote in the October 1st update, “A Harris win, likely coming with a divided Congress, would be mildly negative due to fewer provisions of expiring tax legislation getting extended due to political gridlock.”
Trump win likely positive for Stocks
“In aggregate, we view a second Trump presidency under a sweep scenario as net positive for equities. The expectation is for a more favorable corporate tax regime and less of a regulatory burden, both of which should boost corporate profits. Conversely, there is the potential for increased tariffs and retaliation from U.S. trade partners … We view U.S. stocks as best placed under Trump, with banks and capital markets, as well as the oil and gas complex, well positioned due to lighter regulation. Aerospace and defense is also likely going to benefit as well as biopharmaceuticals. Areas that could see pressure are restaurants and leisure, due to the less availability of labor, as well as EVs, autos and clean energy producers.”
Harris win might be “mildly negative” for Stocks
A Kamala Harris win would be less positive for U.S. stocks, Schulze writes: “We see a Harris win as mildly negative to equities should she preside over a divided Congress. It will be more of a headwind to the markets should we see a Democratic sweep as she will then be able to implement higher taxes on corporations and high-income individuals, as well as push a more ambitious regulatory agenda. However, tax credits for low-income individuals would provide an offset, creating an economic boost to this segment of the economy.Tighter regulation could weigh on biopharmaceuticals, banks, capital markets, energy as well as mega cap technology. But again, we caution against basing investment or portfolio positioning solely on the regulatory environment. Areas to be bullish about under Harris would be consumer discretionary, specifically restaurants & leisure, home building and building products.”
Generally, Franklin Templeton continues to advocate a “stay the course” stance for investors geared to the long term. The chart below shows that going back to 1944, the U.S. stock market has risen steadily over time regardless of which political party is in the White House.
Stephen Dover, chief market strategist and Head of Franklin Templeton Institute, acted as Moderator in Wednesday’s webinar, fielding audience questions. He also wrote a U.S. election update earlier this month, headlined “Uncertainty Reigns.”
He concluded back then that the election remains “too close to call. A divided government in Washington, DC, with no single party controlling the White House, Senate and House of Representatives is likely … Investors should gird themselves for uncertainty and potential bouts of volatility preceding and following election day. It is quite possible that the outcome for the presidency will not be settled until the December 17 certification deadline.”
Dover expects market uncertainty to continue well past November 5th, if not until January’s inauguration of the ultimate winner.”Legal challenges, some of which have already commenced, add to uncertainty. Re-counts, delays and disputes over certification of results, alongside courtroom litigation are virtually assured if state election outcomes are close. Various legal and procedural challenges are likely to endure until at least December 17, which is the deadline for state certification of the presidential election results and the official nomination of state electors to the Congressional certification on January 6, 2025.”
However, Dover says his basic investment conclusions remain unchanged. They are as follows: Continue Reading…
U.S. stocks can provide Canadian investors with all the foreign exposure they need
I’ve been advising Canadian investors to include U.S. stocks in their portfolios for more than 30 years. I continue to recommend them today. The U.S. stock market offers the widest variety and highest investment grade of companies to invest in of any country in the world. It also offers a wider selection of growth opportunities for those companies to pursue, in North America and around the world.
For our portfolio management clients, our general preference is to invest one quarter to one third of their holdings in U.S. stocks and the remainder in Canadian stocks.
Many major financial institutions recommend investing in North America. Some also recommend investing outside North America, especially in developing nations. They say that countries outside North America also offer great opportunities, and they may be right in some cases. They note that foreign investing offers an additional chance for diversification. This may be true, but we see it as irrelevant. Our view is that North America offers all the diversification that you really need.
Many promoters of emerging-market investing are also motivated at least in part by a conflict of interest.
By offering imported investments in their home market, they can earn higher profit margins than they get with domestic investments alone. That is, they make more money by promoting foreign investments. Investors may not make any more money, but they undoubtedly face more risk.
We have occasionally offered favourable advice about a handful of high-quality foreign stocks in the past few decades, while mentioning the added risk. But we’ve stressed our view that the U.S. and Canadian markets provide all the investment opportunities that you need to succeed as an investor.
Of course, the Canadian market offers opportunities that beat those available in the U.S.: in bank stocks, in the Resources & Commodities sector, and in specialists like CAE Inc. But Canada has nothing to compare with, say, Alphabet, Microsoft, McDonald’s and any number of other household names.
Neither too hot nor too cold
Some investors say they agree with our view on U.S. stocks in principle, but they disagree with our timing. They think the U.S. dollar is just too high at present levels: too hot, you might say. These folks seem to think that the natural foreign exchange rate between the U.S. and Canadian dollars should be around parity.
As of late 2023, the U.S. dollar has traded at around one-third higher than the Canadian dollar. Way above parity! In fact, the U.S.-Canada exchange rate has not been anywhere near parity in the past decade.
The U.S. dollar has mostly stayed between $1.20 Cdn. and $1.46 Cdn. since the start of 2015. It’s now around the middle of that 8-year range.
Since 1971, the U.S. dollar has stayed between $0.94 Cdn. and $1.60 Cdn. It’s now around the middle of that 52-year range.
Timing is worth a look. But if you make it the deciding factor in your investment decisions, it’s apt to cost you money, in the long run if not in the short.
“Has-been” U.S. dollar has a long life ahead
A lot of foreign governments share the view that the U.S. dollar is overvalued.
In March 2023, in a meeting in New Delhi, the representative from Russia revealed that his country is spearheading the development of a new currency. It is to be used for cross-border trade by the BRICS countries: Brazil, Russia, India, China, and South Africa. (Potential recruits include Iran, Syria and North Korea.)
I put this ambition on a par with the claims of cryptocurrency promoters. Some of them still predict that cryptocurrencies will take the place of the U.S. dollar. Continue Reading…
Unless you were literally born yesterday, you’re probably already aware that 2022 was an extraordinary year for investing … extraordinarily bad, that is. It hardly mattered which asset mix you invested in. Both stock and bond markets experienced double-digit losses, so even conservative investors with bond-heavy holdings saw their portfolio values plummet.
That’s investing for you. We may not like it, but we actually expect some years to serve up heaping helpings of realized risk, sometimes across the board. It’s the price we pay to expect these same markets to deliver longer and stronger runs of future returns.
From this perspective, we hope you’ll keep your eyes and your asset allocations focused on the future as we review the 2022 performance for the Vanguard, iShares, BMO, and Mackenzie asset allocation ETFs.
Before we look at the 2022 returns for our asset allocation ETFs, let’s check out the year-end results for their underlying holdings, starting with the equity ETFs.
2022 Equity ETF Returns
Canadian equity ETF returns were similar across the board, with losses of around 6%.
Disappointing, for sure, but their performance was still better than that of global stock markets, which lost 12% in Canadian dollar terms. That’s in large part due to the Canadian stock market’s overweight to energy companies. The energy sector happened to have a stellar year, returning over 50% during 2022.
U.S. equity ETFs also ended 2022 on a low note, losing around 20% in U.S. dollar terms. During this time, the U.S. dollar appreciated by 6.8% against the Canadian dollar, reducing the loss for unhedged Canadian investors. Once we factor in the return bump from U.S. dollar exposure, our selection of U.S. equity ETFs lost around 12%-14%, in Canadian dollar terms, net of withholding taxes.
BMO’s trio of U.S. equity ETFs had noticeably higher returns than the others. This is largely due to the methodology used to construct the S&P indexes tracked by BMO’s ETFs. For these indexes, an S&P index committee selects which companies to include in each index. The indexes tracked by the Vanguard, iShares, and Mackenzie ETFs have a less subjective process. This means there is more active decision-making going on in the three S&P indexes tracked by BMO’s ETFs, which led to a wider short-term return difference between BMO and the rest of the more passive index-tracking providers in 2022.
International equity ETFs ended the year on a disappointing note as well, losing between 8%-10%.
Two components explain most of the performance differences among our international ETF providers: Continue Reading…
Once upon a time there was a man who loved apples so much that he wanted to own an apple tree. So, he went to an apple-tree broker to buy one. The man was impressed to see an apple tree one hundred feet tall with apples the size of basketballs. He asked how much it would cost to buy such a magnificent tree.
The apple-tree broker smiled tolerantly and said, “No one person can own such a magnificent tree. You can only own one tiny piece of it, a small branch a few inches long. How much do you have to invest?”
The man replied that he would like to own more than one tiny branch. Surely there must be something in your orchard that I can buy?”
The apple-tree broker said of course there is, but you must understand that for twenty years the apples that come from this magnificent tree have got increasingly bigger and even more plentiful. Even these little twigs, in time, will produce several more giant apples than they do now.
“What else do you have?”
“Well over in this corner are 10 trees you could buy for the same amount of money; however, some years they do not produce apples and the apples are very small but if you really want a bargain, I can give you 100 apple trees for one dollar. Hold out your hand.”
The apple broker poured one hundred apple seeds into the man’s palm who testily responded, “These aren’t magnificent apple trees?”
“No, these are speculative apple trees. You are buying them for their potential.”
“What else do you have?”
“Well, see those fellows over there. They operate apple tree funds. They buy 500 apple trees at a time and sell people like you a piece of their apple tree fund.”
“Are these 500 apple trees all magnificent trees?”
“No. Of course not. There are fewer than 100 magnificent trees available to buy. The fund may have partial ownership of a dozen magnificent trees but for diversification they spread the risk of apple trees over five hundred trees. They call it their safe apple tree index.”
”Would this include some that are just seeds, some a few inches high, some a few feet higher and some fully grown ones whose production of apples may be spotty from year to year?
“It would but some might grow into magnificent trees, and you might be able to sell units in the fund for more than you paid.”
Safer to invest in 20 dividend-paying stocks than funds
This allegory is an attempt to explain why you are safer investing in 20 financially strong companies paying high dividends then investing in index funds, mutual funds, and ETFs. Why would you invest in hundreds of weak, mediocre stocks when you could invest the same amount of money in financially strong companies paying high dividends? Strong companies with easily accessible historical records that can show their share price and dividend payments increasing yearly for decades. Continue Reading…
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