MARKetS REPORT – 2021 3rd Quarter

MARKetS REPORT – 2021 3rd Quarter

Dear friend,

I hope this note finds you well and that you had a good summer as the country started to open up again.  I had an eventful summer.  I managed to drive about 10,000 kms in a two week stretch.  Nothing like seeing the country (or at least London Ontario to Victoria BC) in a pickup truck.  As proof of the long haul (taking my daughter to school out west) I could show you a photo of the bug splattered bumper, but that might gross you out too much.  How about I just say in summary (and without the holiday snaps) we have a beautiful country and it was worth every minute on the road there and back.

As is my past pattern, I have enclosed a summary of the markets over the past 3 months, ending in September.  I am back to writing these summaries again, bear with me if my prose is a little rusty. 

Canadian, U.S. and global equity markets started the third quarter on July 1st where the second quarter ended, confidently charting a course forwards. By the end of August, equities had notched a seventh straight month of gains, with the S&P 500 Index in the U.S. finishing near its all-time high and the TSX Composite Index in Canada on its longest winning streak in four years. Markets then dipped dramatically in September on a number of risk-related events, before finishing on September 30th very close to previous highs.

Fixed income markets were mainly flat and U.S. treasury yields steady on reassuring economic comments from the Fed.  Canada’s top six banks also posted strong quarterly earnings that easily beat analyst expectations. Overall, approximately a fifth of TSX listed companies and third of S&P 500 listed companies reported handsome corporate results during the quarter, including some of the biggest tech names.

The U.K.’s Freedom Day, celebrating the reopening of its economy went ahead on July 19th. Developments in the U.K. are seen as a potential leading marker for the reopening of other western economies. Shortly after, the Canadian federal government unveiled a roadmap to reopen its borders. On August 9th, vaccinated Americans were allowed to visit Canada again and on September 7th the border opened further to vaccinated travelers from other countries. Q3 also witnessed an historic monetary development as El Salvador (the 103rd largest economy in the world by GDP) became the first nation to adopt bitcoin, the most popular crypto-currency, as legal tender on September 7th.  In other crypto news, China (the 2nd largest economy in the world after the U.S.) outlawed crypto-currency mining and declared on September 24th that all crypto-currency transactions (whether inside or outside of China) to be illegal. 

The U.S. Federal Reserve Board left U.S. interest rates in the near zero range but indicated it would begin winding down its US$120 billion monthly government bond buying stimulus by year end. U.S. inflation, although cooling, rose 5.3% annually from the same period last year, driven by COVID-19 infections impacting economic growth and related shortages of labour and supplies affecting prices. The Fed also reiterated it saw no immediate need to raise rates as this recent inflation spike was thought to be temporary. However, the Fed signaled rates might start going up sooner than previously planned – possibly by late 2022.

The Bank of Canada also held interest rates at 0.25% saying it expects the economy to strengthen throughout the second half of the year. The bank warned supply chain bottlenecks and rising COVID-19 cases could slow the pace of the recovery though. The bank continued with its bond buying program but scaled back purchases to about C$2 billion per week.

Canadian inflation went north as well. Inflation rose 4.1% in August compared to year ago, the highest since 2003. The Bank of Canada has regularly stated it would intervene should inflation come in persistently above its 2% target, but noted the current bout of inflation was likely transitory.

Capital Markets in Q3

U.S, Canadian and global equity markets started the quarter brightly. By the end of August, equities had notched a seventh straight month of gains, with the largest publicly traded companies in the U.S., as measured by the S&P 500 Index, finishing near its all-time high and here in Canada, the TSX Composite Index on its longest winning streak in four years. Markets then dipped over concern about inflation being too high for too long, the U.S. debt ceiling not being raised (which would push the US government to default on some of its previous bond issues), the Evergrande crisis in China (Evergrande is a Chinese property developer that accounts for about 4% of China’s home sales, and may not be able to deliver its promised apartments or repay its current debts) and speculation on when the U.S. Federal Reserve’s bond taper would begin, before finishing Q3 close to previous highs.

Fixed income markets remained calm and U.S. treasury yields steady on the Fed’s reassuring comments about its bond tapering plans, a potential rate hike next year and the current inflation spike being temporary. The treasury yield curve flattened somewhat as yields on all but the longest-term US government bonds increased

In foreign exchange markets, the Canadian loonie appreciated against the U.S. dollar and other G10 currencies due to rising oil prices.  As I’ve said before, Canada has a very oily dollar.  Oil prices surged following the threat of Hurricane Nicholas in the U.S. gulf and depleting U.S. crude inventories before declining on Russian plans to increase exports. The debt crisis of the mega Chinese property developer Evergrande at the tail end of the quarter then caused the oil prices and energy stocks to climb again. Our currency may have also stabilized following the Canadian federal election outcome, which was a lot of hot air expelled for very little change at all. 

Here in Canada, the S&P/TSX Composite Index ended the quarter up 0.17%, led by the 3 different sectors: Financials (which together total 31.9% weight of the Canadian index), Energy (13.1% weight) and Information Technology (11.5% weight) sectors.  In the US, the S&P 500 Index posted a 0.58% return led by Information Technology (27.6% weight), Health Care (13.3% weight), and Communication Services (11.3% weight) sectors. The rest of the developed world, as measured by the MSCI EAFE Index was also in positive territory with a 1.95% return led by the Financials (17.2% weight), Industrials (15.8%) and Information Technology (9.6%) sectors.

For the year to date (up to September 30, 2021), the S&P/TSX Composite Index increased 17.5%, the S&P 500 Index rose 15.9% and the MSCI EAFE Index was up 8.2%. Commodity prices varied.  Oil was up over the quarter (WTI closed at $75.03 up 2.1%).  Natural Gas Price Futures soared 60% to $5.867 (NYMEX US$ per million Btu).   Gold closed at $1,728 /oz US$ which was down 2.8% over the quarter and Silver dropped to $21.57 / oz US$ which was down 17.4% over the same time period.

Stock markets rose, due in part to demand for individual stocks but also because ETFs (or Exchange Traded Funds) are gaining in popularity.  Canadian ETF inflows topped more than C$4.9 billion with total assets growing to C$302 billion.  There are ETFs that provide targeted low-cost exposure to broad markets and sectors as well as specific areas like technology, health care, crypto-currency or green energy.  Here at Mandeville Private Client Inc. our clients have access to ETFs listed on many different stock exchanges.  Please call me for more information on whether ETFs make sense in your portfolio.

What we can expect now?

The accommodative (low interest and easy access) monetary policies of major central banks are beginning to be pared back so it’s natural we might experience some near-term setbacks and volatility in the bond and stock markets as conditions shift. The pace of economic growth will likely be slower but this is understandable as we are coming off a record breaking 12 months of performance. Overall, the outlook remains positive driven by strong economic fundamentals and corporate earnings.  However, weird things happen (like a Chinese real estate company’s bad results) and these can spook the markets.  But volatility can be our friend as well.

Regardless of where we are in the market cycle, it’s important to take a disciplined approach to investing and stay focused on your long-term financial goals. This strategy helps you keep your emotions out of investing – typically buying high and selling low like many investors do.

We recommend you maintain a diversified mix of investments in your portfolio to maximize potential returns and minimize risk. Regularly reviewing and rebalancing your portfolio back to the target asset mix we created also ensures it remains aligned with your goals.

Reminders

If you have not contributed to your Tax Free Savings Account for 2021, I will remind you that the investment limit this year is $6,000 for a Canadian resident over the age of 18.  Since the TFSA program was established in 2009, millions of Canadians have used these types of accounts.  If you have never contributed you may be eligible to contribute as much as $75,500 to a TFSA.   You are typically contributing to TFSAs if you have maximized your RRSP contributions or can no longer add to RRSPs because of your age.  Although the name of the account stresses “savings”, I believe that most people should use the majority of these accounts for tax free investments for the future.  TFSAs are proving to be beneficial to keep the tax man away from interest income, capital gains and taxation on dividends from eligible Canadian companies.  There are not many ways to keep the CRA off our backs, but this is one that should be considered top of the list.

And for those of you with children or grandchildren that may be considering post-secondary education and are thinking (or worrying) about the large outlay of $ that comes with such a plan, I would urge you to consider establishing or adding to a Registered Educational Savings Plan.  Contributions to an RESP qualify for federal government grants called Canada Education Savings Grants (CESGs).  The government will contribute a CESG equal to 20% of your annual RESP contributions up to a maximum grant of $500 per year per child  (so a $2500 RESP contribution earns a $500 grant).  You can catch up on missed contributions and the CESG will be as high as $1000 for that year (so a $5000 RESP contribution catching up on a couple of years will earn a $1000 grant).  Beneficiaries may also be eligible to receive additional grants and the Canada Learning Bond (both are based on family income).  Your contributions and the CESGs they generate will accumulate and grow tax-free in an RESP.  When the funds are withdrawn for the beneficiary’s education, only the growth and the CESG portion of the plan are taxable in the hands of the student (who are likely already in a very low tax bracket).   So free money from the government, no tax on the annual growth, low tax on the income when removed, all benefiting the education of your loved ones…what more can you ask for??

In Closing

Thank you again for your continued trust in me and my team for the opportunity to assist you in working toward your financial goals. We are with you every step of your investment journey, identifying strategies and opportunities, reviewing performance and rebalancing your portfolio to keep you on track.

Should you have any questions regarding your portfolio, or wish to set up a meeting either in person, by phone or online by Zoom, please do not hesitate to contact my office at 519-432-6744.   My assistant Susan can be reached at extension 239 and I can be reached at extension 238.

Until we speak again, I hope you have a wonderful autumn.

 

All the best,

Mark

Mark McConnell, BA (Econ.) DipBIS

Senior Investment Advisor, Branch Manager

 

Mandeville Private Client Inc. is a member of the Investment Industry Regulatory Organization of Canada and a member of the Canadian Investor Protection Fund.

Commissions, management fees and expenses all may be associated with investments in exchange traded funds (ETFs). Please read the prospectus before investing. ETFs are not guaranteed, their values change frequently and past performance may not be repeated.

This publication contains the opinion of the writer.  The information contained herein was obtained from sources believed to be reliable, but no representation or warranty, express or implied, is made by the writer, Mandeville or any other person as to its accuracy, completeness or correctness.  The information in this letter is derived from various sources, including CI Global Asset Management, Fidelity Investments, Google Finance, Globe and Mail, National Post, Wall Street Journal, Bloomberg, Reuters, Investment Executive, The Economist, Bank of Canada and Statistics Canada as at various dates. This material is provided for general information and is subject to change without notice. Every effort has been made to compile this material from reliable sources and reasonable steps have been taken to ensure their accuracy. Market conditions may change which may impact the information contained in this document. Before acting on any of the above, please contact me for individual financial advice based on your personal circumstances.