- the source for market opinions


August 9, 2020 | Infectious

A best-selling Canadian author of 14 books on economic trends, real estate, the financial crisis, personal finance strategies, taxation and politics. Nationally-known speaker and lecturer on macroeconomics, the housing market and investment techniques. He is a licensed Investment Advisor with a fee-based, no-commission Toronto-based practice serving clients across Canada.

So how do you like 2020 so far?

The fastest descent into a bear stock market ever as the virus hit. Then the quickest recovery. From full employment in the US to over 30 million jobless. Our federal deficit swelled a dozen times larger than planned. Mortgages plunged below 2%. And while eight million people went on government support with almost a million unable to pay their loans, real estate took off again. Airlines cratered. Retail was crushed. And two-thirds of people are too scared to go back to work. But the S&P is up 17% from last August and grew 50% since March. Now we’re thirteen weeks from a US election the results of which could be transformative.

And Covid? Almost 20 million cases across the world, big troubles for America and Canadians have been told to mask up for a second wave. Maybe. So far 0.03% of us have tested positive for the virus and it was only five months ago that federal health minister Patty Hajdu (remember her?) had this terrifying statement:

“I would say that it is safe to assume that it could be between 30 per cent of the population that acquire COVID-19 and 70 per cent of the population.”

Was that totally irresponsible? Or just uninformed? In fact no country on earth has experienced that rate of infection. In Canada alone it would have meant 15 million to 26 million people with Covid. As it turned out, 120,000 souls got it. Of those 111,000 have recovered.

However, we turned off the economy, made public finances circle the drained, destroyed a number of industries, ensured higher future taxes, created structural unemployment, turned downtowns into ghost towns and scared the stuffing out of a majority of the population.

Seems Mr. Market has decided a few things.

  • The pandemic can be contained, controlled and conquered. It’s temporary. It will end.
  • 2021 will likely be a catch-up year of rampant growth, recovery and the restoration of profits.
  • Politicians screwed things up so monumentally that excessive spending will continue in order to paper over consequences.
  • Interest rates will be in the ditch until 2023 with bonds and savings paying nothing, pushing more dollars into equities.
  • There will be a vaccine. Or at least a good treatment. It will change everything overnight.
  • Trump is done. Biden is a centrist. Trade wars will fade.
  • And the virus episode brought new opportunity (the stay-at-home sector) while pumping up tech (the FAANG boys) and creating value (airlines – people will fly again).

There are many lessons for you, me and those who want a secure life.

Don’t be afraid of volatility, because we’re now into years of it. Markets will move more violently up and down. Ignore it. If 2020 has taught us anything it’s that those who react to short-term fluctuations end up as road kill.

Society will take time to heal from the damage done by the fearmongering and missteps of politicians. The virus may not be done, but so far the government and financial response has been overkill. The economy cannot function with social distancing in place, masks, no large gatherings and two-thirds of employees afraid of their workplaces. It’s not different this time.

The year so far has been a complete validation of investing in a balanced and diversified fashion. When the market crashed in March, equity losses were tempered by bond gains. When CBs crushed rates, fixed income assets jumped. When stock markets recovered, so did the growth portion of portfolios. As in 2008-9, a balanced portfolio fell less, reduced volatility and regained ground quickly. Sixty per cent growth, forty per cent fixed wins again. Set it, and forget it.

Time to get serious about tax avoidance. Governments can’t drop the hammer just yet because of a fragile economic recovery, but they will. In Canada we may see a new tax bracket created for higher income-earners, an increase in the capital gains inclusion rate, maybe even a financial transaction tax, another assault on professional corps or a real estate speculation levy. Whatever. Taxes are going up, not down. Act accordingly.

Fill your TFSA to the top. Use RRSPs and registered education plans for your kids, harvesting tax deductions and free grant money. Take advantage of the cheap prescribed interest rate (1%) to make a spousal loan and income-split. Open a retirement plan for your lower-income partner. Invest to earn cap gains and dividends rather than rent or income.

As for real estate, don’t fall for the run-to-the-burbs meme. It’s temporary. Downtowns will repopulate in time. People will commute again and want urban locations. Condos will take longer to recover in proportion to height, so buy low-rise. Lock in your mortgage – five years at under 2%. It’s a once-in-a-lifetime gift. And wait to purchase (if you can truly afford it) until the mortgage deferral cliff arrives.

Remember this year. Especially what’s to come.

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August 9th, 2020

Posted In: The Greater Fool

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