November 2020 Newsletter

This too shall pass (or in the case of the election, has passed)

It's pretty much over, at least in the eyes of the market. The U.S. election uncertainty was largely removed with the Associated Press and other major outlets, declaring Joe Biden the winner of the 2020 election. In what is an American pastime, Trump has been exploring legal action and recounts which he is fully entitled to do. However, given the margin that would be needed to switch the election results, these challenges are unlikely to overturn the outcome.  From a politics standpoint, the attention will now swiftly shift to the Senate, where two run-offs in Georgia will decide its fate. It is our belief (as is the markets) at this point that the Republicans will retain control of the Senate come January (as indicated in our weekly market comment from November 6).  A split Congress and Democratic president means that any extreme progressive policies initiated by Democrats, will be blocked by the Senate, leading to more certainty for markets when it comes to legislation and policy making. In other words, more continuity of the current environment rather than the potential for wide-sweeping changes. We view this is as a net positive for equity markets, particularly in this scenario, given it puts the odds of higher taxes very low in the years to come. In the near term, investor focus is likely to shift back toward fiscal stimulus (including dealing with December 11 U.S. government shutdown deadline) and Covid. Also, the virus spread continues to intensify and remains a headwind. While this can influence market volatility, our expectation of continued positive news flow on therapeutics and a rolling out of a potential vaccine by year-end remains.

• Politics and elections in particular, can provoke strong emotional reactions. When describing the election outcome voters use words like disillusioned, discouraged, anxious, confused, fear, sad and on the other side hopeful, joy, satisfaction and relief. These are not words any investing professional would want to employ while implementing an investment strategy, as we know that emotions and investing are not a good combination.
  
  
• The market received a double dose of positive news this month as we moved past much of the election uncertainty; Pfizer, BioNTech, and Moderna provided positive news regarding their vaccine candidates, each showing 90% plus effectiveness.
  
  
• We have contended that in the grand scheme of things, politics are simply a footnote in terms of the long-term trajectory of the markets, as there are other more impactful drivers for equity market returns. Again, thinking back to 2016, Trump ran on a pro-fossil fuel agenda, yet the fossil fuel industry has continued to struggle over the past four years, while renewables have flourished. This shift, regardless of political rhetoric or policy, has more to do with capital flows.

Legacy Portfolios continue to perform well post-election

As earnings season wraps up, we are pleased with the robustness of our Legacy names in terms of revenues and earnings. More importantly, the earnings outlook for many of our names are excellent and we believe our companies will continue to benefit from dovish central bank policy along with continued government stimulus as tailwinds. We have also been continuing to thoughtfully put money to work in several sectors including healthcare, financials and industrials.

No One Left Behind

With the economic recovery underway, it is only natural that the expansion begins to encompass greater participation across different economic sectors. By definition, an expansion is an “action of becoming larger or more extensive” and as we move past the initial recovery of the pandemic, we anticipate that the areas of the market that have been “left behind” will begin to benefit.

While equity market valuations can look stretched on an absolute basis, in a world where investors must make relative choices of where to place capital, the decision is clear – equities are more attractive than bonds and cash. This month, we saw a significant rotation from growth to value names driven by the easing of election uncertainty and positive vaccine news coming from both Pfizer, BioNTech, and Moderna.

Monetary & Fiscal Stimulus

The unprecedented stimulus provided to the economy is a powerful tailwind for risk assets. As you’ll see in the following section, we believe it was largely responsible for economic data faring much better than expected and it sets the economy up for a rather robust recovery once we return to some form of normalcy. Regardless of the election outcome, additional fiscal stimulus was going to be provided; it was only a matter of magnitude rather than a question of if. The outcome of the run-off elections in Georgia in early January to determine the control of the Senate, takes somewhat greater importance in terms of the size of fiscal stimulus measures. If the Democrats gain control, a larger spending package should be anticipated, with more dollars directed to “green” infrastructure and on the margin, benefit companies focused in this area.

Economic Surprise

Actual U.S. economic data has been surprising to the upside relative to the consensus view by a magnitude not seen since the Citigroup Economic Surprise Index was established. While magnitude for the beats has narrowed, actual data continues to exceed economists’ expectations.

US Citigroup Economic Surprise

Source: FactSet, Raymond James Ltd.

Bottom Line

With the vast majority of the election uncertainty out of the way, attention can turn back to the more significant market drivers. The positive backdrop for risk assets is supported by the understanding that governments and central banks will backstop the economy (implicitly, at least), which has resulted in improved confidence and economic data surpassing expectations by a wide margin. With almost eight months of COVID-19 restrictions under the belt, consumers and corporations have learned and adjusted to our current reality making the second wave that much more manageable. Positive vaccine and treatment developments also provide light at the end of the tunnel and when we return to “normal” the economy will be in an advantageous position to foster a robust recovery.

While equity market valuations can look stretched on an absolute basis, in a world where investors must make relative choices of where to place capital, the decision is clear – equities are more attractive than cash.

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Market Risks

Source: Manulife Investment Management

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Charts of Interest

Yield on a 100-year Austrian Bond

CAT Sales Reflect the K-Shaped Recovery

Copper inventories were -1575 tonnes. Total global copper stocks are now at 613kt which is -34% YoY. Days of Consumption = 9.5

Tail wind for the economy particularly when more stimulus comes

Dr. Copper on a roll- China Economic Rebound Pushes Copper Prices to Multiyear High

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Year-End Tax Planning Tips

December brings many opportunities to gather with friends and family (this year, perhaps virtually), and the topic of finances often emerges.  Most talk about blowing their budget over the holidays, but many have financial questions or concerns they’ve been thinking about all year. Setting aside a quiet time after celebrations to discuss issues like life insurance and estate planning can help to ensure another year doesn’t go by without a plan in place. You can also use your own experiences to help young people in your life understand how to build and stick to a budget, and the value of long-term goal-setting. 

As the year winds down, it's also time to look at your tax plan. Reviewing your investments with a focus on your goals, the tax environment and the economic landscape can help you and your Cadence Financial Group team plan for where adjustments need to be made to position yourself for success in 2021 and beyond.  Consider the following ideas:

1. Take advantage of family income splitting with tax-free savings accounts for all family members over the age of 18;
2. Determine when you should realize capital gains/or harvest capital losses.  It may make sense to delay realizing a gain until early 2021 – doing so allows for a one-year deferral by pushing your tax bill to April 2022; 
3. If you are 65+ this year and have no other eligible pension income, consider converting a portion of your RRSP to a RRIF to shelter $2K/year of income from federal tax.  If your spouse is also 65+ then they also qualify for the pension income tax credit;
4. If you expect to withdraw money from your TFSA in 2021, consider withdrawing the funds now so that you don’t have to wait until 2022 to re-contribute those funds; 
5. Consider transferring investments that have dropped in value to a minor child before the taxation year-end.  You will trigger a capital loss that can be used to offset realized capital gains and any future growth is taxable to the minor child since attribution rules do not apply to capital gains;
6. A charitable donation by year-end provides valuable tax credits.  Consider donating securities with unrealized capital gains instead of cash.  You will receive a donation receipt for the full value of the asset and the resulting capital gain will be tax-exempt. 

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Spreading some holiday cheer

2020 has been a precedent year.  We’ve experienced lots of volatility with the markets, politics, current events, and perhaps, in our personal lives.  That is why this holiday season, we want to make the holiday season a little bit brighter for those in need in our community.  This year, we will be supporting three local Vancouver-based charities:

• Greater Vancouver Food Bank

Today the GVFB provides assistance to approximately 8,500 people weekly across Vancouver, Burnaby, New Westminster, and the North Shore.  Of all our clients, 24% are children and youth, 58% are adults, and 18% are seniors. We have specialized nutrition programs for children from birth to 12 years old.

• Dixon Transition Society
  Serving the community since 1973, Dixon Transition Society helps to reduce the impact of domestic violence by providing a safe haven for women and children. Transitional housing programs, counselling and outreach services form a continuum of care to help women and children live a life free from violence.


• Junior Achievement of BC
  JABC is a non-profit organization proud to deliver a wide selection of educational programs focusing on financial literacy, work readiness and entrepreneurship. Through partnerships with educators and volunteers from local businesses, JABC offers important interactive, hands-on learning experiences to students in all communities across British Columbia.
  
  

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This newsletter has been prepared by Seth Allen and expresses the opinions of the authors and not necessarily those of Raymond James Ltd. (RJL). Statistics, factual data and other information are from sources RJL believes to be reliable but their accuracy cannot be guaranteed. It is for information purposes only and is not to be construed as an offer or solicitation for the sale or purchase of securities. This newsletter is intended for distribution only in those jurisdictions where RJL and the author are registered. Securities-related products and services are offered through Raymond James Ltd., member-Canadian Investor Protection Fund. Insurance products and services are offered through Raymond James Financial Planning Ltd., which is not a member-Canadian Investor Protection Fund.  This provides links to other Internet sites for the convenience of users. Raymond James Ltd. is not responsible for the availability or content of these external sites, nor does Raymond James Ltd endorse, warrant or guarantee the products, services or information described or offered at these other Internet sites. Users cannot assume that the external sites will abide by the same privacy policy which Raymond James Ltd adheres to.