Weekly Capital Strategy – September 4, 2015

September 4, 2015

Contrarians at the Gate
(Andrew Pyle, Sr. Wealth Advisor and Portfolio Manager)

A common trait for many investors is that they will tend to sell stocks when markets are near their worst and buy them when they are near their best—the so-called “sell low and buy high” dilemma. As I have commented in recent weeks the correction in equites this summer was long overdue, but the intensity of selling was exacerbated by investors who had come in late in the cycle. Either the perception was that stocks could keep grinding higher without a pullback, or that the lack of volatility which has plagued markets for several years would continue, stocks were eventually going to hit a wall. Late-comers, seeing the wall, would respond in a manner different from long-term investors and cash out in panic. When this happens, sentiment indicators that measure the degree of bullishness or bearishness in the market can offer some guidance as to where stocks go in the future.

There are a number of such indicators, from put-call ratios to actual investor sentiment surveys, but all have shown a swing towards the bearish camp in recent weeks. Take, for example, the AAII US Bearish Sentiment indicator (from the American Association of Individual Investors). This indicator measures bearish sentiment among investors over the next six months and it has been climbing since the end of last year when it hit a nine-year low of 15 back in November. By the end of July it had broken above 40, which was a level not seen since the summer of 2013. Earlier that year the index had broken above 50 and the recent peak was north of 70 when stocks hit rock bottom in March 2009.


AAII Bear indicator Sep 2015


Many view these types of measures as contrarian indicators, meaning that they often signal (when they are their worst) that the market is about to recover. The opposite is also true, when the indicator of bearishness drops to very low levels, suggesting that investors are too bullish. Where we are today is a kind of no-mans land in that investors are neither exuberant or in panic mode. If we are to use the increase in bearish sentiment as a true contrarian indicator we have to look at the fundamentals. Back in early 2009 when some investors threw in the towel, global economic fundamentals were terrible. Recessions were ravaging developed economies and central banks were slashing interest rates and governments were engaging in massive deficit financing initiatives to stimulate economic growth.

Today, global growth is on track for about 3% this year (far from recession) and most governments have reduced budgetary deficits to more stable levels. When I talk to clients about the current climate versus 2008 I like to turn the comparison around and say that in order to get a 50% drop in North American equities in 2008-09 we needed a global recession and a 30% correction in the world’s largest housing market. Neither are present today. Therefore, bearish investor sentiment indicators that are still not as high as they were in early 2009 are not necessarily telling us there is more room for stocks to erode further. Adjusted for fundamentals I would argue that such indicators are telling us that stocks may have found at least a temporary floor. Of course, some are not taking chances. For example, the European Central Bank (ECB) announced this week that it was extending its quantitative easing program. Hardly a vote of confidence, but perhaps it was yet another contrarian indicator.


Back to School on the Outlook for Consumers
(Andrew Pyle, Sr. Wealth Advisor and Portfolio Manager)

I don’t know if we can aptly call the last few months an enjoyable summer given the volatility that engulfed global markets; but as we head into the long-awaited labour weekend there is some hope that the worst is over and relief that trading volumes will return to normal. At the time of writing, stocks were once again feeling some pressure on expectations that the Federal Reserve will begin to raise interest rates this month.


TSX vs S&P staples Sep 2015


For the S&P500 the index remains down about 5% since the start of the year and 8 of the 10 major sub-groups are in the red. The bright spots, however, were consumer and health care stocks (consumer discretionaries are up 3% and consumer staples have fallen by only 3%).  As for the TSX, this year has also been problematic as the index deals with a 7% loss since last December (down 18% in US$ terms), with 5 of 10 groups under water. Similar to the US, consumer stocks have provided some lift to the overall index and both discretionaries and staples are up for the year (staples up 11% and discretionaries up 1%). The relative outperformance of consumer stocks is consistent with their more defensive appeal to investors, especially on the staples side. Maintaining the better performance over the remainder of the year will depend on how the market views the health of both the American and Canadian consumer. Here we might have some divergence.

This morning’s August jobs reports painted a picture of continued expansion in the US, albeit at a slightly more modest pace; while they left open the question regarding Canada’s recession. US non-farm payrolls increased by 173K on the month, which was below the 215K consensus call, however, there was an upward revision to the prior two months of 44K. Factoring that in and you basically have a report that was bang on expectations. More importantly, the unemployment rate fell 2-tenths of a point to 5.1% which is the lowest since April 2008. Since the unemployment rate can be an important ingredient in consumer confidence this latest dip should counter some of the negative mood from volatile stock markets. Confidence is one driver behind consumer spending but it pales next to actual dollars in the pocket. On that score this morning’s report was also positive in that average hourly earnings rose by 0.3% in August and weekly earnings jumped by 0.6% (both the best showings since March). Combining the acceleration in wage growth with continued payrolls gains in the 200K neighbourhood and you have some pretty solid footings for consumer spending at back to school time and into the holiday season.


TSX vs S&P discretionaries Sep 2015


Canada’s job performance has been more erratic, though the 54K gain in full-time jobs last month was a welcome surprise (overall payrolls rose by 12K versus market consensus of a decline). Indeed, for an economy that supposedly had a recession in the first half of the year the full-time job gains haven’t been bad. We have seen increases of between 30K and 65K in four of the past five months. This too will add to incomes at the end of the third quarter, however, the unemployment rate rose by 2-tenths to 7% in August, returning to where it was a year ago. While this increase stemmed from more Canadians entering the workforce, the rise in the rate will not help consumer confidence.

The ace for both Canadian and US consumers during the remainder of the year is the fact that energy prices are lower. Cheaper gasoline and home heating fuel (and gas) will leave more money in household budgets for discretionary spending, acting almost as a tax cut. For the reasons above investors should at least be maintaining neutral weightings in consumer stocks and perhaps even overweight while global market uncertainty remains.


The Old and New—Minimum RRIF Withdrawals
(Emily Downie, Senior Associate)

When an RSP (Retirement Savings Plan) account holder reaches the age of 71 the account must be converted to a RIF (Retirement Income Fund) and a minimum withdrawal is mandatory from the account.  One of the items from the 2015 Federal Budget, included a reduction in the amount of minimum withdrawal that is required beginning in 2015.  This item has been given Royal Assent and financial institutions allow the client the option to take a lower prescribed amount for this year.

Although RSP accounts can be converted to RIF accounts at any time, the method for calculating the payments varies for an individual depending on if they are under the age of 70 or if the payment is based on a younger spouse’s age.  In the case of an individual under the age of 70, the factors for calculating the payment are not impacted by the 2015 Federal Budget.  The calculation for the minimum payment is calculated as:  1 divided by (90 – the age of the annuitant at the beginning of the calendar year) and then the factor is multiplied by the market value of the RRIF holdings at the beginning of the year.  For those individuals who are 71, the new minimum they must withdraw is lowered approx. 2% from 7.38% (multiplied by the market value of the RRIF holdings at the beginning of the year) to 5.28%.  The updated withdrawal minimum also affects life income funds (LIFs), registered pension plans and locked in retirement accounts. The withdrawals will continue to increase every year.  By the age of 94, an individual will be forced to withdraw 18.70% and capped at 20% at age 95.  With the new changes in the minimum amounts, the idea is that as life expectancies have increased, the change will help to reduce the risk of people outliving their savings and lower taxes.


New rule rrif payments

Upcoming Events

  • Canada: Housing starts, building permits, Bank of Canada meeting, new home prices
  • US: Consumer credit, wholesale inventories, producer prices, Univ. of Michigan consumer sentiment


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