WHEN THE FACTS CHANGE I CHANGE MY MIND!
WHAT DO YOU DO?
It has been a little over a month since the U.S. elections and Donald Trump won. Whether you are in shock or in awe it is reality.
Let’s take a look at what has happened in the equity and bond markets since that ‘fateful’ day.
Did the EQUITY markets around the world collapse as was predicted? As you can see by the chart below EQUITY markets have not fallen apart. They have risen on the ‘BELIEF’ that his policies will make ‘America great again’.
The U.S. broad based market is up 3.2% since the election which has dragged the Canadian market along with it for a gain of 3.4%. The CDN$ has gained .84% since then reducing the gain for U.S. stocks and the CDN$ is about the only currency to gain against the greenback over this time period. This is due to oil having moved back towards $50+.
The Europe, Australia and Far East markets have also moved higher. It looks like there is a belief that if America becomes great again it will bring the entire world along with it (?).
So clearly equities (broadly speaking) have been a winner since November 9th. Are there any losers?
You do not have to look any further than the BOND markets. Since the election government bond yields in the U.S. have spiked higher for one of the largest percentage gains in such a short time frame. The 10 year bond yield was about 1.8% in early November and in a very short time moved to just over 2.4%. If you owned the U.S. 10 year bond the value of that bond dropped about 5-6% over that time frame.
Why did bond yields move higher? INFLATION FEARS! Many of Trumps policies (if enacted) are inflationary. If you reduce imports from lower cost countries and restrict the movement of cheaper labour than the consumer will pay more…this is INFLATIONARY.
The chart below shows the TD bond has dropped over 2% since the election. High yield bonds (represented by Aston Hill Strategic Yield) has actually moved higher over the same time frame (however higher yield EQUALS higher volatility.
BOTTOM LINE: EQUITIES are higher by about 3% and BONDS are down by about 2-3%. So as far as your portfolio is concerned it is CLOSE TO A DRAW over the last 30 days.
The QUESTION is whether these policies can counteract DEMOGRAPHICS. The population is getting older and as such is saving more and spending less. This can and has put a damper on GDP (growth of the economy) reducing the need for higher rates.
In the short term BELIEFS can win BUT in the longer term I suggest that DEMOGRAPHICS will win.
As such areas that have been HURT by the rising interest environment may be opportunities again. This includes:
Higher yielding equities
Areas that have benefited from rising rates and the ‘make America great again’ story may see a pullback and these areas include:
To keep a long story short (who said ‘to late’) I will finish with a summary of what I believe are opportunities:
Individual bonds yielding 4-5% (for those nearing retirement and requiring cash flow)
Preferred shares yielding 4-5% (reduced tax implications in TAXABLE accounts)
XAW ETF (low cost all country all cap exposure to equities BECAUSE we really don’t know what will do well and when)
DYNAMIC TACTICAL BOND PRIVATE POOL (next 2 years income for RRIF accounts…all clients are getting high net worth pricing with this fund!)
***Aimia Inc. PREFERRED SHARE (yielding 10.4%)
Still doing the ‘work’ on gold (you need to believe in inflation to believe in gold and I am not there yet.
The views expressed do not necessarily reflect the opinion of Argosy Securities Inc. This does not constitute an offer or solicitation to buy or sell any of the securities mentioned. The information contained herein may not apply to all types of investors. Please consult a professional before making an investment decision.