We realize that at this time of year, shopping for Christmas presents and making sure the eggnog is nice and cold in the fridge takes priority over all else. However, this post may give you something to read while waiting in line for that perfect gift.
With the US election, OPEC meeting and an increase in the US Federal Funds Rate (key interest rate in the US) now in the rear view mirror, we believe that we are seeing more opportunities than we have for several years.
The prospect of lower corporate taxes, less regulation, higher inflation, higher interest rates, repatriation of foreign earnings and now higher oil prices is a lot to digest. Market consensus leading up to the US election was heavily, if not universally, tilted toward “low growth and rates forever”. The possibility that aggressive tax reform and deregulation could stimulate meaningful economic growth and investment (and potentially inflation) is just starting to be discounted by the equity market.
Furthermore, worldwide Economic data has been coming in above expectations, suggesting that the world economy could actually be reaccelerating, potentially alleviating the “boat anchor” most had thought would continue to drag global growth lower.
But….yes, there is always a but... It is early days for all of these changes and we must not make the mistake of thinking that these changes all represent long term trends just yet. Over the longer term, a Trump election also bears significant risks. While the market has paid little attention to trade so far, a protectionist trade policy stance could seriously hurt the Canadian economy, trigger trade wars with other US trading partners (especially China) and ultimately create a very inflationary environment. Moreover, if the US dollar was to appreciate too far too fast, it would again represent a headwind to multinational earnings, engender renewed stress in some emerging markets that have large USD liabilities, force China to accelerate its own currency depreciation, and create contagion in financial markets.
Finally, throwing massive fiscal stimulus at an economy that is already operating with a 4.6% unemployment rate creates a serious risk of overheating. For now, the market has decided to focus on the increasing likelihood of near to medium term stimulus, but eventually we expect more volatility as longer term risks from Trump policies potentially start to present themselves.
With all of this said, what should you be doing going in to 2017. Here are our top four suggestions:
1. Review your mortgage – If you have less than 3 years left in the term of your mortgage, approach your lender about strategies such as a blend and extend. With 5 year rates still extremely low, managing your interest rate risk on renewal might be very valuable. All of the mortgage rule changes and acceleration of growth south of the border should lead to higher mortgage rates on the horizon.
2. Know the value of a business when investing – Just because a stock looks good because of the recent changes in the landscape, don’t ignore the price you have to pay. Overpaying for a good business can sometimes be just as bad as buying a bad business.
3. Control the things you can control – Focus on how much you need to save, managing expenses or your estate planning instead of spending all of your time trying to day trade the market.
4. Give up on trying to predict where the Canadian dollar will go – Currencies might just be the hardest things to predict as their random movements over the short term are rarely driven by logic. If you are vacationing in the US this year, do yourself a favor and put some savings into a US dollar account. This will avoid the futile mental gymnastics of predicting the path of the Canadian dollar and will make your vacation more enjoyable.
We wish you and your family the very best this holiday season. Merry Christmas and Happy New Year!