Some Thoughts From Your Favourite Money Managers

September 09, 2021 | Taylor Iutzi


While it still isn’t at an end, it is sad to see the majority of summer now behind us.

Fingers crossed we continue to get warm weather and the economy and society in general continues to move to a “new-normal” (as distinct from the post financial-crisis “new-normal”).


Some thoughts from who we hope are your favourite money managers …


Equity returns this past year have been outstanding and generally above the long-term trend. Some of that was certainly due to catchup from the pandemic-induced recession; and, some of it is tied to the ultra-low interest rate environment that prevails along with the amount of government support for just about everyone, and promises of more to come. As with every market advance, there is a wall of worry for investors to climb and there seems to be no shortage of worries (Delta and a 4th wave being front and centre, higher taxes to pay for recent spending, inflation and rising interest rates, another disappointing season for The Leafs, and on the list goes). Once we run out of worries, look out!


If we take a step back, we need to recognize that market corrections are a thing of nature when it comes to capital markets. Markets look to, and try to anticipate, the future. To do this successfully, one needs a pretty good crystal ball; one that can correctly anticipate any and all bona fide surprises along with everything else. Truth is, we can’t, and so from time to time we get a reality check that requires a response from investors that puts us into a correction of some magnitude. The corrections that occur independent of an actual recession are pretty benign … I won’t say they are bloodless, but they should not be fatal. If the underlying economy continues apace (see below), the market will catch its breath and collect itself and mount a recovery. A market correction that is accompanied by a recession, on the other hand, can be a long and drawn out affair and runs the risk of chasing investors away for a long time. So, what do we do to protect portfolios from corrections and recession corrections? Well for the mid-cycle corrections, we ride it out while deploying cash to purchase equities at low prices and more attractive valuations.


We may also undertake some general rebalancing of the portfolio, often to catch the recovery wave a little more fully. A recession correction is still a correction, but one that we feel more. We need to bear in mind that the world has never experienced a recession and related correction without actually recovering from it, so history is on our side. A grinding economic recession is hard on everyone. Jobs and businesses are at stake and the excesses of the previous growth phase need to be worked off or unwound. The general strategy here is to move to defensive equities such as consumer staples (the stuff we will continue purchasing through a recession), utilities, telecoms and the like, for their attractive dividends and ability to weather a storm. Holding a mittful of economically-sensitive cyclicals is going to cause a lot of pain as earnings disappear and dividends get cut.





U.S. Estate Tax


This is a tough subject for a number of reasons, the main one being that very few of our clients are U.S. residents / citizens, and of those who are not, most do not realize that by virtue of owning “U.S. situs assets” (e.g. US stocks, US corporate bonds, US real estate) they may be on the hook for some amount of U.S. tax upon their demise (this is by virtue of the Canada- US tax treaty). The details of U.S. Estate Tax rates, limits, deductions, exceptions and exemptions, etc. is complicated and keeps the accounting profession busy. Of the details worth noting, there is currently an exemption for estates under $11.7 million USD. However, that exemption amount may be reduced to $3.5 million USD under a Biden administration proposal. You will be relieved to know, there are actions that can be taken to reduce or even eliminate one’s exposure. Please contact us directly if this is a concern or you would like to discuss further.




A Fundamental View: The current state of the economy


The two tables below confirm that we are still in the early innings of the new economic cycle, and that there are no yellow, never mind red, signs to be concerned about right now.

A couple of observations from the chart below:


  1. The Canadian market, as illustrated by the S&P/ TSX (top box) was in an extended sideways trend dating back to just before the Financial Crisis of 2008 / 9, and has just recently broken out of that pattern. So, it appears it may be the beginning of a new trend for the S&P / TSX.
  2. The bottom box illustrates the outperformance of the US market (when the line is declining), as measured by the S&P 500, post-Financial Crisis. The strength of this outperformance is moderating and may be setting up for a reversal in favour of the S&P / TSX.



As you can see, even though the market never rises in a straight line, many of the short term bumps are just that, and the longer term trend is what we really want to focus on.