From our Portfolio Advisory Group

Global equities have been somewhat directionless over the past few weeks. One notable development was the Canadian inflation report for May, which was higher than expected for the first time this year. This has moderately reduced expectations for a July rate cut, though markets still anticipate another one to two cuts from the Bank of Canada through the remainder of the year.

It's hard to believe, but we have reached the year’s midway point. Below, we take the opportunity to reflect on this year’s developments and share some thoughts on the outlook. We also want to highlight the Global Insight Mid-Year Outlook, published by some of the thought leaders across our firm. The special report on U.S. debt is particularly thought-provoking, though the whole piece is worth a read.

There has been encouraging progress on inflation this year, albeit with different regions seeing different rates of decline. Yet, services inflation has remained sticky throughout most of the developed world thanks to wage growth, resilient demand, and shelter-related costs. Even so, fading pressures have allowed a few central banks to begin cutting rates, while others, like the U.S. Federal Reserve, suggest cuts remain a possibility later this year. On the growth front, things have been arguably better than anticipated, given many investors were expecting a recession to have already begun in various jurisdictions. The manufacturing sector has been generally weak, offset to a large degree by the services side of the economy. The consensus view is that a soft landing, where the economy slows but avoids a material deterioration in employment, is now more likely for many economies, particularly the U.S.

The backdrop above has driven global equity markets higher this year, with the U.S. leading the way. But, as has been the case for some time, U.S. gains have been heavily influenced by large-cap technology, and more specifically, anything related to artificial intelligence. This momentum may continue for some time, but a few things warrant attention.

The U.S. market has become more expensive over the past year. While valuations are more reasonable if one excludes the large “tech” stocks that have led markets, they still sit above historical averages. That may have bigger implications over the longer-term than it does for the rest of the year. Meanwhile, our confidence in the sustainability of a bull market is usually highest when gains are driven by a broad range of stocks and sectors. But that hasn’t exactly been the case this year, though there is always the possibility that market leadership could broaden, or shift to other sectors. We don’t view investor sentiment as overly optimistic yet, which can often be the case near market peaks, but it is more positive than it was a year ago, suggesting there is growing risk of some investor complacency. Most importantly, the risk of recession remains above average based on various factors we monitor. As a result, we believe the range of possibilities for equities is wider than normal despite the market strength to date.

Outside the U.S., and “tech” in particular, equity markets sit at valuation levels that are more balanced, reflecting some of the economic headwinds that exist in parts of the world. On the fixed income front, yields remain attractive in our view, and higher quality bond exposure can act as a stabilizer in portfolios in the event equity market volatility returns. Overall, our approach to managing portfolios remains a bit more cautious at this time given the range of potential outcomes. We remain committed to regular rebalancing to mitigate the risk of overexposure to any one market or sector’s idiosyncrasies.

Wealth Management

I always have clients approaching retirement. Our firm has published a retirement checklist. For government benefits – CPP and OAS, it’s a good idea to set up a Service Canada account – this account will provide you with details on your entitlement. CPP is contributory so if you didn’t pay into it for most of your working adult years, you will not be eligible for 100% of benefits. Everybody’s situation is unique and by and large it makes sense to defer CPP to age 65 or you take a lifetime reduction in your benefit.

We also have a section on Estate Planning in this article. This was a recent question on our client survey which many clients questioned – “Have you reviewed your estate plan in the last 12 months? Note: an estate plan outlines distribution of assets, estate tax obligations, business succession plans, and/or other legacy wishes that ensure a smooth transfer of wealth. It typically includes a Will and powers of attorney.”

Typically when I meet with clients and update their financial plans, I ask about Wills and Power of Attorney and if they are in place and reflect your wishes. Naming an appropriate Executor who is nearby and has the knowledge and time to settle an estate is equally important. Wills and Power of Attorney documents are done by a Lawyer. For those who want assistance with the role of Executor or Power of Attorney, we have Royal Trust to assist. It is still a requirement for you to have your own lawyer to draft the Wills and POAs and Royal Trust assists with the wording to appoint them. Having beneficiaries listed on your registered accounts helps minimize taxes and Kim and I regularly review all registered account to ensure beneficiaries are in place where appropriate. Also a part of an estate plan is to understand how your assets will flow. Insurance helps offset income taxes at death. Please reach out to me if you have questions on your estate plan.

Client events

Coming up in the fall -

We are planning a fall market update event for September; please stay tuned for more details.

In the Community

On June 2, I participated in Bike For Health. This was a premier event that RBC sponsored; RBC had 29 riders (I was one of them), 30 volunteers from 5 lines of business. The event raised almost $364,000 and the money is going to Lakeridge Health Foundation, Ajax Pickering Hospital Foundation, Bowmanville Hospital Foundation and Port Perry Hospital Foundation. We were very pleased with the amount of funds raised so thank you to those who sponsored. See attached pictures (photo 1 and photo 2).

https://give.lhfoundation.ca/ui/bikeforhealth24

Our office held a fun putting challenge where we raised $255 for Feed the Need this month.

Our office also volunteer at the Humane Society Open House.

We have partnered with Canadian Blood Services and hosted a Blood drive.

Lastly, this year our branch will be supporting Ontario Shores through our Community Impact Campaign. We are donating $8500 which will be directly used in the expansion of the adolescent eating disorder unit.

 

Please note - our office and the TSX are closed on Monday July 1. The U.S. stock markets are closed on July 4 but our office is open that day.

 

Happy Canada Day!