THE BEST MONTH IN THREE YEARS
In the September issue of this blog (see the “September Sag” section), we expressed optimism for the final quarter of this year, based on historical data. From that blog: “Since 1945, the S&P 500 and its predecessor index have lost an average of 0.73% in the back-to-school month. The good news is that after a drop of 1% or more in August and September, the S&P 500 tends to rebound in October and perform well in the fourth quarter.”
November 2023 has even exceeded that optimism. It has in fact been the best month in the markets, and the best month for our portfolios, in the past three years. Regular readers of Marche Monthly will be familiar with the crucial importance of staying invested in order to not miss out on upswings such as this. To put it another way, investing success is not about timing the market (which is impossible), but time in the market.
Mistiming the market by just a few days can dramatically affect an investor’s returns. Can you guess what happened to the investor who missed the best 10, 20, 30 or more days in the market between January 1, 2003 and December 30, 2022? Here is what would have happened to their $10,000 investment in the S&P 500:
If they were invested on all days, their portfolio would have risen to more than $64,000. If they missed just the 10 best days, their performance would have been more than 50% poorer, resulting in a portfolio of under $30,000. Just 10 days!
Source: Visual Capitalist
RBC is forecasting that inflation will drop from 2.8% to 1.6% by the fourth quarter of 2024, and that interest rates will therefore be lowered from 5% to 4%. We believe this will be positive for our clients’ equity portfolios. We saw this effect in November, when interest rates dropped 0.5% and our 100% equity portfolios increased by over 6%. Our fixed income portfolios are up as well, but not quite as much, the yield on 10-year bonds in Canada and the United States having fallen 0.4% and 0.6%, respectively, in November.
PUTTING MONEY TO WORK
As of April of this year, our equity portfolios consisted of 15% cash that we “parked” there in short-term bonds, as we waited patiently for better opportunities to invest in equities. In subsequent months, we saw more value in the equity markets, became more optimistic about them moving forward, and now have fully invested that cash, by adding to our positions we think are the most undervalued, and establishing new positions in Nvidia, Estee Lauder and Starbucks across most of our equity portfolios.
TAX-LOSS SELLING
Many of our clients have had significant capital gains in taxable accounts over the past three years. Thus, some clients will have the opportunity this year - an opportunity we do not get very often - to trigger capital losses through a strategy known as tax-loss selling. The objective of this strategy is to offset taxes arising from capital gains in the three most recent prior years (2020-2022). Or, if there are no capital gains taxes to be offset in those three years, you can carry forward these losses into the future indefinitely.
As a value-added component of the discretionary asset management we provide, we have been proactively triggering capital losses where applicable in many of our taxable accounts over the past month. To ensure we deploy absolutely the most effective strategy, we partner with our clients’ accountants in more complex situations and/or when necessary.
If you would like to discuss this strategy further - or any other year-end tax planning opportunities that we have not already discussed - we look forward to hearing from you. You can also review this informational piece.
FALL ECONOMIC STATEMENT
In our federal government’s Fall Economic Statement, released November 21 by Deputy Prime Minister and Minister of Finance Chrystia Freeland, new measures totaling $20.8 billion over the next six years were announced. A detailed discussion is here. Some highlights include:
-No changes to personal or corporate income tax rates are proposed.
-The government will continue with previously announced changes to the Alternative Minimum Tax (AMT). RBC coverage of this issue is here.
-With the goal of making housing more affordable and making more long-term housing available for Canadians to live in, the federal government is proposing to deny income tax deductions for expenses incurred to earn short-term rental income in provinces and municipalities that have prohibited short-term rentals - and in situations where short-term rental operators are not compliant with the provincial or municipal licensing, permitting or registration requirements.
-The government also intends to introduce a new Canadian Mortgage Charter, which regulates how financial institutions must work with Canadians to provide relief and ensure payments are reasonable for borrowers experiencing temporary financial stress caused by elevated interest rates.
The Fall Economic Statement also contains other measures pertaining to individuals and businesses. For a more detailed summary and how it might affect you, see this discussion by RBC Family Office Services - or reach out to us.
FORECASTS
RBC Economics and Thought Leadership has published its forecasts for the current period through to Q4 2024. Here are some highlights.
As I mentioned above, inflation is forecast to drop from 2.8% to 1.6% by the fourth quarter of next year. As well, pre-tax corporate profits are forecast to rise from -12.1% to 2.7% and real GDP is forecast to rise from -0.5% to 2.6%. The Canada 10-year bond yield is now at 3.59% and is forecast to be 3.35% by the end of next year; the US bond is forecast to decline from 4.5% to 3.95%. Interest rates are forecast to decline from their current 5% to 4%, and the US dollar is forecast to drop from $1.38 to $1.31 Canadian.
“MUSH” MONEY
Are you involved in a MUSH?
“MUSH” is an acronym for municipalities, universities, school boards and hospitals. For some years now, I have been working with many of them on their investing strategies. Many of these organizations are discovering they do not have strong strategies in place, especially in terms of fixed income in a high interest rate environment. And so, they are experiencing poorer returns than should be anticipated.
I am working with them to modernize their Investment Policy Statement, establish relevant benchmarks and design investing strategies that will exceed those benchmarks.
If you are on the board of, or otherwise involved in, a MUSH, here are the questions you should be asking:
- Do you have an Investment Policy Statement?
- When is the last time it was reviewed, to ensure it is still relevant?
- When is the last time benchmarks were reviewed, to ensure they are still appropriate?
- How do you measure your performance against those benchmarks?
- Is the amount of risk you are undertaking aligned with your organization’s objectives?
- Is there transparency to stakeholders?
- Are your total investment management costs too high?
Questions? Just reach out if you would like to discuss.
THANK YOU, CHARLIE
Charlie Munger, Berkshire Hathaway's vice chairman and Warren Buffett's right-hand man and friend of 60 years, died on November 28, at age 99.
In announcing the death of his friend, Mr. Buffett declared that "Berkshire Hathaway could not have been built to its present status without Charlie's inspiration, wisdom and participation.” Berkshire Hathaway, as you may know, is a multinational conglomerate that owns many businesses purchased according to the principles of value investing - principles we follow by focusing on owning companies which:
- Have a track record of creating shareholder value
- Have management that treats shareholders as partners
- Are trading below intrinsic value
- Have a simple, easy-to-understand business model
Here at Marche Wealth Management, we thus owe a debt to both Mr. Munger and Mr. Buffett. Our full investing philosophy, inspired by them, is here.
From its founding in 1965, Berkshire Hathaway’s stock price rose - wait for it - 3.8 million percent. Its performance over that period was 19.8% per year, double that of the benchmark S&P 500. On the day of Charlie’s passing, it was trading at $547,000 per share, resulting in a total market capitalization of $785-billion, eighth in the world between Meta (7th) and Tesla (9th).
Mr. Buffett said that in 60 years of knowing Mr. Munger, the two men never had an argument. The full and quite touching story is here.
AN AMAZING TEAM
In a similar spirit, I will take this opportunity to applaud and thank the incredible team I am honoured to work with in serving you, our client. It is a team that delivers exceptional client experiences and outcomes every day. They are:
Tracy McClure, CPA, CA, CFP – Financial Planner
Joy Loewen – Senior Associate
Karen Snowdon-Steacy, TEP – Senior Trust Advisor
Steve Mogdan, CPA, CA – Financial Planning Specialist
Andrew Sipes, CLU, CFP – Insurance and Estate Planning Specialist
Alleen Sakarian, LL.B., TEP – Will and Estate Specialist
Kimberley Plewes, MFA-P – Philanthropic Advisory Specialist
THANK YOU - AND HAPPY HOLIDAYS!
The biggest thank you of all is reserved for you, our clients. For your ongoing trust in us, for giving us the privilege of working with multiple generations of your families, and for referring us warmly to people and organizations you care about.
On behalf of the entire team here at Marche Wealth Management, I wish you a very Happy Holidays and New Year!
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We don’t speak jargon. We’re all about uncomplicating your life, so we speak plain English. If there is someone you care about – someone who would appreciate this simple and straightforward approach – please feel free to share this message with them or put us in touch.
Want to discuss any aspect of this month’s blog, or any other issue on your mind? Have a story idea? I am always happy to receive your call or email.
**To learn about our unrivaled team of experts, delivering Canada’s widest array of wealth management services to our clients, visit our website, here and here.
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