Chalten Investment Review – Q4 2019

Welcome to the Chalten Investment Review for Q4 2019.   Risk takers were rewarded in the final quarter of 2019 as global stock markets rose significantly.  Global trade tensions eased as China and the US signaled both countries were ready to move forward with Phase 1 of a trade deal.  Economic data was fairly stable and therefore central banks remained relatively tempered with their policy response.  Of course, with markets reaching ever higher, the doomsayers are out in force once again.  Yes, there will be bad news and yes, there will be market downturns, sometimes quite sharp ones as we experienced most recently in Q4 2018.  Downturns are an inevitable and unavoidable part of investing.  Important to having a successful investment experience is the ability to ride through near term dips, shut out the noise and try to focus on the long-term.        

We think historical perspective can sometimes help.  Dimensional Fund Advisors shared some of their own perspective recently which we think is worth passing on:

“When faced with short-term noise, it is easy to lose sight of the potential long-term benefits of staying invested.  For investors, it can be easy to feel overwhelmed by the relentless stream of news about markets. Being bombarded with data and headlines presented as impactful to your financial well-being can evoke strong emotional responses from even the most experienced investors. Headlines from the “lost decade” (for US stock market, generally accepted as 1999-2009) can help illustrate several periods that may have led market participants to question their approach.

May 1999: Dow Jones Industrial Average Closes Above 11,000 for the First Time

March 2000: Nasdaq Stock Exchange Index Reaches an AllTime High of 5,048

April 2000: In Less Than a Month, Nearly a Trillion Dollars of Stock Value Evaporates

October 2002: Nasdaq Hits a Bear-Market Low of 1,114

September 2005: Home Prices Post Record Gains

September 2008: Lehman Files for Bankruptcy, Merrill Is Sold

While these events are now a decade or more behind us, they can still serve as an important reminder for investors today. For many, feelings of elation or despair can accompany headlines like these. We should remember that markets can be volatile and recognize that, in the moment, doing nothing may feel paralyzing. Throughout these ups and downs, however, if one had hypothetically invested $10,000 in US stocks in May 1999 and stayed invested, that investment would be worth approximately $28,000 today.

When faced with short-term noise, it is easy to lose sight of the potential long-term benefits of staying invested. While no one has a crystal ball, adopting a long-term perspective can help change how investors view market volatility and help them look beyond the headlines.”

Q4 Market Review

Again, the Bank of Canada decided not to change its benchmark interest rate, keeping it steady at 1.75% despite the fact that the US Federal Reserve cut interest rates once again during the quarter.  Perhaps this policy difference drove the Canadian dollar higher against the US Dollar over the quarter, which was counterproductive for Canadian investors’ US stock investments.  Government bond yields generally rose and prices fell.  International stocks overall outperformed stocks from the other regions we track, driven by emerging markets stocks which flipped from the worst performers in Q3 to the best performers in Q4.   Small stocks with low relative prices (value stocks) outperformed large growth stocks over the quarter in Canada and the International region.  In the US, while small cap stocks outperformed large cap stocks, growth outperformed value driven by strong continued outperformance of US technology stocks.   

  • The total return on the Canadian stock market was 3.2% for Q4 2019.
  • In the US, the total net return of the S&P500 in Canadian dollar terms was 6.8% for Q4.
  • The total net return for the S&P Global ex-US BMI Index of stocks outside of the US (in Canadian dollar terms) was 7.1% for Q4.
  • The Canadian dollar gained 2.0% against the US dollar over the quarter for a gain of 5.0% for the year as a whole.
  • Total return for Canadian bonds was -0.8% over the quarter, behind the performance of Global Developed and Emerging Market bond returns.   

Financial Planning topics of interest

The election in Canada delivered a Liberal minority government which probably means limited changes to tax policies for now.  For business owners, that means recent changes to tax on split income (TOSI) rules and the taxation of passive income will remain in place. 

And of course a new year brings new TFSA and RRSP contribution room and an opportunity to make 2019 RRSP contributions through until March 1.  Remember the CRA often doesn’t update your account with current TFSA contribution room until mid-February.  You may also wish to make new contributions to RESP and RDSP accounts to take advantage of various government grant programs.

In closing, we will remind investors again for 2020 to try to filter out the noise (a year of US election news flow won’t help!) and focus on the long-term.