Category: Accounting tips

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   By Guest Blogger Ryan Lewenza

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The US stock market has been “the” market over the last decade, in large part due to the phenomenal gains from the US tech sector. Indeed, over the last 10 years the Nasdaq and S&P 500 Information Technology sector have returned 18.6% and 20.9% annualized, respectively.

Since the pandemic hit it’s been the only game in town, with the Nasdaq rallying an incredible 75% from the March lows. That was until the beginning of this month when technology stocks pulled back sharply, leaving many to wonder whether the tech rally has run its course, or has much more to go. This is our focus today.

The Nasdaq’s Wild Ride Since the Virus Hit

Source: Stockcharts.com, Turner Investments

Let me begin by stating that this recent pullback should not be a surprise to any investor and only greed could blind you to this fact. Yes, there are many supportive and bullish trends for the technology sector as I’ll touch on shortly, but nothing, even Tesla’s stock price, goes straight up. With the Nasdaq having rallied an incredible 75% since the March lows, tech stocks were ripe for some profit taking.

First, tech stocks had become insanely overbought on a technical basis. The Relative Strength Index (RSI) momentum indicator hit 80 for the Nasdaq in early September (above 70 indicates overbought) and the Nasdaq was trading 28% above its 200-day moving average (MA) – both extreme overbought technical readings.

Second, with the strong price gains valuations for the tech sector had become downright frothy. Below is a chart of the forward price-to-earnings (P/E) ratio for the Nasdaq and you can see how it just “hockey sticked” over the last few months. To start the year the Nasdaq P/E was at 24x and following the huge rally increased to 40x, nearly double the long-term average of 24x. Sure earnings should continue to rise but I’m not sure if enough to support a near doubling of valuations. As Warren Buffet famously said “price is what you pay. Value is what you get”.

Nasdaq P/E Has Surged to 40x Earnings

Source: Bloomberg, Turner Investments

So, given the extreme technical readings and elevated valuations, tech stocks were vulnerable to some profit taking and very well could fall further in the short-term. Currently the Nasdaq is at a critical technical juncture with it trading right at its 50-day MA. If this level fails to hold the Nasdaq could experience another leg lower and I would look to roughly 9,400 (14% lower from current levels) for next major support, which is where the 200-day MA comes in. The next few weeks are going to be very interesting for tech stocks!

The Nasdaq is Trading at its Important 50-day MA

Source: Stockcharts.com, Turner Investments

Now longer term I’m still very bullish on the technology sector given so many supportive trends. They include:

• E-commerce. The biggest tech trend has been the move to online sales. Last year global e-commerce sales rose to US$3.5 trillion, up from US$1.3 trillion in 2014. And with e-commerce sales still only representing 14% of all global retail sales there is still tremendous growth potential. E-commerce sales are projected to hit US$6.5 trillion by 2023, which would represent a 19% compounded growth rate since 2014. Sorry brick and mortar businesses! Amazon came and changed the world (not necessarily sure if in a good way).

• Artificial Intelligence. This is the next big thing and will have far-reaching implications for the labour markets, how we get around with autonomous cars and ridesharing, robotics, computing, healthcare and so much more.
• Cybersecurity. As our whole life moves online bad actors will try to exploit this through those terrible cyber-attacks. In 2018 there were 80,000 cyber-attacks per day in the US or 30 million in total. Cybercrime damages are forecasted to rise to US$6 trillion next year, up from US$3 trillion in 2015. Huge potential!
• Stay at home. All these technology trends we’re already well established but the pandemic only accelerated these even more. We’re shopping online even more as we avoid large in-closed shopping malls, we’re watching a lot Netflix, Disney and Prime, we’re all on Zoom conference calls, while playing the newest video games. It’s crazy to think one event could change the world so dramatically, with many tech companies greatly benefitting from this pandemic, sadly.
• Then there’s automation, Fintech, VR, blockchain, IoT, and don’t even get me started on drones! Those things are nuts!

I see these trends lasting for some time, so I’m bullish long-term on the tech sector. But in the short-term, there could be more downside given the current mania and elevated valuations. Buckle up!

Ryan Lewenza, CFA, CMT is a Partner and Portfolio Manager with Turner Investments, and a Senior Vice President, Private Client Group, of Raymond James Ltd.

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Some people wonder how, in the midst of recession and pandemic, RV sales are surging. Boats, quads and hot tubs are flying off the shelves. Building supplies are scarce and precious as prices rip higher. Real estate is sizzling with sales and values inflating – as if the economy were on fire.

But it’s not.

And, incredibly, look at the chart below. This is the Canadian household savings rate. Remember when it was barely above 1% a while ago? Well, the rate just jumped to 28% – the same level as back when I had sequined bellbottoms and thick, curly chest hair.

Source: Statistics Canada, Turner Investments

But wait, there’s more news. Equally astonishing.

Direct deposits into Canadians’ bank accounts increased in the last three months by almost $94 billion. Billion. With a b. The most ever. Household net worth in the midst of the worst downturn since the 1930s was up by 5%. The value of investments increased by over $300 billion. Residential real estate was pushed higher $78 billion in just 90 days. Yikes.

There’s more. The ratio of debt payments to income dropped by the largest amount on record, partly because of all those mortgage deferrals. Debt as a percentage of income plunged from over 175% to 158% – the biggest quarterly plop ever.

This is a staggering jolt to personal finances. Historic. Unprecedented. And it’s 100% because of a torrent of government money coursing out of Ottawa into bank accounts across the nation – a response to a virus which infected far less than 1% of the entire population, but caused the economy to shut. The public cost was just as startling, new StatsCan numbers show, as the impact on consumers and the gush of spending on home renovations, quads and bungalows.

In a mere three months Ottawa was forced to borrow $301 billion. Of that, $234 billion came in short-term paper issued by the central bank and $66 billion in fresh bonds. More records. Nobody alive has ever seen this level of new public indebtedness. Says the agency: “The ratio of federal government net debt (book value of total financial liabilities less total financial assets) to gross domestic product (GDP) jumped to 32%, the largest quarterly increase in the life of the time series, as federal government net borrowing increased and GDP contracted sharply during the quarter.”

Okay, what does all this mean?

First, politicians deliberately turned off the economy, throwing eight million people out of work, shutting down entire industries and blowing an historic hole in the GDP. This was in reaction to Covid 19. It might have been wise and prudent. It might have been a hysterical over-reaction. History will tell us. Nonetheless, those who locked us out of employment, schools and routines had an obligation to compensate for their actions.

Second, we will be paying for this for a long, long, long time. When the government burns through $100 billion a month, every month, pushing the debt past $1 trillion (double that when provincial red ink is included) there’s no choice going forward but increased taxation, currency debasement, inflation, or all of the above. Oh, and Parliament’s been suspended or restricted the entire time. Most measures were announced under the powers of a state of emergency. So much for democratic protocol.

Third, did Canadians blow this? Handing over $94 billion in direct deposits made real estate less affordable, goosed motorcycle sales and drove the price of two-by-fours through the roof at the same time 25% of all homeowners with mortgages decided to stop making payments and unknown numbers of tenants welched on rent. There’s a growing sense we might come out of this in way worse shape thanks to the unregulated flow of CERB cash. More spending did not reduce debt. In fact, household borrowing just hit a new high of $2.33 trillion.

Covid really messed things up. The political response was extreme. Maybe that was the right response. Perhaps not. Obviously a lot of people needed income support when their livelihoods were erased. Others found CERB cash replaced the need to look for a job. Others quit work to collect it. Small businesses complained of a lack of willing employees. And the gush of cash, along with crashed interest rates, has inflated prices and increased personal obligation. Now we have an unfathomable shortfall in public finances, and a government unbothered by it.

The next few months will tell the tale. Throne Speech soon. Budget a few weeks after that. At some point in 2021, likely an election. Polls today show the spendiest government in history would win again. Our national appetite for caution, moderation, prudence, restraint went pffft. These are the days of quick gratification when people vex if a download takes more than five seconds.

Covid brought us to this crossroads. Pick your path.

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Covid killed tourism. And that slaughtered Airbnb. The company says bookings have started to reappear, but the revenue hit was about $1 billion. That temporarily put the kybosh on plans to take the room-sharing giant public, making the founder a bazillion.

Some online, shared-economy ideas are winners. After all, who doesn’t love the dancing nymphs on TikTok? But Airbnb turned over the years from a way to make money renting your back bedroom to creepy strangers from Moncton to a rapacious, greedy monster upping property values and punting renters.

Once it became evident you could buy a house or a condo, sign up for short-term rentals and make $200 a night renting it out, no longer did it compute to have pesky tenant paying two grand for a whole month, expecting you to actually fix things and then maybe decide to stop paying and squat. Investors competed for high-rise units and whole houses to run Airbnb, and soon large-scale commercial hosts were dominating the platform. In Toronto alone, pre-virus, there were about 7,500 properties in that category (of 21,000 listings) – nobody lived there permanently. They were not room-sharing principal residences, but ghost hotels.

So Airbnb (a) displaced long-term tenants, (b) caused rents to increase by sucking off the rental pool, (c) seriously hurt hotels which (d) caused many lower-income people to lose their hospitality jobs, (e) decreased the supply of housing for residential uses in most cities and thus (f) helped inflate property values making it harder to families to buy. Critics also claim the sharing platform caused an unwelcome surge in tourism in many places that don’t want it. Paris. New York. Venice.

What a legacy.

Cities like Vancouver, Montreal and (finally) Toronto have adopted rules that Airbnb hosts must live in the place they’re renting out, register and collect tax. But so far the platform continues to list thousands of places that are just fake hotels. Lots of owners still flog their units, pocket the cash, pay no tax and are usually in violation of condo bylaws.

Well, Airbnb’s controversial CEO, Brian Chesky, says he’s sorry. All the criticism has merit, he adds. The company will change its ways.

“We grew so fast, we made mistakes. We drifted. We really need to think through our impact on cities and communities.” He went on to say that “Airbnb needs to change. We need to go back to basics — to what really made us successful in the first place.”

Chesky says priority will be given mom-and-pop hosts in the future. The company will ink deals with cities limiting the number of nights rentals can occur. It will comply with enhanced municipal regulations. And it will assess and mitigate its impact on local property values.

In practical terms, Airbnb bookings have plumped again as the economy reopens but a lot of hosts are bailing out, selling properties and adding to a swell in property listings. This is helping to push down rents in places like Toronto while Covid whacks condos and inflates the burbs.

So, yeah, it’s a changed world. Airbnb kills hotels. Uber massacres all the taxi drivers. Amazon and Wayfair destroy the physical retail sector. Zoom steals your office. AI might finish off your job.

And here we thought the pandemic was the problem. Silly us. The millennials did it.

Are you a female living in BC or Ontario?

Hmm. Odds are (says a new Nik Nanos poll) you think the Trudeau Libs should continue to let it rip, spend money, provide social support and care not about the deficit. Support for this approach peaks on the west coast (of course) and tanks in Alberta (naturally). A majority of men want less spending and lower federal deficits. Most women are the opposite – more spending if it means better support. Overall 86% of Canadians oppose government even trying to balance its books if it means a cut in benefits.

Wow. Trudeau gets a pass, it seems. And now that we’re just twelve sleeps away from the Throne Speech, this pretty much paves the path of the nation.

Ottawa will spend maybe $400 billion more than it collects this year. That’ll push the accumulated debt to over $1 trillion. Economists figure deficits will run at least $100 billion each year the Liberals stay in power, which compares with the worst-ever previous cock-up – Harper’s $56-billion hole during the credit crisis.

The big speech will outline more spending, a green initiative and measures to address the wealth gap, including (probably) a form of guaranteed annual income, or UBI. If you have wealth and think the role of government is not to remake society, you’ll hate it. But the real hit could come with the first Chrystia budget a few months later. New tax bracket. Capital gains inclusion rate hike. Corporate tax jump. Big tech attack. More debt, taxes and spending than you ever thought possible.

Five years ago Justin Trudeau said the budget would balance itself. The pandemic just taught us something else about him. What a revealing little bug.

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“Tearing my hair out here,” says Brenda, who needs to get a life. “Your blog keeps talking about stupid cheap mortgages at 1.5%, but the best my bank (the green one) will give me is 1.81%. So what should I be doing because my loan comes due in a few months? Will I miss this chance?”

Calm down, lady. Get a grip. Go for a walk. Sheesh. Society’s in the middle of a global pandemic with Depression-era job loss and you’re worried about a third of one per cent?  First World problems.

To be clear, here’s the difference between those rates on a $300,000 mortgage with a five-year term and a 25-year amortization: $44 a month, or $1.46 per day. That’s $526 a year. If that makes a consequential impact on your cash, B, you shouldn’t own a house. Period.

Mortgage rates are both cheap and all over the map. The banks still have posted rates of more than 4.5% for five-year loans, but will generally slash that to 2.3% if you can still breathe. Good customers (flatter TNL@TB and buy some of her dodgy mutual funds) will get something between 1.8% and two. Sometimes this will dip to the 1.7% range. To do better you’ll have to visit a mortgage broker (slicked-back hair, loud jacket, big rings, Jeep, curvy secretary) but the borrowing may not come with sexy stuff like pre-payment privileges (…but why would you pay it off?).

Some people think rates will never go up. Central banker boss Tiff Macklem has fed that narrative by pledging to keep the cost of money low until Covid is history. He did it again Wednesday. This is not necessarily good news, since low rates = bad economy. Sooner or later bad economy = crappy real estate market.

Said the Tiffer:

The Bank continues to expect this strong reopening phase to be followed by a protracted and uneven recuperation phase, which will be heavily reliant on policy support. The pace of the recovery remains highly dependent on the path of the COVID-19 pandemic and the evolution of social distancing measures required to contain its spread.

So when the economy reopens, a vaccine arrives and normal creeps back, the cost of money will rise. Not a lot and not fast. But when people stress out over a few basis points and obviously are cash-strapped, imagine when happens when mortgages return to 3%, 4% and then 5%. And, yes, it will happen. If it doesn’t you have bigger things to worry about. We will not survive the next downturn if rates are still in the ditch.

The best strategy?

Lock in, of course.

Do not be seduced by the slightly-tastier rate on a term shorter than five years. Eschew variable. Consider a decade-long loan (now as cheap as 2.55%) if you don’t plan on moving for at least five years (the break fee is big).

And what about aggressively paying down a mortgage with a rate that’s less than two per cent? Does it make sense to double up on payments or throw big chunks of cash at the loan every anniversary?

Nope. Probably not. Despite what your debt-hating spouse wants. After all, you’re using precious after-tax cash to pay down a loan with a rate about equal to inflation on an asset that’s hopefully increasing at a pace faster than the annual cost of living. Meanwhile financial portfolios have averaged a 7% return over the last decade and popped more than 15% in 2019. Even in 2020, the year everything screwed up, returns will likely surpass the cost of that home loan. So over five years you’d be better to invest the dough in balanced ETFs, see it grow, then plunk it against the mortgage principal upon renewal. End result – greater net worth. Happy spouse.

Now look closely at what the central bank just said:

• “The rebound in the United States has been stronger than expected.”
• “As the economy reopens, the bounce-back in activity in the third quarter looks to be faster than anticipated in July.”
• “Economic activity has been supported by government programs to replace incomes and subsidize wages. Core funding markets are functioning well, and this has led to a decline in the use of the Bank’s short-term liquidity programs. Monetary policy is working to support household spending and business investment by making borrowing more affordable.”
• “Household spending rebounded sharply over the summer, with stronger-than-expected goods consumption and housing activity largely reflecting pent-up demand. There has also been a large but uneven rebound in employment.”

Exports are still iffy. Business confidence subdued. Recovery, the bank says, will be “slow and choppy.” But wait. Core inflation is now between 1.3% and 1.9% – and the point of ignition for interest rates is not far off. When will the cost of money start to rise? The bank said Wednesday it “will hold the policy interest rate at the effective lower bound until economic slack is absorbed so that the 2 percent inflation target is sustainably achieved.”

Dunno about you, but it seems to me the trip from 1.9% to 2% is probably not a long one. Maybe it’ll take a year. Or two. Depends on Covid. But pandemics are temporary, and this one’s already past the curve.

Do not assume cheap money will stay forever. Nor that there’s still a downside for rates. Real estate that’s been inflated by monetary policy can be deflated just as fast.  Lock ‘er up. And if you’re losing sleep over a few basis points, you may not survive what’s surely coming. Time to find a greater fool.

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Once there were cows. Then cookie-cutter little houses on treeless streets. Then the Home Depot came. Fat roads. Traffic and people. McMansions And now this.

Last month 360 detached houses sold in Mississauga (pop 800,000) for an average price of $1,307,832. That was $244,300 (or 23%) more than the same house fetched a year ago. The first time above $1.3 million. And it was forty grand more than similar homes were changing hands for across the line in west Toronto, and $100,000 above the price in the east end of the city. Only the traditional mid-town enclave of the wealthy saw sales at a higher level (by a million).

Hmm. What’s up?

The Virus Boom. It’s hard to imagine a global pandemic would have rendered the commutershed more valuable than the employment destination it fed. But it’s occurred. More evidence that these are not normal times. The question is whether or not they constitute the new normal.

It’ll be years before that question’s answered. However, the paleo thinking behind this blog is that until human nature is altered, things will revert to the way they were. Cities will restore and rejuvenate. Employers want workplace interaction, creativity and team thinking and people with aspirations will want to be there. After all careers and jobs are two different fish. Even in the gig economy. Once the world normalizes, a mess of newly-minted suburbanites will discover what commuting hell is, and why urban houses cost seven figures more.

Meanwhile, the best strategy at the moment is to sit on your hands, not falling victim to FOMO.

Look what financial markets have been saying recently. Volatility is building. Valuations are being second-guessed. Commodity prices deflating. After all, we’re still in a recession with scary levels of unemployment, record heaps of personal debt and hundreds of thousands of people not able to service their mortgages. Some companies aren’t coming back. Some are crippled. Look at Porter Airlines – no fights now until at least the middle of November, if ever. Retail is crushed. Restaurants entering a winter nightmare. Big corps trimming office space in advance of trimming workers.

Meanwhile the macroeconomics may start to suck soon. The American election is a slow-mo disaster. The virus is churning a second wave through parts of Europe, hitting India and leading to a 200,000 death toll to our south. Oil prices are forecasting a slower pace of global recovery. Central bankers, sitting on near-zero rates, are out of magic bullets. Government spending is off the charts.

Yet the average house in Mississauga now costs $1.307 million, up a quarter million since Covid came. Does this not define ‘risk’? It’s emotion, after all, not the economy which has caused a continent-wide real estate rush.

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Speaking of emotion, time for a sort hop to Montreal.

“We recently migrated to Montreal from Vancouver,” says Alex. “Primarily due to the unattainable, and disgusting nature of the home ownership in BC. We thought we could get to Montreal in time to buy something at a modest price but alas, it seems as though house prices are moving faster than our wee toes can keep up.

“My wife and I are Both 36 and have a 1 year old. We have never owned a house, but we feel we need a home and don’t really know how much bullshit it is going to be. We have a huge down payment, and won’t need to borrow big to pay off a loan.

“I do not understand if we should be trying to buy now in a great area or wait until October when the mortgage deferrals stop and an influx of properties could hit the market and drive prices “18-20%” lower. Do I try to lock in a mortgage rate for 120 days now and wait until the axe falls? We are looking for a home for our family with the ability to service the debt without killing ourselves like everyone we know in Vancouver. What to do?”

Well, Alex, sales in Montreal last month were up over 30% and prices ahead 24%. Of course, compared to Van or the GTA (including Mississauga), it’s cheap. Average price under $450,000. Like in Alberta, big numbers of deferrals. Big Covid in Quebec, too. And the shuttered US border is having a significant impact.

Will houses cost less in November than in August? Probably. Will the deferral cliff have an impact? Yes, it will. Will mortgage rates go up by Christmas? Not a chance. The answer to your question – buy now (in a frenzy) or wait (until it passes) – should be obvious. The next query is why, when home loans are 1.5%, you’d throw all your cash at an asset that could prove unstable. Better to have a minimal downpayment, cheap financing and invest the rest for the long-term security of your family. Or, if you insist on using the cash, borrow against the place to invest and achieve a tax-deductible mortgage. Or just rent.

By the way, you didn’t need to move 4,500 km to afford a house. Drama queen, much?

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So here’s where we are.

Interest rates can hardly fall further. Mortgages are 1.5%. It doesn’t get any cheaper. This suggests we hit peak house (above 2017 pricing) last month during the Virus Boom. With no room for rates to fall there is little reason for real estate to inflate.

Second, the economy’s about to become a lot more critical. CERB is ending. Employers expect millions to return to the office, shop or factory floor. Child care expenses, commuting costs, new slacks and haircuts are back in the household budget. (If you think WFH was a permanent thing, you’ll be surprised what the next 18 months bring.)

Third, that exodus to the suburbs will probably end up being a career-killer for many. In any case, it wildly inflated non-urban prices, brought urban rents and condo values down and was the answer to boonie-dwellers’ prayers.

Fourth, there’s a ton of volatility on the way. Second wave – hope not. US electoral paralysis – almost certain. Trudeau/Chrystia spending orgy and political consequences – bet on it. Vaccine – its arrival will be explosive. America – closer to a civil war than at any time in memory. Inflation – a certainty after the world spent $20 trillion fighting a bug.

Fifth, real estate listings could take a turn higher as the deferrals end. In fact, all kinds of mayhem might result, since the number of people missing their payments over the last few month has been seriously under-reported. According to Equifax 1.2 million blew off one or more payments between March and July. There are 8.24 million homeowners in Canada and 44% don’t have a mortgage. Of the 4.7 million with a home loan, therefore, 25% stopped making payments. This is not only massive, it’s more than double the rate in the US – where folks currently carry far less debt.

Mortgage broker rockstar Rob McLister recently estimated 61,000 forced sales could occur as the deferrals shudder to a halt over the next few weeks. But the housing risk could be greater. According to the Equifax analysis (and, yes, they are recording all these deferrals) 600,000 people were still not making payments last month. These borrowers had mortgages 25% larger than the average, lower credit scores and greater leverage. Duh.

“If mass payment forbearance ends as expected next quarter and we do get 60,000+ forced liquidations,” says McLister, “say goodbye to record-high home prices for a while.”

But the deferral cliff is just one reason experts like CHMC are sticking to their forecast of a 20% decline in prices over the months to come. Or more. The list of uncertainties has seldom been as lengthy as it is now. Big job losses. Recession. US electoral crisis. A pandemic. Record debt. Spend-and-tax politicians. At-risk industries. Winter.

Do sane people leverage up and move away from their jobs in days such as these?

Only if they think it’s different this time. (It isn’t.)

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Photo credit: whitevalhallawolves

More than 500,000 households, at latest count, still aren’t paying their mortgages. That’s about $140 billion in debt. Thus, over $300 million per month is being added to outstanding debt, as interest piles up. Oh, plus there’s another $100 billion in LOC and credit card debt that’s gone unserviced.

In total, three million Canadians took a Covid payment holiday. That’s 25% of all the households in the nation, or 16% of employment-aged citizens. The biggest deferrers were people aged 35 to 44.

Says the bankruptcy association: “There is a large proportion of Canadians who are already technically insolvent; they are unable to pay their bills and debt repayment obligations each month. Most who are in this position are using COVID-related financial support to make ends meet. But we know that many of these individuals will need debt relief when the temporary support ends.”

It’s starting to emerge that Covid came to town at a convenient time for a lot of folks, who were sinking into a state of poochedness all on their own. The shuttered offices, job losses, recession, lockdowns and quarantines led to (a) the temporary suspension of crippling debt payments and (b) a gush of federal money, from CERB to enhanced child pogey to wage subsidies.

“Delinquency rates held up relatively well and do not reflect the sharp rise in job losses thanks to the various support mechanisms,” says credit bureau Equifax. “One in five people utilizing deferred payments were already financially stressed prior to the start of the pandemic. Some of these consumers may find it harder to recover as support mechanisms start to reduce.”

Indeed. We now know household debt is going up again. In the last year 12 million households managed to add $55 billion to the pile, now sitting at just under $2 trillion. Most of that comes from mortgages – interest on all those deferred payments plus new borrowing thanks for the Virus Housing Boom.

As stated here a few times since FOMO arrived for the second time in five years, there are reasons the current real estate frenzy will not last and buying now is a really, really, really bad idea. We’re in a recession. The jobless rate is awful and will take years to drop to early-2020 levels. Debt is off the chart. Government spending is out of control. The virus is not over. There’s no cure. Some industries are in critical condition. People are panic buying, paying too much and making rash choices. The US election could end in a protracted crisis. Mortgage deferrals are ending. And people who should know – CMHC and the Bank of Canada (among them) are warning you about an unsustainable housing market.

We know what the immediate reasons for the feeding frenzy are. Pent-up demand (Covid stole the spring market). Remote work (people think this is forever and are rushing to bigger homes, further out). Insecurity and the need to nest (the virus makes everything scary). All of these are pandemic causes. And what folks forget is that pandemics are temporary. They pass. This one will, too. Making huge lifestyle decisions and snorfling massive debt based on a temporal event is, well, one definition of human fallibility.

Beyond the virus, this also accounts for the outburst of house horniness…

Interest rates have been in a long-term decline for the last thirty years. Central banks seriously whacked the cost of money to deal with the 2008 credit crisis, and again when oil prices collapsed in 2015. Now Covid has delivered another gut-punch to the economy, and the Bank of Canada has responded by crushing the cost of debt.

Some people – many of whom come to this blog to justify bad behaviour – think interest rates will never rise again. But if they don’t, when the next financial crapstorm hits, central bankers will be out of bullets. Any downturn would be deeper, longer and fatal for indebted homeowners.

Second, what if house prices have really only gone up over the past few years because the cost of money has gone down? This pandemic is a great example. House values have flared when the economy tanked, millions lost their jobs and millions more couldn’t even pay their mortgage or credit card monthlies. That made absolutely no sense – until you realize 1.5% home loans allow more debt. More debt brings real estate appreciation. Until the drugs run out.

So if rates stay in the ditch with mortgages bottoming at these levels and the economy in a long recession why would prices rise from here? And when the next slowdown (or worse) materializes there will be no more narcotics to dole out. The debt, however, will remain.

Is this a solid personal strategy?

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  By Guest Blogger Doug Rowat

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Given the social and economic dumpster fire that has been 2020, I take glimmers of hope where I can find them.

As a portfolio manager, I naturally focus on a long list of fundamental factors that may drive equity markets—corporate revenue and profit outlook, balance sheet strength, valuations, government and central bank stimulus, interest rate policy and, particular to this year, the progress (or lack thereof) in containing Covid-19.

But sometimes a part of my outlook is determined simply by a few strong trading days or—even better—a few strong months, particularly if they occur in the midst of a market crisis. Is such nascent positive momentum a certain predictor of future market success? Of course not. But it’s certainly worth considering.

History has shown that an unusually strong quarter, or even several unusually strong trading days, signals a shift in market sentiment, which often sparks an extended rally. Let’s start first with what a few really good market days could be telegraphing.

The table below shows the 15 best single-day returns for the S&P 500 Index since 1960 and its subsequent price performance over ensuing short- and long-term periods. Note that these good days usually occur close to the heart of a market crisis and the subsequent index price movement over future time periods is virtually always positive. The takeaway is obvious: strong market days have something very clear to say about shifts in market attitude and where markets may head in the future. Thus far in 2020, there have been five trading days that would have made this list, including two days in March where the S&P 500 had one-day gains of greater than 9%.

S&P 500 performance following its best single days

Source: First Trust; returns annualized, price performance only (no dividends).

Now, let’s shift focus to quarterly returns. As we know, the second quarter of this year was a scorcher with the S&P 500 gaining a whopping 20%, making it the fourth-best quarter for the index since 1950. What might this strong quarterly return suggest about what comes next?

According to SunTrust Advisory, following the top 10 quarters since 1950, the S&P 500 has climbed EVERY time in the next quarter with an average gain of 8%. For those who have been paying attention to market performance thus far in July and August, this perfect record looks set to continue. And with respect to S&P 500 performance one year after a blow-out quarter? The S&P 500 was higher one year later after nine of these 10 best quarters with an average gain of 15% and a median gain of 17%.

Of course, markets never track the past exactly and risks abound. But the early momentum we’ve seen since March is encouraging. As noted investor Gil Penchina once explained it: “momentum begets momentum, and the best way to start is to start.”

So we’ve started. And I believe that markets are far from finished.

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And finally, examining the actual fundamentals in detail will be a subject of a future blog, but I’ll leave you with this chart. Needless to say, the massive amount of global stimulus and its divergence with financial asset prices supports our bullish outlook into next year:

Global liquidity growth vs world financial asset prices (US$ terms, 1981-2020)

Source: CrossBorder Capital; liquidity is defined as all cash and credit available to financial markets including liquidity provided by central bankers.

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And finally (for real), it’s that time of year again when hurricanes get the continuous nightly-news treatment. While no one would argue the damaging and often deadly consequences of hurricanes, what I’ve always questioned is the disproportionate amount of attention that they receive in the financial media. Every year, this kind of imagery gets plastered across the business newsfeeds:

It’s the end of the world… or is it?

Source: Bloomberg

However, as I point out every year, the actual consequences of hurricanes to markets are negligible. Fear always generates viewership, but keep the below table in mind when the frightening hurricane newsflow continues over the next few months:

While hurricanes always make the financial news, they don’t actually impact markets

Click to enlarge. Source: Bloomberg, National Oceanic and Atmospheric Administration, Turner Investments. Total return shown. Damages not adjusted for inflation.

Doug Rowat, FCSI® is Portfolio Manager with Turner Investments and Senior Vice President, Private Client Group, Raymond James Ltd.

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This week stocks laid an egg. The pros weren’t much surprised.

We were overcooked, after all, with investors getting ahead of themselves and pushing valuations – especially for inflated tech companies and sexy corps like Tesla – into the stratosphere. Mobs of moist little day-traders clicking on their Robin Hood apps didn’t help much. Lately speculation has been everywhere. Equity markets hit record highs earlier  this week, and the S&P 500 had gained 60% since March. Sixty per cent. That’s about nine years of normal growth. Stunning.

So markets are taking a reality check.

Do we still have a global pandemic? Check.

Almost 190,000 Americans have died of Covid, right? Check.

There are some 30 million unemployed Americans on the dole? Check.

The federal deficit in Ottawa is 12 times bigger than expected? Check.

Washington is spending $3.3 trillion more than it’s collecting this year? Check.

These are numbers the world has never seen before, is that correct? You bet, check.

The jobless rate in Canada tops 10% even after the latest gains? Check.

This is the worst recession since at least World War Two? Check.

The US is trying to pick between a burned-out 77-year-old career politician and a quixotic, race-baiting misogynist billionaire reality TV real estate guy? Who’s 74? Uh-huh. Check.

So, stock markets are reassessing their froth. Good thing. A correction of 10% or so would be understandable. Even welcome. The world is still brimming with uncertainties. A second virus wave could come. The American election could degenerate into chaos. The online stocks are smelling a lot like the dot-coms did twenty years ago, more flash than cash flow. After riding an incredible tsunami since the virus first hit, professional fund managers are happy to hit the sell button, take risk off the table and wait for the economy to catch up.

Average investors can try the same, but it’s probably not a great idea. Let the Robin Hood kids get whipsawed around by Mr. Market. For most people with an eye on retirement, for example, the best strategy is to set up a B&D portfolio, tweak it every year or six months, and forget it the rest of the time. A bunch of gains since March could be reversed, but they will be restored over time. And you have absolutely no idea on what day big advances or declines will take place. So stop trying to time it.

Now what differentiates putting money into a financial portfolio from investing in a house comes down to one word. Debt. Or leverage. People buy ETFs with money they have. They grab houses with wealth they don’t have. Using 10x or 20x leverage is common. When the real estate you bought with leverage rises in value, you win. If you paid too much in a frenzy and the value falls, you’re pooched.

So if stock investors were overly ambitious and are now being spanked, why can’t that happen with real property? After all the same conditions exist – pandemic, recession, big unemployment, political instability and debt. How much danger is there that this housing market could correct, far faster and sooner than many expect?

Hmmm. Beats me. But look at this:

In Toronto in August prices hit an all-time record high. That was the second record in two months. Sales were up 40%, the average selling price gained 20% year/year and a ho-hum detached gained 19%, to $1.2 million. Toronto, by the way, has an unemployment rate of 13%. Fewer people went on vacation in August this year because of the pandemic and job loss, says the real estate board, so they stayed in the city and bought houses. Sure, makes sense. Toilet paper, Zoom downloads, houses. Whatever.

In Vancouver sales were 20 times higher than the 10-year average. The benchmark price topped $1.04 million. Both detached and attached houses saw sales more than double from the same month a year ago. Prices were up 5%. The realtors said, “Low interest rates and limited overall supply of homes for sale are creating competition in today’s housing market.”

In Victoria there were 48% more sales in August, while listings fell and prices gained over 5%. To its credit, the local board has been realistic, suggesting this stuff will not last: “This is not a trend, but our market at this moment in time during a unique situation. It is a challenging time to define what is happening in the market given so many factors that don’t exist in a normal year. We have been surprised by the pace of the summer market and are grappling with the evolving socio-economic effects of the pandemic and how these underlying factors will influence our fall real estate market.”

In Ottawa there were 17% more sales last month amid the biggest surge in listings in five years. House prices shot ahead 22% and the values of condos swelled 24%. Multiple offers abound and the realtors are calling it “a perfect storm.” Adds real estate board boss Deb Burgoyne: “This is an extremely challenging market for many, especially those on the buying side. Many are experiencing what we call ‘buyer burnout’, having placed many offers without success.”

Other cities – Halifax, Montreal, Winnipeg – have yet to report, but the story’s expected to be the same. The disconnect between what people perceive and what exists is huge. It’s unprecedented that in a recession, amid job and employer carnage and in the grip of a public health crisis, battling a virus with no cure, that FOMO would foment.

Some people have come here to slough off warnings about a real estate bubble, saying if it exists, stocks must be there, too.

Maybe so. But one is far more lethal.

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“We’re scared,” Terry told me yesterday.  “Yeah, I know it’s emotional, but it’s real. Whaddya think we should do?”

The Toronto entertainment exec called me to share his family’s angst over the most tragic thing any household could ever consider. Leaving Toronto. Seriously. It’s tearing them up. Of course (like everything else) this is Covid-related. The bug hit, sent Terry and Jane into remote-working mode, shuttered the schools their three kids were attending and, incredibly, set the value of their mid-town house on fire.

Here’s the debate: should they sell, move down the 401 to London and start a new life on more secure footing, distant from the megalopolis?

Cough it up, I said. Tell me everything. Then you get an opinion.

So they’re mid-forties, three pre-teenagers with a family income just south of $160,000. No pensions, save the usual crappy insurance-company mutual fund-laden group RRSP. No non-registered account. And about four hundred thousand in bank mutuals across tax-free accounts, RRSPs and an RESP for the spawn. Monthly savings (with three expensive children) is zero. When the last one is finishing up uni, Terry and Jane will be wanting to retire. Income then will be inadequate, without selling the house.

That property, by the way, is now worth about $2 million, or double the value of a decade ago – and has raced higher over the last two months as the Virus Boom hit Toronto. Fueled by cheap money, pent-up demand and panic buying of detached homes that people can turn into germ-free bunkers, sales have exploded 40% with prices up by a fifth and the average detached now fetching $1.2 million.

Plan A, then, is do nothing. Be frugal. Pray the kids go to university via the subway, not in another province. Stay employed. Hope like hell the property market holds on to its value even when the FOMO ends, mortgage rates advance and economic reality sets in.

Plan B is London. That city (pop 450,000) is a mini-version of Toronto, but without gridlock, 75-storey condo towers, Drake or a silly basketball team. The average house costs less than $500,000, even after a 17% year/year price surge. I told Terry I’d lived there a couple of times, both instances in the historic, leafy north end which smells a lot like Rosedale or Shaughnessy. Houses that cost $3 million in mid-town Toronto go for about seven large.

The advice? Simple. No brainer.

Sell in TO for two mill. Buy for seven. Invest one point three in a balanced, diversified, well-managed portfolio earning six or seven percent over the next decade and end up by age 60 with at least three million. That should throw off close to $200,000 in annual income for Terry and his squeeze for the rest of their lives, while they live in a paid-off home and have several million dollars of liquid assets.

What possible reason can you dream up for not doing this? I asked.

His best two were: (a) it’s very scary leaving Toronto (there could be bears in London) and (b) my 13-year-old daughter will miss her friends.

After I recovered, we reviewed things.

Of course, staying put – taking no risk on the unknown – likely constitutes the greatest risk. Job loss (in a volatile industry) would be catastrophic for a family of five. It’d likely necessitate a house sale, hopefully when the market is still robust. A second wave and lockdown would change everything, trapping their equity and capping choices. Terry and Jane don’t have enough saved for retirement, lack good pensions and have big financial demands coming. Why not grab windfall capital gains now and put the money to work? Will their $2 million beater house become a $4 million mcmansion in another decade? Will middle-class incomes double or triple by then to support that price? Can mortgages get any cheaper? Or is this, logically, the apex? If so, why not grab on?

The trade: one inflated house in a big city for a better house in a smaller place, plus income and financial security for life. Duh. How is it even debatable?

But could the stock market plop over time along with residential real estate? Sure, although there’s never been a ten-year period since WW2 in which markets finished lower after a decade. Besides, a B&D portfolio contains no individual stocks, has global exposure, at least 40% safe assets, generates income whether equities rise or fall and – unlike a house – doesn’t have everything concentrated in one asset on one street in one city.

“Don’t be such a wuss,” I gently and compassionately counseled. “And tell your spoiled kid to get over it. Sheesh.”

He hung up. I may have to work on my technique.

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