Sell And May And Go Away? Maybe Not Read This...

If you didn't sell in May, stick around

42 minutes ago by Gordon Pape

Perhaps this was the year to sell in May and go away. And even though it’s June, there’s still time if that idea appeals to you.

Despite everything you’ve been reading about some indexes hitting record highs, the reality is that stock markets lack conviction and investors are confused. Many economists believe that stocks have become too expensive and that a major correction is long overdue.

But where else are you going to put your money? Government bond yields are barely outpacing inflation with the benchmark 10-year Canada paying a paltry 2.33 per cent. So-called “high interest” savings accounts aren’t even coming close to matching the 2 per cent inflation rate. As for gold, its price movements have become completely unpredictable. It goes up when it should go down and vice versa.

We’re consistently told that the global economy is gradually recovering but the evidence is hard to find. Exports continue to lag (Canada actually ran a surprise trade deficit last month), China’s financial and real estate woes are a growing concern, and in Europe fears of deflation have prompted the central back to go negative on its overnight rate.

The result is a rudderless ship with us as passengers wondering whether to hit the lifeboats or hang on and pray.

The performance of world stock markets so far this year reflects all this uncertainty. As of June 5, the closely watched Dow Jones Industrial Average was showing a year-to-date gain of only 1.6 per cent. European markets are showing the same lack of direction with the German Dow up only 1.3 per cent and the London FTSE 100 ahead about the same.

In Asia, Japan’s Nikkei Index, last year’s world leader, is down 7.4 per cent while Hong Kong’s Hang Seng is off 0.6 per cent. The Shanghai Composite is in the red by 3.5 per cent. Only India bucked the pattern with a convincing gain of 18.6 per cent for the year, fuelled largely by the election of a pro-business government there.

Canada is one of the few exceptions to the global market malaise. The S&P/TSX Composite is ahead 8.7 per cent for the year, led by a strong performance from the energy sector (+17.2 per cent) and a respectable 8.2 per cent gain by metals and mining, which last year was a black hole. But the TSX didn’t experience the explosive growth of the major U.S. indexes in recent years and we’re still a long way from catching up. Over the three years to June 5, the TSX gained only 11.1 per cent according to GlobeinvestorGold.com. The S&P 500, by contrast, was up 50.9 per cent.

At the start of the year, I believed we would see a significant correction of 10 per cent+ before summer, followed by a rebound in the fall as the economic outlook for 2015 and beyond improved. But here we are only a couple of weeks away from the summer solstice and the correction has yet to happen.

What now appears more likely is that the ship will continue to wallow for the next few months as investors wait for some clearer direction on where the global economy is going. We could still see that 10 per cent correction but barring some major geopolitical development a return to a bear market (a drop of 20 per cent or more) looks unlikely. Equally unlikely is a surge in stock prices such as we enjoyed in 2013. That optimism was premature and the stagnant markets we are now experiencing is the price we are paying.

So do you sell or stay? If your portfolio is mainly composed of sound, dividend-paying stocks, my advice is to stick it out. Go to the cottage, collect your quarterly dividends, and relax. The markets aren’t likely to do anything dramatic while you’re sipping your beer by the lake.

Gordon Pape’s new book, RRSPs: The Ultimate Wealth Builder, is now available in both paperback and Kindle editions.

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Important lessons for Canadian borrowers and investors in Europe’s historic plunge into negative interest rates

The European Central Bank (ECB) has lowered its interest rates to unprecedented levels, to the point where it actually costs money for private banks to deposit money with them. The rate they now pay on deposits is negative 0.1%. And Canadian GIC investors thought they had it tough?

While Denmark and Sweden have experimented with negative interest rates, the ECB is the first major central bank to do so. Although rates in Canada have been described as “having nowhere to go but up” in recent years, Europe’s decision potentially suggests otherwise.

This is a modern day experiment in central banking to discourage banks from hoarding cash. One of the key intentions of the rate move is to encourage bank lending, which would have a resulting impact on spending, economic growth and inflation.

A further impact of the cut should be to lower the value of the euro and make EU exports more competitive, a big win for European exporters.

The European economy has really not kick-started after the 2008 recession and quite to the contrary, has experienced a ripple effect of economic setbacks.

It may come as a surprise to many investors that the Euro Stoxx 50 index is up 5.5% year-to-date and 21.6% in the past 52 weeks, after posting a 26.0% increase in 2013. It’s important to know that negative headlines don’t necessarily mean that stocks are going down, or that they are going to go down. Quite to the contrary, sometimes such events can prove positive for stock returns.

So what does this mean for Canadians? I’d say there are important lessons for borrowers (some of us) and investors (most of us).

Borrowers have got to wonder if low rates are here to stay or if they could get lower. Maybe 2.99%, 5-year fixed rate mortgages aren’t such a good deal after all? If rates are falling elsewhere, why not here?

The other side of the coin is to consider the fact that the ECB has lowered rates because they’re concerned about deflation, a decrease in prices where inflation actually goes negative. Deflation increases the real value of debt, making it harder to pay back debt when prices, incomes and asset values are declining. And given the precariously high debt levels in Canada, deflation could be particularly difficult if it ever came home to roost.

The Bank of Canada has been worried about inflation levels, but recent numbers have been quite positive.

I’d say the most important lesson for investors is that double-digit portfolio returns can’t be counted on when doing your retirement planning. Stocks have performed reasonably well in recent years, but low interest rates, low inflation and low growth are becoming increasingly prevalent within the developed world.

And while many Canadians would echo criticisms of the ECB move by Germany that low rates penalize savers, the short and potentially medium term reality of fixed income investing is a low yield.

In particular, those who are close to or into retirement need to evaluate what a sustainable withdrawal rate is from their investment portfolio to ensure they don’t outlive their savings.

Jason Heath is a fee-only certified financial planner and income tax professional for Objective Financial Partners Inc. in Toronto.