Quarterly | May 19, 2020 | Brendan Greenwood CIM, QAFP, B.Comm
A growing disconnect between the stock market and the economy, a case for silver, risks in the bond market, claiming home office expenses and managing conflict around the family cottage
Look before your leap…a growing disconnect between the stock market and the economy
After news spread that the novel corona virus would not be contained and the lockdown that shuttered the Chinese economy rocking global supply chains was going to be experienced in Europe and North America maximum fear hit. The VIX spiked and the S&P 500 fell 34% from its February peak in less than 5 weeks as investors headed for the exits.
The only other time such a rapid fall in the market happened in the past 70 years was the 1987 Black Monday crash. The heart of the economy had been stopped by lock-down measures to prevent the spread of the virus. The market dived ahead of bad economic numbers. The government managed to put a floor beneath the fall through monetary policy that included purchasing massive amounts of government and corporate debt as well as bringing interest rates to near zero. With news of the economic shutdown ending investors became optimistic the current economic malaise would be short-lived as things returned to normal. The stock market quickly rebounded technically re-entering into a bull market gaining more than 20%. The S&P 500 is now at levels it was at in August of last year.
Now that investors know the economy is re-opening the next question has become how difficult will it be for the economy to recover. There are plenty of headwinds, that will start to show face. First, there is the likelihood of a second wave of infections which could see exponential growth ignited by the world re-opening. Second, as businesses try to navigate this uncertain environment they will be looking to cut costs in order to protect margins, pay back furloughed debt and simply survive which will only depress demand hurting economic growth prospects and the future employment outlook.
Political instability should not be overlooked. The pandemic has not seemed to help diplomatic relations as co-operation between trading partners seems to be waning as countries look inward. Big businesses have been getting more than their fare share of subsidies which may start to create further imbalances and political backlash as smaller firms continue to find it harder to compete against the goliaths.
Investors will continue to look at the market for yield with interest rates so low, but there will continue to be more pain.
If you like gold these days, consider adding silver to your portfolio
As governments around the world resort increasingly to printing money to provide cash flow and support growing debts inflation risk has increased. Gold has been receiving a lot of attention as a precious metal that will rise in value relative to fiat currencies providing a good store of value as a hedge against inflation risk.
Less attention has been given to Silver which not only provides a store of value to protect against inflation, but also has industrial application. It is a natural conductor of electricity and heat allowing it to benefit from the accelerating global transition to a carbon efficient economy.
The world is currently experiencing a silver supply crunch that could continue to drive silver prices higher. Silver is a by-product of many base metals (non-precious) which have experienced a decline in production. The drop in silver prices in recent years and the fact that base metals continue to be in a bear market has meant producers have not invested much in expanding mine capacity. This has caused a decline in global silver reserves. A perfect storm for silver may be coming and it warrants adding some to your portfolio as hedge against inflation and market uncertainty. The most cost efficient and safest way to add gold and silver exposure to your portfolio is through ETFs that own physical silver and gold bullion as a custodian on behalf of the buyer. EFTs that own a combination of silver and gold will provide even greater cost efficiency.
Risk of bonds and bond funds with longer durations to your investments
Interest rates are now near zero with not much room to fall and negative rates are seen as a last resort by the Fed and BOC. This could mean not much more upside for bonds. Falling interest rates have provided most of the upside for bonds in recent years. If we start to see higher rates of inflation and that puts upward pressure on interest rates, portfolios with exposure to longer duration bonds could see a dramatic fall in the value of these positions.
If you still want some safety in your portfolio short-term high-grade corporate bonds could be a good option. You will benefit from a yield risk premium over government bonds while protecting yourself against a large potential drop in the value if the current downward trajectory of rates takes a turn.
Many of us are working from home, be sure to maximize your tax return by claiming home office expenses
If you rent your apartment or house, you can deduct a portion of the rent proportional to the amount of space you use in your home for your office. Homeowners will not be able to deduct the principal of mortgage payments, but can deduct a portion of the interest component. A portion of property taxes, home insurance, mortgage interest and depreciation are also tax deductible. Keep in mind your home office needs to be your primary place of work, meaning you work there more than half the time.
Keeping the cottage in the family while avoiding conflicts around costs
Costs to maintain a cottage property can add up quickly and be a source of contention between the families of kids that inherit the family cottage. Especially when family incomes vary. Consider purchasing a life insurance policy that would pay a tax free benefit upon your death into a trust and invest in income yielding securities to cover annual cottage expenses such as property taxes, insurance, hydro, gas or propane, repairs, maintenance, landscaping, boat storage and repairs, furnishings and capital improvement. The testamentary trust would also allow for income splitting between family members maximizing the amount of income available to go towards annual cottage expenses.
Brendan Greenwood is an Investment Advisor with Worldsource Securities focused on personal pension strategies and leveraging technology to provide progressive institutional style investment solutions for professionally incorporated individuals, business owners, tech professionals and retirees.
For other articles authored by Brendan Greenwood on issues impacting business owners and investors see https://www.greenwoodwealth.co/blog.
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