WEALTH Matters — WINTER 2009

Economic Outlook

While the recession technically ended in the summer of 2009, the economy still has high levels of unemployment and therefore weak consumer spending. Stimulus measures are expected to boost consumer spending through the first half of 2010 at least. Various markets are still well below their 2008 peaks, and some are not far above their lows, so there is lots of room for growth in values.


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RRSP TFSA and your Personal Assessment

Investment Market Commentary

Economic Outlook and Interest Rates

Important Dates For Tax Planning

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The graph in our Investment Market Commentary article shows that the TSX (Toronto) index recovered much more strongly than the Dow (New York).

A good part of this is due to recovering commodity prices, especially oil, copper and potash in demand among emerging economies which are growing much faster than ours is.

Commodity prices tend to surge when inflation is returning to the economy, thereby providing good protection against inflation’s negative impacts on real rates of return.


Large company stocks selected for their long-term value rather than their growth prospects may have the most potential since their prices are still depressed while their earnings growth prospects are strong. Earnings growth in the S&P 500 index has averaged 6.7% across a typical market cycle. Coming off the sharp drop of the past year, an above-average growth phase should not be surprising.

Dividend-paying stocks can produce a regular tax-advantaged income while you wait for price gains.

This can protect against inflation, which usually robs bond and GIC investors of most of their after-tax return. Inflation is now near 0, but is widely expected to move back into the Bank of Canada’s target range of 1-3% over the next year or so.

With bond yields very low, a rising inflation will depress prices – especially for safe government bonds. Including some corporate bonds and some real-return bonds can protect you against inflation, as will dividend paying stocks.

Commodities are riskier than the average asset class, and if you have a well diversified portfolio with some Canadian exposure, you’re probably already exposed to this sector to the extent you need to be.

There is a great deal of debate about when we’ll see inflation (and along with it, interest rate increases) make a comeback. Some economists believe that the recovery is very fragile and could stall once government stimulus money runs out. About an equal number believe that price increases are already above the target range for fresh food, energy and other items that especially affect people on fixed incomes, and that interest rates must at some point rise to attract savings, and constrain the resumption in consumer debt growth that has been helped along by the historically low interest rates.

Because of the uncertainty, most portfolio managers seem to be keeping a balance with defensive assets even with the low yields available and the risk of rising rates. Interest rate risks are mitigated by using dividend-paying stocks and some real return bonds, corporate bonds over governments, and some small exposure to high yield bonds which still offer a high interest premium.

Interest Rates

Interest rates are still low, but may be rising again.


Trying to time the market rarely works, especially when even the experts are unsure of the future direction of interest rates.

It is still true that laddering maturity dates diversifies interest rate exposure risk each year, while getting a higher average rate on the overall portfolio. 5-year rates are more than double the 1-year rates, so an investor with a 5 year ladder would currently be receiving twice the interest compared with another investor who is using 1-year terms for all deposits. And the 5-year ladder still allows access to 20% of the capital each year for unforeseen needs or investment opportunities.

Since a year ago we’ve been producing a graph like this one in our newsletters, comparing the top wholesale GIC rates for various terms at different dates.

Rates dropped sharply since the market meltdown began in 2008. We have not seen much further downward movement since fall 2009, and while short rates have still dropped a bit, 3, 4, and 5-year rates have been increasing lately.

Based on the above comments, we’re either in for a rate hike in 2010 because of returning inflation, or we’ll have steady low rates for another year or two.

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