November 2017 review and market outlook

Market commentary by Kim Mailey

December 8, 2017

This year’s pace of economic expansion should carry into 2018!

The current growth cycle’s duration (now at approximately 8.5 years) is approaching the longest expansion cycle on record in the post-WWII era (10-years: 1991-2001).  As a result, a number of major equity markets hit new all-time highs in the month of November. Notwithstanding occasional bouts of profit-taking, I remain bullish on equity markets heading into year-end and the New Year.

November ’17 Y-T-D 1 Year 3 year 5 year 10 year
S&P/TSX Composite + 0.26% + 5.10% + 6.53% + 2.91%/yr. + 5.59%/yr. + 1.61%/yr.
S&P 500 (C$) + 2.84% + 13.43% + 15.85% + 13.04%/yr. + 19.42%/yr. + 8.70/yr.
S&P 500 (U$) + 2.81% + 18.26% + 20.41% + 8.59%/yr. + 13.33%/yr. + 5.98/yr.
MSCI EAFE (C$) + 0.91% + 15.06% + 19.26% + 7.39%/yr. + 11.03%/yr. + 1.22%/yr.

* Source: Equity Index and Currency Data: Bloomberg. Data as of November 30, 2017

The mid-November pullback has come and gone and the market is now trending favorably into year-end as has been projected for many months. Healthy global corporate earnings growth is expected for 2018 on the basis of improved global GDP growth, a benign U.S. dollar in a moderately rising U.S. interest rate environment, fair equity valuations, and a re-acceleration of the corporate merger and acquisition cycle on improving CEO confidence and risk appetite. The rally in equities since 2016 has been fairly broad-based, supported by low interest rates and high liquidity, but in my view the spread between winners and losers could broaden out as liquidity is slowly removed.  In such an environment, I believe active management investment strategies could outperform their passive counterparts.

A Santa Claus rally may be all that is needed for 2017 to become the first year US equities record a positive return in every calendar month. November 2017 marked the 13th successive month of positive returns in the S&P 500 index – something not seen going back over 90 years!

The strategy game plan entering 2018 continues to favour equities over bonds. Remember, economic and equity market cycles do not die of old age but rather of overheating – and inflation remains tame.  Scotia Wealth Management’s Global Portfolio Advisory Group’s most conservative assumption is that the next U.S. recession begins in early-2019. Other indicators they monitor suggest a later recession start date and a longer period of equity relative outperformance. Three Timely Planning Opportunities

Tax-loss selling – After a year of strong returns it seems odd to talk about tax-loss selling. However, you may have investments in your portfolio that have not done well and are currently in a losing position. Selling that security allows you to “realize” the capital loss which in turn allows you to offset any “realized” gains and the associated taxes they attract. In fact, a realized loss can be applied to “realized” gains in the previous three calendar years or carried forward for use in a future year. If you really like the long term potential of the security being sold for the tax offset, CRA says that you can buy back that security after 30 days. If it is repurchased before then it is considered a superficial loss and cannot be used. The last day to complete the sale for 2017 is December 27th.

Two Changes for private corporations – I recommend you seek the advice from your professional tax advisor if either of these matters that impact you.

Dividend sprinkling – 2017 appears to be the final year in which you can do this. In other words, if you have family members who are over age 18 and who are shareholders of your business, some tax advisors say you may want to consider paying extra dividends in 2017 if those family members are in lower tax brackets. Under the proposed rules, starting Jan. 1, 2018, any dividends paid to non-active family members who are shareholders will be taxable at the highest marginal rate.

The second issue concerns passive investment income. On this topic, there’s nothing you need to do before the end of the year. The government has announced there will be full grandfathering on the retained earnings of passive [investment] income earned inside a corporation so there’s no need to pull earnings out or put extra in. If other rules eventually come into play, then the treatment of passive income is something to consider for future years.

2018 TFSA Contributions – CRA has confirmed that the maximum contribution for 2018 is $5,500.

From all of us at Mailey Rogers Group, we wish you a healthy and happy holiday season.

Mr. Kim Mailey, CFP
Senior Wealth Advisor
Director, Wealth Management
Mailey Rogers Group
1555 Marine Drive,
West Vancouver
Tel: 604.913.7013
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