This Year in Review

My thoughts on Canadian economic performance in 2017 and what lies ahead

January 18, 2018

Michael Fahy, First Vice President, Portfolio Manager

Let’s take a brief year-end look at the economic, business and financial landscape in which we live and work in 2017. Generally, we’re concluding the year on favourable terms, though the consensus of opinion among many seasoned investment advisors – including myself – is that 2018 is unlikely to be quite so productive.

S&P 500

The S&P 500 has had a stellar year – to take just one index – rising 14% to record highs. Investors piled into stocks on growing hopes of U.S. corporate tax reform, an improving economic landscape and strong earnings growth.

Global stock markets

Global stock markets also surged this year, in part on expectations of U.S. tax reforms, which is seen boosting corporate profits and higher dividend payouts.

MSCI World Index

The benchmark MSCI World Index, which tracks shares in 47 countries, hit a record high last week putting it on course for its best year since 2009.

A prediction from Goldman Sachs

As reported in MarketWatch1 (December 6, 2017): ‘Goldman Sachs target for the S&P 500 at the end of 2018 is 2,850, or about a 10% rise from current levels.’ I am a shade more pessimistic and forecast single digit market returns for 2018.

U.S. Tax reform

With the passing of President Trump’s tax reform package2, we will see a substantial stimulus to financial markets. To summarize, the new U.S. tax provisions include:

  • A reduction in the corporate tax rate from 35% to 21% in 2018.
  • The top individual tax rate will drop to 37%.
  • Other key elements include less inheritance tax, an expanded child tax credit, and lower taxes on overseas corporate profits.

The tax reform is, generally, good news for businesses, particularly multinational corporations and the commercial property industry.

De-regulation

This is a hot-button issue and, if the initiatives proposed by President Trump are enacted, they too will have a profound impact on financial markets.

Under the headline $25 Billion: Trump’s plan to cut Wall Street regulation is going to have a big impact, Frank Chapparo writing in Business Insider3 (January 21, 2017) summarized the likely implications of Trump’s policy:

1. Elimination of the Volcker Rule – $6 billion
The fallout will be significant for large investment banks since dropping the rule would generate additional revenue and profitability streams.

2. Reductions in capital and liquidity requirements – $19.84 billion
This will likely free up nearly $20 billion in unproductive capital over the next 18-24 months that banks are hoarding and could redirect to other areas.

3. Goodbye to the Consumer Financial Protection Bureau – $1.4 billion
The elimination of, or serious reduction in, CFPB regulations will mean a potential savings of nearly $1.4 billion for banks.

4. Too Big to Fail will be revisited – $840 million
‘This initiative alone could return an additional $840 million to institutions,’ Mr. Chapparo observed, according to his sources.

Bank of Canada interest rate

As of this writing, the Bank of Canada left its key rate unchanged at 1%, as expected. The BOC noted improvement in the jobs market following the unemployment rate’s drop to a nine-year low in November.

As recorded in U.S. News & World Report4 (December 14, 2017) Bank of Canada Governor Stephen Poloz ‘is growing increasingly confident that the economy will need less stimulus over time, adding that the economy is in a sweet spot after making “tremendous” progress over the last year.’

Small business tax proposals

Our government’s widely criticized small business tax proposals are still being redefined. Broadly speaking, they include limiting a corporation’s ability to convert income into capital gains and dividends, halting business owners from lowering their tax rate by sprinkling money to family members regardless of their involvement in the business through dividends or by paying them salaries, and restricting the ability for private corporations to recover taxes through passive investments.

The continuing importance of respecting the fundamentals

While the key influencers of the markets may change, sticking to the fundamentals should remain your priority as we head into 2018:

  • Stop worrying about things you cannot control.
  • Stick to your plan and stay focused
  • Try not to make impulsive decisions based on emotions.
  • Remain invested.
  • Maintain a diversified portfolio.
  • Continue to make regular contributions.
  • Never hesitate to consult your advisor.

Finally, remember the motivational poster produced by the British government in 1939 in preparation for World War II: Keep Calm and Carry on. Happy New Year!

Michael Fahy, The Michael Fahy Group, CIBC Wood Gundy, 604-691-7207.