Weekly Market Commentary - Feb 26 2020

The Markets

Risk on or risk off?

The coronavirus appears to have inspired two distinct schools of thought among investors. Some investors currently favour opportunities that are considered lower risk, like Treasury bonds and gold, because they’re concerned about the potential impact of the coronavirus on the global economy. Others are piling into higher risk assets, like stocks, that could benefit if central banks (like the United States Federal Reserve) take steps to stimulate economic growth, reported Randall Forsyth of Barron’s.

Currently, the U.S. Federal Reserve (Fed) is holding interest rates steady. The minutes of the January Federal Open Market Committee meeting indicated the Fed, “…generally saw the distribution of risks to the outlook for economic activity as somewhat more favorable than at the previous meeting,” reported Lindsay Dunsmuir of Reuters.

Last week, Fed Chair Jerome Powell said it was too soon to know whether the economic effects of the coronavirus on the U.S. economy would warrant a change in monetary policy, as major stock indices moved lower. Al Root of Barron’s reported, “The Dow Jones Industrial Average dropped 1.4 percent this past week, snapping two weeks of solid gains…The S&P 500 index dropped 1.3 percent for the week…The Nasdaq Composite dropped 1.6 percent on the week…” By comparison, the S&P/TSX Composite index fared somewhat better, ending the week flat.

The Cboe Volatility Index (VIX), a measure of stock market volatility, moved higher last week, indicating an increase in volatility as a result of fears about the coronavirus.

During periods of uncertainty, like this one, the benefits of holding well-allocated, well-diversified portfolios become clear:

• By holding asset classes (e.g., stocks, bonds, and other asset types) that respond differently to the same market conditions, investors can minimize or reduce the effect themselves from the poor performance of a single type of asset.
• By diversifying holdings within asset classes (e.g., investing in different parts of the world, investing in different industries), investors can minimize or reduce the effect themselves against the poor performance of a single investment.

Constructing a well-allocated and diversified portfolio that aligns with your goals, objectives, and risk tolerance can help provide reassurance when markets are volatile. If you have any questions or concerns about your portfolios or current market conditions, please don’t hesitate to give us a call.

Should you contribute to a TFSA, and RRSP or both?

If you are in a low income tax bracket (for example, if you are a student or are on maternity leave), saving in a TFSA may be more advantageous than saving in an RRSP. The RRSP tax savings are less significant, and you may be in a higher tax bracket when you make withdrawals.

For people in a middle income tax bracket, there may not be a clear advantage to using one plan over the other. One strategy would be to contribute to your TFSA now and accumulate RRSP room to be used later, when you’re in a higher tax bracket and can optimize the advantage of the tax benefits.

Finally, if you are in a high tax bracket, you may want to consider using both types of plans. An RRSP may be a better option if your current tax rate is higher than you expect it to be when you withdraw your savings; you will benefit from a tax deduction when you make your contribution, and withdrawals will be taxed at your lower future rate. You can also use the refund from your RRSP contribution to fund your annual TFSA contribution.

At the end of the day, whether to save in a TFSA, an RRSP or both may depend on your savings needs, your eligibility for income-tested benefits, and your current and expected future financial situation and income level.

We’re here to help you determine the best tax-advantaged investment strategy to help you achieve your goals. If you are unsure which account to contribute to, we would be happy to provide you with advice.

Weekly Focus – Think About It

“Friendship…is born at the moment when one [person] says to another "What! You too? I thought that no one but myself…”

--C.S. Lewis, writer and theologian

Best regards,