We built Inukshuk Capital Management to serve the needs of clients looking for a unique approach – void of conflicts of interest, commission sales and pushed products. We began by putting our own money where our mouth is. With low fees and active risk management, we help families achieve financial longevity, that’s the bottom line.
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September 2024 – Market Stories
In this issue:
- Global Equity Market Performance
- The Bank of Japan
- The Fed
- The Story
- The Stock Market and Rates
- Wrapping Up
- Longevity of Wealth – Maximizing Retirement Income
Global Equity Market Performance
Well, that escalated quickly. August was a wild one. Five trading days into the month the four major equity indexes we track were down 5-6%. All but Emerging Market finished the month higher. The tech-heavy S&P 500 which underperformed every other market in July rallied 2.2%, the S&P/TSX 60 1.6% and MSCI EAFE 1.1%.
This is an example of why it’s a good idea for long term investors to ignore the daily noise.
It’s also a good idea to test the theories of those who tell the stories about investing. In this note we will look at the idea of whether interest rate cuts by the Fed boost stock prices.
Our systems remain fully long both the S&P 500 and the S&P/TSX 60.
If you would like to stay current on our measures of trend and momentum in the markets we follow, please click here .
The Bank of Japan
As stated above, August was a wild ride for the indexes we track and trade. But the Nikkei 225 said: ‘hold my beer’ and proceeded to fall 20% in the first three days of the month. This after the Bank of Japan raised its overnight policy rate from 10 basis points (bps) to 25 on July 31.
The yen had devalued 15% against the dollar since the beginning of the year. Maybe the BoJ thought they had to follow up on their currency intervention with some rate intervention.
Are they worried about running out of dollars?
In North America things in interest rate land are going the other way. The Bank of Canada cut its rate target 25 bps on September 4, for the third time in a row, to 4.25%. The Federal Reserve has yet to act, however the market is expecting them to go next week.
The Fed
There is good evidence the market is usually ahead of the economists at central banks with respect to interest rates. Then they follow the lead. Makes you wonder about the purpose of these institutions.
Let’s look at what the market thinks the Federal Open Market Committee will do on September 18. The CME FedWatch app calculates the odds of rate moves using interest rate futures prices.
Here’s what it is saying.
In words, those squiggles mean the expectation is 100% the overnight target rate will be cut next week¬¬ – 66% odds it will be 25 bps lower and 34% 50 bps lower. That’s up from a 0% chance in February.
A market tries to price things it expects to happen. Where the rubber hits the monetary road is when things happen. When a central bank cuts rates, it impacts everything.
The plumbing of the financial system is becoming increasingly complicated. Once interest rates change, the downstream effects on the economy and other markets are not that predictable.
The Story
A funny thing about central bankers (there are lots) is they admit they don’t know if what they do will achieve the goal they want. And, more importantly, they don’t know when.
In this line of work, timing is everything.
The current story amongst the pundits is that rate cuts will spur a further rally in stocks. Is that true? That’s the kind of thing we like to figure out.
Let’s take a look at this in detail.
The Stock Market and Rates
We like numbers. The more the better. But we don’t have a huge sample size of what the consequences are for equity markets when the Fed cuts. There are only three significant policy easing cycles over the past 25 years.
To test the idea that rate cuts cause stocks to rally we track the S&P 500’s performance over the year after the first cut.
In the first two cases the market bounced around the starting point before eventually ending 10% lower in 2000-2001 and 15% in 2007-2008. In the most recent example, it bounced around before rallying 15%, collapsing 35% and finishing 10% higher.
Like we said, that isn’t a very big sample size. In all three cases, however, an investor who bought the S&P 500 the day of the first rate cut would have experienced a loss at some point over the following 12 months. And a big one if they panicked in March 2020.
Wrapping Up
An important lesson here is markets are complicated. Another one is that the demand for money making solutions is high. The supply of stories is equally high. There is no magic secret that will solve the investing problem.
We try to keep it simple. We use the prices of the markets themselves to determine how we allocate our assets. There is a lot of information in the prices of large liquid markets. You just don’t know what it is at the time. But you eventually find out. Let’s see where we are a year from now and what stories are told to explain how we got there.
Now let’s look at some simple solutions to managing retirement income.
Longevity of Wealth – Maximizing Retirement Income
Retirees often juggle income from RRIFs, TFSAs, and non-registered accounts. Understanding how to strategically withdraw from these accounts can reduce taxes and maximize retirement income.
Overview of Accounts
- RRIFs require mandatory withdrawals, taxed as regular income. Drawing more than the minimum in lower-income years can prevent higher taxes later.
- TFSAs allow tax-free withdrawals, making them ideal for supplementing income without impacting your tax bracket or government benefits.
- Non-registered accounts are taxable, so careful timing of withdrawals can help minimize the tax impact, especially on interest and capital gains.
Key Strategies
- For RRIFs, early withdrawals before OAS and CPP can reduce overall taxes and avoid the OAS clawback.
- For TFSAs, use them when taxable income from other sources is high to keep taxes low. Reinvesting RRIF withdrawals into a TFSA is also a smart move.
- Non-registered accounts can be managed by selling investments strategically to spread out capital gains over lower-income years.
Conclusion
Balancing withdrawals from these accounts can help retirees optimize income while minimizing taxes. A personalized approach based on individual needs ensures a financially secure retirement.
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Challenging the status quo of the Canadian investment industry.
