Market Highlights of the WeekCanada
Whatever happens over the remainder of the year, 2017 will go down as a very good year for the Canadian economy. In July, the economy created 10.9k jobs and the unemployment rate fell to 6.3%, its lowest level since 2008.
Even if economic growth is flat and no more jobs are created over the remainder of the year, real GDP will have grown by 2.5% (annual average) in 2017 and the economy will have created 290k jobs – the highest in a decade.
With household debt levels at record highs, interest rates going up and home prices looking to decelerate further, economic growth is likely to return to a less exciting pace around 1.5% to 2.0% in 2018. This is still close to a trend rate for an economy with an aging population and limited productivity growth.
United States
U.S. stock indices remained supported by the continued flow of favorable earnings releases. Bond yields and the U.S. dollar moved lower through Thursday but that dynamic reversed course with the robust payrolls report.
The American economy continued to churn out jobs at a robust pace in July with payrolls rising by 209k. At the same time, the unemployment rate fell to a cycle low of 4.3%.
THIS WEEK IN THE MARKETS
Source: Bloomberg Finance L.P. July 28, 2017 to August 4, 2017
2017 Has Been a Good Year for Investors...So FarMajor asset classes have posted solid performances since the start of 2017. Foreign stock markets did particularly well, having benefited from a weaker US dollar. Strong growth in profits is promising for the stock market outlook. The Canadian stock market has underperformed in the last few months, but some catch-up may take place for the remainder of the year. The bond market continued to show remarkable resilience in the first half of 2017, but the next few months could be more difficult for this asset class.Returns Are Still StrongThe first few months of 2017 were particularly eventful on the political front as the impact of Donald Trump’s election continues to be felt in many sectors. A number of elections in Europe also attracted attention. Geopolitical tensions have also intensified, particularly in the Middle East and Korea.Despite all that, many asset classes have posted strong performances as we approach the year’s halfway mark In particular, foreign stock markets shot up, with the MSCI EAFE posting a total return of close to 15% since the start of 2017. The U.S. stock market also continued to prove the pessimists wrong. An Excellent First Half of the Year for Foreign Stock MarketsWe weren’t surprised to see the stock markets continue to grow in 2017, although the extent of the gains made by foreign stock markets exceeded our expectations. Movements of the U.S. stock market since last fall have beenstrongly influenced by Donald Trump’s election and the difficulties of his administration. However, beyond the political front, we should underscore the spectacular performance of S&P 500 companies in the first quarter of 2017. With more than 98% of companies having published their results, reported earnings and operating earnings were up by 26% and 20%, respectively, compared with the first quarter of 2016. Growth of the main index since the start of 2017 (as at June 15, 2017)Source: Datastream, Economic StudiesThe Canadian Stock Market LagsWhile most asset classes have exceeded our expectations since the start of the year, the Canadian stock market’s performance has been far less stellar. At the middle of June, the S&P/TSX posted a total return of just 0.4%. While this result fell well below most other indexes, we must remember the index’s spectacular gain of 21% last year.Upon closer examination, the difficulties of the Canadian stock market appear to be primarily due to the retreat of the important sectors related to commodity, especially energy, and of the financial sector (graph 1 below). Most of the other sectors posted significant gains, with the exception of healthcare, which continues to face difficulties, but without a notable impact on the total index.Graph 1: Energy is a big part of the problems facing the TSX (as at June 15, 2017)Source: Datastream, Economic Studies
Unethical bank practices point to need for consumer protection.
In light of disturbing new allegations, Ottawa should strengthen financial regulations, improve transparency and ensure watchdogs have the resources and mandate they need.
Last week, three TD Bank Group employees told CBC News about the “incredible pressure” they and their colleagues are under to meet sales goals variously described as “aggressive,” “unrealistic” and “insane.”
The Bank of Montreal was the big winner among Canadian banks last quarter, with an increase in profit of 40 per cent over the same period last year. You needn’t feel bad for the competition, though. The Royal Bank’s profits were up 24 per cent, CIBC’s by 13 per cent. With a net gain of $2.5 billion, TD Bank’s rose by a not-shabby 4 per cent.
How did they do it, especially at a time of low interest rates and increased capital requirements? A series of reports from CBC News has shed some light on the secret of their success. It seems profits were boosted in part by a troubling combination of unethical, indeed exploitative, sales practices and inadequate consumer protection.
Last week, three TD Bank Group employees told CBC News about the “incredible pressure” they and their colleagues are under to meet sales goals variously described as “aggressive,” “unrealistic” and “insane.” “When I come into work,” said one, “I have to put my ethics aside and not do what’s right for the customer.” They say that to keep their jobs they have no choice but to pressure clients to buy unnecessary services or even illegally sign them up for products without their knowledge.
In its defence, TD insists all of its employees are required to follow the company’s code of ethics. However, in the days since the story broke, hundreds of employees, not just from TD, but from all of the major banks, have come forward with similar allegations.
Sales quotas are so high, they say, that the only way to meet them is to aggressively upsell, or worse, surreptitiously extend customers’ credit limits or charge them for other new products without their consent. (The Bank of Montreal, Royal Bank and CIBC also deny the claims.)
It’s somewhat troubling that these problems came to light through journalism rather than through government oversight. On Wednesday, in response to the allegations, Canada’s financial consumer watchdog announced that it would launch a review of practices among the major banks. This is a welcome move. But Ottawa must also look beyond this investigation to address the larger inadequacies of the regulatory scheme and its enforcement that make the whistleblowers’ claims sadly plausible.
We have long known that banks are able to get away with a great deal without customers or anyone else noticing. Last year, CIBC reported itself to the Ontario Securities Commission because it had been overcharging its clients for 14 years, bringing in $73 million in unearned revenue. In July, Scotiabank struck a similar deal, repaying $20 million in errant fees. In both cases, the overcharging might have gone on indefinitely had the banks not turned themselves in.
A key problem, as many financial experts argue, is a lack of transparency. Bank statements are inscrutable to most people, in large part because financial institutions are not required to clearly present and explain charges. Consumers should not have to decode the information that is provided in their bank statements. As the whistleblowers make clear, people are being charged for services they don’t need or know about. This demands action.
Ottawa is currently reviewing the Bank Act, the federal legislation governing financial institutions. The process is meant to be completed in 2019 and should be seen as an opportunity to strengthen regulations, improve transparency and ensure watchdogs have the resources and mandate they need.
In the meantime, consumers would be wise to check their statements carefully, banks ought to get their house in order, and the federal financial watchdog should use its power to make sure that happens.Randy Risling, Toronto Star March 16, 2017
In cased you missed it
Below are a few articles that I found interesting on various financial and investing topics.
The Seduction of Pessimism
Tell someone that everything will be great and they’re likely to either shrug you off or offer a skeptical eye. Tell someone they’re in danger and you have their undivided attention.
.
Salary or Dividends: Which is better for business owners?
All incorporated small business owners eventually must decide how to pay themselves: by salary or dividends. There’s no simple response, so let’s unpack the process to answer that question.
Quantifying the Cost of Bad Behaviour
We have met our enemy and he is us. The average Canadian investor has lagged the average fund for the last 10 years. Through December 2016, the average Canadian diversified equity fund returned 4.37%, yet the average diversified equity fund investor earned 2.99% over the decade--a 1.38% gap.
A Beginners Guide to Coping with [housing] Market Mayhem
The headlines are hard to avoid, and by now, the words "Toronto housing crisis" come across as a mere statement of fact, rather than any sort of prognostication. And rightly so. In 2017, our city's problems with housing affordability are abundantly clear. Sharp increases in home prices and rents continue to outpace income growth, accelerating a pernicious cycle of socio-economic polarization that's making housing in the urban core inaccessible to lower and middle-income Torontonians.
