Steady as She Goes


As I sat down at the start of this month to write our team's latest market update, I noticed that the situation "on the ground" closely mirrored what we discussed in our previous newsletter. Market conditions remained strong, corporate earnings and forecasts were stable, and tech leadership was broadening into other sectors. Inflation appeared relatively contained, and although expectations for rate cuts had somewhat diminished due to this strength, they were still reasonably anticipated for the year. As you’d expect, the markets reflected these factors:

In fact, at that point, things were progressing so smoothly that we had experienced nearly 100 days without a 2% blip in the market:

Source: Cormark 2024

As seasoned investors would say, although overall conditions were improving, the markets seemed a bit overextended. As I pointed out in our last newsletter, "the path forward is rarely linear," and "volatility will be a constant companion, influenced by both predictable factors like the US election and unforeseen events."

Given the initial lack of developments, I paused my market update, almost inviting fate to resolve my writer's block. Then, seemingly on cue, it comes. First, there was Israel's strike on the Iranian consulate in Damascus, followed by the U.S. March CPI report coming in incrementally higher (worse) than forecast. Finally, on the day I sat down to restart my update, there was the threat of Iranian strikes on Israel, their actual execution, and the subsequent threats of retaliation. Labeling any of these developments as unforeseen might be an overstatement, given their prominence in both current discussions and historical context. While the nature of hot conflict remains inherently unpredictable, the market’s response to escalation threats, coupled with inflation uncertainty, tends to follow a predictable pattern:

So, despite a year that has been relatively quiet on the volatility front, things have become noticeably noisier early into the second quarter. With this increased noise invariably comes the concern associated with any conflict: Will it escalate? How will it disrupt the global economy? And how will it impact my portfolio? Unfortunately, with the rise in geopolitical strife, I don't have to look far back in my own writings to find relevant past comments for today's issues. Historically, investors tend to sell risk when faced with geopolitical uncertainty—this we know. We've witnessed it twice in very recent memory. Assuming there's nothing larger looming in the economy, history offers a guide to what happens next: markets adjust, the new circumstances become the norm, and life goes on:

The lesson from market events, especially those centered around conflict, is that reactions are usually short-lived and long-term trends are typically unaffected. Given the Middle East's importance in shipping and energy, and the ongoing cost of war to the West, inflationary concerns could be crucial to monitor should escalation continue. However, these concerns remain speculative for now, and we will keep a close eye on developments.

We entered 2024 with optimism, and despite recent turbulence in the Middle East, we see no reason to alter our positive outlook. Broadly speaking, although there are concerns about reigniting inflation, real-time indicators that we watch (Trueflation below) suggest that, barring significant changes, we are unlikely to revisit the peak inflation levels of 2022:

Source: Trueflation

While headline inflation may likely remain above pre-2022 levels, current figures are in line with long-term averages. This situation allows central banks the possibility to ease policies if they believe they have met their inflation targets or if they observe signs of economic weakness—a step some foreign central banks have already initiated or signaled. We believe any relaxation of credit conditions will positively affect both the economy and the stock/bond markets, while earnings growth accelerates and major drivers such as AI contribute to broad innovation and productivity gains, serving as a significant growth tailwind.

April has undoubtedly been a rocky month, but as investors, we understand that volatility is the inevitable cost of achieving long-term market success. Benjamin Franklin aptly noted in his book The Way to Wealth, "There are no gains without pains." With this in mind, remember that in an average year, the market typically experiences more than seven 3% dips, at least three 5% mild corrections, and about one 10% correction:

We have now achieved our first 3% dip this year. Given historical patterns, it’s safe to assume, there will be more dips ahead. With all factors considered, we see this month's activity as just another in a series of fluctuations of a healthy functioning market as we move past the disruptions of the past few years and look forward toward the next economic growth cycle.

As always, if you’d like to discuss our current market views, your portfolios, or review your financial plans, please don’t hesitate to reach out to the team and set up a time to chat.

- Jack


Federal Budget 2024

The Federal Budget for 2024, announced on April 16, 2024, allocates nearly $50 billion for new spending initiatives, partially funded through a combination of newly announced tax measures. A key feature of the budget is the increase in the annual inclusion rate for capital gains tax, impacting individuals who realize more than $250,000 in gains annually, as well as corporations and trusts, with changes effective from June 25, 2024. The revenue generated from these tax changes will support ambitious projects, including the construction of 3.87 million new homes by 2031, targeting Canada’s housing affordability crisis. Despite these efforts, the budget continues Canada’s recent trend of increased spending and taxation, falling short of addressing long-term issues such as productivity and competitiveness.

Here are some key highlights we’d like to share with you:
  1. Increase the capital gains inclusion rate from 50% to 66.67%:
    • On capital gains over $250,000 realized by individuals
    • On all capital gains realized by corporations and trusts
    • For capital gains realized on or after June 25, 2024
  2. Revise Alternative Minimum Tax proposals impacting philanthropy:
    • Permit 80% of charitable donation tax credits to be claimed
  3. Increase the Lifetime Capital Gains Exemption to $1.25 million:
    • 23% increase in the exemption for dispositions on or after June 25, 2024
  4. Introduce the Canadian Entrepreneurs’ Incentive:
    • Preferential capital gains inclusion rate of 33.33% on up to $2 million of eligible capital gains
    • $2 million limit is phased in by $200,000 increments per year from 2025 until 2034
Measures introduced to target home affordability & healthier communities:
  • Increase the Home Buyers’ Plan (HBP) withdrawal limit from $35,000 to $60,000
  • Temporarily defer HBP repayment period by an additional 3 years
  • Permit 30-year mortgage amortizations for first-time buyers of newly built homes
  • Invest in national housing and health programs
  • Launch a new Canada Disability Benefit

Read the full report here.

If you have questions about areas of Budget 2024 that may impact your personal financial situation, please be sure to book an appointment with us.

Last-Minute Changes to Bare Trust Filings leaves Canadian’s frustrated

In our last newsletter, we highlighted significant updates from the Canada Revenue Agency (CRA) regarding trust reporting rules. These changes had broadened the scope of trusts required to file tax returns, with a particular focus on bare trust arrangements. However, a recent last-minute policy reversal by the CRA just days before the April 2 deadline, exempted bare trusts from having to file a trust return or Schedule 15 for 2023 unless directly requested by the agency.

This eleventh-hour change has caused considerable consternation among Canadians, financial advisors, and tax professionals, underscoring the CRA's ongoing struggles with the communication and rollout of new tax rules. Despite early warnings and repeated appeals from tax professionals to refine the legislation's overly broad language, it was passed with no significant amendments, leading to a chaotic implementation phase. This has not only undermined the credibility of tax authorities but also placed unnecessary stress and financial burdens on those who had prepared to comply.

To summarize and highlight impacts of the CRA's last-minute changes, we draw attention to the "Investment Executive" editorial, "Bare Trust Debacle Makes Fools of the Law-Abiding." This article critically examines the consequences of the sudden adjustments to bare trust filing deadlines, detailing how these abrupt changes disrupt the lives of ordinary Canadians. It advocates for greater clarity, consistency, and fairness in tax policy, stressing the essential role of trust in the relationship between the public and tax authorities.

The Unstoppable Rise of Crypto ETFs:

At Chernick & Associates, we've been closely engaged with the crypto asset sector since our initial foray into the market with the launch of Canadian-based ETFs in mid-2021. Despite a downturn in interest when cryptocurrencies experienced declines alongside other risk assets in 2022, 2023 served as a pivotal year. During this time, major cryptocurrencies such as Bitcoin and Ethereum saw significant recoveries. This positive trend has extended into 2024, beginning with a wave of optimism following the SEC’s approval of the first U.S.-listed Bitcoin ETFs, led by prominent firms like BlackRock and Fidelity. These ETFs have not only been successful but have also set new records for sustained dollar inflows and asset growth, prompting other financial institutions worldwide to launch similar products to cater to the increasing investor demand.

The long-term investment potential of cryptocurrencies like Bitcoin and Ethereum is becoming clearer to investors in the context of global economic conditions marked by fluctuating fiscal and monetary policies that influence currency volatility and consumer purchasing power. With intrinsic supply discipline embedded into their code, this perspective is mirrored in the anticipation of Bitcoin enthusiasts for the upcoming halving event, which is expected to further increase its price as demand grows and reduced mining rewards constrict supply. Ethereum is following a similar positive path, with significant moves toward establishing US and foreign based Ethereum ETFs. Despite potential regulatory hurdles, eventual approval of these ETFs seems likely, adding to our enthusiasm for the future of these assets. We have long considered the Ethereum blockchain a powerful platform capable of supporting transformative applications in traditional finance and more. This perspective is endorsed by leading financial figures like BlackRock's CEO Larry Fink, who reinforces our view of Ethereum's role in reshaping the economic landscape.

For more insights into how blockchain technologies are being integrated into modern financial systems, watch Larry Fink discuss the tokenization of financial assets, a key capability of Ethereum ecosystem, in the video below.

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