8. 2018 in Review S&P 500
2018 S&P 500 -4.4%First Correction
in 2 Years
-10.2%
Dec 24, 2018
-19.8%
Bloomberg – Feb 22, 2019
9. 2018 in Review S&P/TSX
Bloomberg – Feb 22, 2019
July 12, 2018July 12, 2018 2018
S&P/TSX
-8.9%
Dec 24, 2018
-16.8%
-8.0%
10. 2018 in Review BEAR-o-meter – Global Equity Markets
Bond Yields & S&P 500 Both Move up
Bonds Prices and Stock Prices Negatively Correlated
S&P 500
-19.8%
-18.8%
-27.2%
-23.6%
-16.8%
-22.8%
-34.0%
-22.3%
-18.2%
-16.4%
-23.4%
-18.5%
-26.4%
-21.1%
-25.8%
-30.8%
-23.3%
-16.2%
20.6%
19.0%
21.5%
24.8%
16.8%
9.8%
29.6%
36.7%
15.0%
10.5%
11.0%
16.4%
17.8%
10.7%
18.2%
25.4%
7.4%
18.6%
-40.0% -30.0% -20.0% -10.0% 0.0% 10.0% 20.0% 30.0% 40.0% 50.0%
S&P 500
Dow Industrials
Russell 2000
Nasdaq Composite
S&P/TSX
Mexico IPC
Argentina Merval
Brazil Bovespa
Stoxx Europe 600
FTSE 1000
Germany DAX
France CAC 40
Italy FTSE MIB
Nikkei
Hang Seng
Shanghai Composite
Kospi
Bombay Sensex
Max Drawdown
Recovery
11. 2018 in Review Canadian and U.S. Yield Curves
Jan 1, 2018
Yield Curve
Dec 31, 2018
+60 bps
+69 bps
Yield Curve
Jan 1, 2018
Dec 31, 2018
+28 bps
+18 bps
-8 bps
12. 2018 in Review BEAR-ometer – Fixed Income & Real Assets
-3.2%
-5.1%
-17.7%
-9.5%
-5.5%
-5.9%
-17.3%
-12.3%
-15.1%
-12.7%
-41.5%
-44.3%
-76.8%
-13.6%
-16.2%
-23.6%
-53.3%
-81.2%
-46.1%
-46.5%
6.4%
4.4%
21.6%
8.6%
5.4%
6.6%
4.6%
20.1%
20.8%
20.1%
33.9%
41.4%
277.9%
10.1%
5.7%
14.3%
18.4%
29.0%
53.7%
62.1%
-100.0% -50.0% 0.0% 50.0% 100.0% 150.0% 200.0% 250.0% 300.0%
US Agg Bond
US TIPS
US Leverered Loans
US HY
Global Agg Bond
Global HY
Cdn Preferred Shares
Cdn REIT's
US REIT's
Global REIT's
Brent Oil
WTI Oil
WCS Oil
Gold
Commodities
Copper
Lumber
Bitcoin
Horizons Marijuana ETF
N.A. Marijuana Index
Max Drawdown
Recovery
13. Four Season Investing
S&P 500
Winter
Recession
Rate cut
Min Risk
Summer
Expansion
Rate hikes,
Max Risk
Fall
Slowing Growth
High Inflation
Reduce Risk
Spring
Recovery
Low inflation,
Add Risk
14. 2009-Current
1990 – 2000
1949 - 1956
1957 - 1961
1982 - 1987
2002 - 2007
1974 - 1980
1962 - 1966
1970 - 1973
1987 - 1990
1966 - 1968
1946 - 1948
10%
15%
20%
25%
30%
35%
0 2 4 6 8 10 12
Return(CAGR)
Years
S&P 500 Historical Bull Markets
Barron’s – July 2, 2018
Fortune – August 2018
The Economist – October 11, 2018
Bloomberg Businessweek Aug 2018
Four Season Investing – Investor Sentiment
Sir John Templeton:
Bull markets are born on pessimism
Grow on skepticism
Mature on Optimism
Die on euphoria
15. S&P 500
Four Season Investing – Consumer Sentiment (temperature)
Mar 2000 – 11 mo.
13 Month Average
Apr 1978 - 22 mo
Nov 1980 – 9 mo.
Feb 1989 – 18 mo.
Aug 2007 – 5 mo.
16. Feb 1989 - Aug 1990
18 months
Mar 1997 - Apr 2001
49 months
June 2006 – Jan 2008
19 months
Average
29 months
Four Season Investing – Wage Growth (pressure)
21. The Perfect Storm – Hurricane Donald
New York Times Op Ed – September 2018
I am part of the resistance inside the Trump Administration
“Americans should know that there are adults in the room.
We fully recognize what is happening. And we are trying to
do what’s right even when Donald Trump won’t.”
Betting Odds Trump will be Impeached
In his first Term
(PredicitIt – Mar 25, 2019)
Business Insider – Dec 31, 2018
• March 25 Close – 22%
• Pelosi – “He’s not worth it”
• Mueller Investigation
• No collusion
22. The Perfect Storm – Hurricane Donald
S&P 500
South China Morning Post WSJ – Feb 19, 2019
USA: 25% tariff on $50 billion, 10% Tariffs on
$200 billion (increasing to 25% by end of
2018)
China: Proposed or imposed tariffs on $110
billion by December 2018
The Deal (we think)
• Easy
• China buys more US goods
• Harder
• Protection of Intellectual property
• Reduce government subsidies to
Chinese SOE’s
• End technology transfer from U.S.
companies
• Hardest
• Enforcement Mechanism – Unilateral?
• Existing Tariffs
WSJ – Feb 19, 2019
23. The Perfect Storm – Donald & Jerome
S&P 500
Goldman Sachs Financial Conditions Index
&
Federal Funds Rate
Fed
2018 - Four increases in Federal Funds Rate
24. The Perfect Storm – Hurricane Powell
S&P 500
Double Line Raising Rates Webcast – Feb 26, 2019
Hedgeye Cartoon of the Day – Feb 21, 2019
26. The Perfect Storm – Hurricane Powell
S&P 500
Hedgeye Cartoon of the Day – Jan 14, 2019
Barron’s – Mar 23, 2019
Three Times in 2019
Once in 2020
Twice in 2019
Once in 2020
No increase in 2019
Once in 2020
One Decrease in 2019
27. S&P 500
The Perfect Storm – Hurricane Jerome
Unemployment recently touched it’s lowest level in 49 years (Dec 1969)
WSJ: Current census estimates only 50,000 jobs/month needed to keep
employment stable
Current Gap
-1.0%
32. An Inconvenient Truth Debt
S&P 500
U.S. Unemployment vs. US Budget Deficit as % of GDP
WSJ – Mar 21, 2019
CBO
US Budget deficit to exceed $1T every year
2022-29
Social Security & Medicare = 40% of all
federal spending (excl. interest).
By 2029 will be 50%.
33. An Inconvenient Truth Debt
U.S. Unemployment vs. US Budget Deficit as % of GDP
Deficit increasing while
unemployment
decreasing
Last time we saw this:
Late 60s
Jeffrey Gundlach –
Doubleline
• Last seven recessions
budget deficit
increase average 4%
of GDP
• Last two recessions
5.8% (2001) and 8.8%
(2007)
• Could hit 13% next
recession
34. Bond Yields & S&P 500 Both Move up
Bonds Prices and Stock Prices Negatively Correlated
S&P 500
An Inconvenient Truth US Debt/GDP
Bipartisan lack of interest in reducing debt:
• Republicans – deficit talk a ploy to roll
back tax cuts
• Democrats – deficit talk ploy to cut
Medicare, Medicaid & social security
Washington Post article:
A conversation last year between the President
and senior advisors took place in which a
“hockey stick” spike in national debt was
presented. Trump’s reaction: “Yeah, but I
won’t be here.”
36. Summary - Farmers Almanac
(Old) NWM Forecast
It’s Fall – Getting closer to Winter
No Recession 2019
Economy and earnings to continue growing
Fed to continue tightening 2020
• Create recession in 2020 – 2021
Equities (Dividend Paying) over Bonds
• Remember 1985 & 1995
• Look to reduce risk
• Diversification
• Roots are strong
(New) Nicola Wealth Forecast
Fed keeps rates low – for too long
Result: More severe recession down the road
• Asset Bubble – 2001
• Stagflation - 1973-5
All asset classes under pressure
Longer term – Inconvenient truth
• More debt
• Higher Interest rates
• Less room for fiscal stimulus
• Roots might get severed
53. Top 10% Income Share
31.4%
30.6%
29.8%
26.6%
25.7% 25.4% 25.3%
22.3%
20.0%
22.0%
24.0%
26.0%
28.0%
30.0%
32.0%
China US India France Italy UK Canada Norway
54. Hey Big Spender
Questions
What is lowest cost form of debt?
How much of mortgage debt has been used to acquire assets
or start businesses vs. for personal consumption ?
85%-176% since 1990
55. It’s About the Cash Flow
Debt Service - P and I increase from 12-14.9% since 1990
Debt Service - Interest only decrease from 10-6.5% since 1990
61. Issues
o Illiquid asset class
o Hard to diversify
o Significant minimum investment
o Higher fees on committed capital
o Due diligence on managers
o Fund of funds likely best option
62. Northleaf PE Returns vs. MSCI World
Returns to June 30, 2014. Northleaf returns gross of Northleaf fees.
63. Where has the low
hanging fruit gone?
Getting harder
all the time2%< historical
Still expensive
How low can they go?
Source: Statscan
https://www.quandl.com/data/MULTPL/SHILLER_PE_RATIO_MONTH-
Shiller-PE-Ratio-by-Month
Source: NAREIT
64. Private debt
(mortgages and
corporate lending)
2%< historical
Still expensive
How low can they go?
Asset allocation
Value investing
Dividend growth
Private Equity
Build to own
Value add
Modest leverage
Where has the low
hanging fruit gone?
Source: Statscan
Source: NAREIT
https://www.quandl.com/data/MULTPL/SHILLER_PE_RATIO_MONT
H-Shiller-PE-Ratio-by-Month
65. Market Cycles
Markets more expensive
Lower probability for above
average future returns
Markets less expensive
67. What if Everyone is Above Average?
2006 Survey of 300 Fund Managers
76% said they were above average
The other 24% said they were average
100% were average or better?
68. The Deadly Trio
Cognitive Dissonance
(I agree with every fact
That agrees with me)
Over Confidence
(a Bridge - or apple -
too far)
Confirmation Bias
78. Know Thyself (avoid overconfidence)
Embrace Uncertainty (Minsky Moments)
Play the Odds (Avoid Loss Aversion)
Diversification in asset classes but focus within them
Accept Pain (necessary path for growth)
Behaving Well
79.
80. The 4% Rule
50% success
https://www.onefpa.org/journal/Pages/The%204%20Percent%20Rule%20Is%20Not%20Safe%20in%20a%20Low-Yield%20World.aspx
81. Price is 3 to 4 times as volatile as cash flow
for both real estate and equities
82. A Couple’s Tale
Bob and Linda are both age 60 . In good health and
considering retirement . Here are the other facts:
• Bob is a lawyer and Linda a dentist.
• They are both incorporated and have personal, registered,
and corporate portfolios of $2M each
• Bob’s portfolio is best represented by Morningstar’s
Balanced Index.
• Linda’s portfolio is invested with us in a Core Model
• They want to know the likely impact of withdrawing 4% of
their capital annually and adjusting that to inflation.
• We recreate that model for them going from January 2000
to December 2018.
83. How Well Does It End?
$2.0M $2.0M$1.8M $1.8M$1.7M
$3.7M
$-
$500,000
$1,000,000
$1,500,000
$2,000,000
$2,500,000
$3,000,000
$3,500,000
$4,000,000
Bob 60/40 Linda
Start Income End
84. A Couple’s Tale
What Happened?
• Bob’s indexed income greater than his overall return.
• 85% of Linda’s return from cash flow so less volatility
and no need to sell assets during negative years such
as 2008.
• SWP have greater negative impact in losing years.
• Bob has 6 losing years out of 19 with a combined
loss of 28% . Linda has two losing years with a
combined loss of 7%.
85. What Is Next?
Real and Secular Road Bumps Ahead
Behave Well We’ve Been Here Before
86. THANK YOU
This presentation contains the current opinions of the presenter and such opinions are subject to change without notice. This material is distributed for
informational purposes only and is not intended to provide legal, accounting, tax or specific investment advice. Please speak to your Nicola Wealth Advisor
regarding your unique situation. Forecasts, estimates, and certain information contained herein are based upon proprietary research and should not be
considered as investment advice or a recommendation of any particular security, strategy or investment product. All investments contain risk and may gain or
lose value. Nicola Wealth is registered as a Portfolio Manager, Exempt Market Dealer and Investment Fund Manager with the required provincial securities’
commissions.