June Market Update

Money is a tool. It's is something that supports your life!

*A new episode of the Financial 15 will be out soon!*

Portfolio Management Comment

The following is from the BMO investment strategy team

It appears “Bond Vigilantes1” have woken up. As the deficits and debt loads of major economies continue to increase and inflation pressures persist, bond investors are asking for better compensation in the form of higher interest rates. The lack of fiscal discipline in developed countries is becoming a bigger concern for investors as this means more debt issuance in the face of a finite pool of capital to absorb this growing supply. Case in point is the U.S. which is already running a 7% annual deficit, even before the passage of Trump’s “One Big Beautiful Bill” which will further increase borrowing. For high-quality sovereign bonds like U.S. Treasuries, getting one’s capital back is not the issue, as we assume they will be money good for the foreseeable future. The real problem is that the coupon payments are fixed, leaving investors vulnerable to inflation which erodes the real value of the bond. This problem is compounded for international investors when the currency of the issuing country finds itself under pressure, as we have begun to see in 2025 with the U.S. Dollar. To illustrate, Bloomberg noted that Taiwan insurers lost over $600 million in April alone due to U.S. dollar weakness in the wake of Trump’s tariff threats. Given countries in Asia own over $7 trillion in American assets, continued U.S. policy uncertainty and volatility could cause diversification away from these assets for years to come.

While the recent U.S. Trade Court decision to strike down the Administration’s reciprocal and 10% baseline duties and the fentanyl-related levies on Canada, Mexico, and China is positive on its face, we believe it actually increases uncertainty since Trump has many other legal levers to maintain or even increase tariffs. Net-net, this lowers the incentive for trade partners to negotiate in the short term. Stay tuned.

 

 

As The Economist recently noted, “a structural source of demand for long-dated government debt is drying up. Asset-liability managers, meaning institutions such as defined-benefit pension funds that use the fixed income streams from bonds to guarantee their future liabilities, have long been big buyers. But yields have now been high enough for them to lock in these cash flows at attractive prices for years, meaning many can afford to withdraw from the market. As the supply of bonds remains high, fueled by fiscal deficits and central banks shrinking their balance-sheets, this sets the stage for long-term borrowing costs to rise even more”.

It is important to keep things in perspective, however. While rates are increasing, they still remain relatively low by historical standards. Still, rising Government yields also means higher mortgage rates. Specifically, 30-year mortgage rates in the U.S. recently pushed above 7%, not exactly supportive for the housing market (which in total accounts for 15%+ of GDP). The impact is being felt by large homebuilders whose confidence is at multi-year lows and whose stocks have been battered. While housing is even more important to Canada’s economy, we are currently enjoying much lower interest and mortgage rates which is a clear advantage for our market.

 

 

The just-released Fed minutes do not show a high likelihood of rate cuts in the next few months. They state: “in discussing risk-management considerations that could bear on the outlook for monetary policy, participants agreed that the risks of higher inflation and higher unemployment had risen. Almost all participants commented on the risk that inflation could prove to be more persistent than expected.” BMO Economics concluded three weeks ago that the Fed was ringing the stagflation alarm, and it appears that the inflation side is still more worrisome.

Stock Valuations Will Matter Again Sooner Than Later

Rising 10-year interest rates directly impact the price of bonds as higher rates mathematically lead to lower bond prices. The longer the maturity3 of the bond, the more pronounced the impact. They also have a significant impact on equity sector valuations and performance. It is well understood that rising interest rates have a nefarious impact on the performance of capital-intensive sectors such as Industrials, Utilities, Telecoms, REITs and even Technology (think of recent huge investments in data centers, AI Chips, etc.) since 1) their costs of funds go up when interest rates rise, and 2) it makes the typical dividend yield advantage of these sectors less attractive relative to bond alternatives. The other more important impact concerns the higher discount rate applied to future cash flows. This lowers the present value of future profits, impacting valuation.

As we have written many times, looking at valuations for stocks – or other asset classes for that matter – is a terrible timing tool. However, financial history has shown time and time again that being disciplined about the price paid for assets (having a “margin of safety” as Warren Buffet famously put it) is the best way to ensure an appropriate return for long-term investors. This principle applies as much to real estate as it does for financial assets such as bonds and stocks. The principal reason for this is that the stock market is inherently mean reverting, meaning that excesses to the upside or downside tend to be corrected with opposite reactions (think of an elastic band which is pulled too far and then snaps in the opposite direction).

However, the changing inflation and interest rate landscape provides some interesting geographic allocation opportunities. In Canada specifically, the market has reacted quite differently, posting far better median gains when interest rates were rising, likely because these periods coincided with inflationary pressure and associated strong commodity price cycles. We remind our readers that approximately a third of the S&P/TSX market capitalization is in the Energy and Materials sectors versus less than 10% in the U.S.

Canada: Still Trading at an Unusually Steep Discount to the U.S. Based on Price-to-Earnings (Lower) and Dividend Yield (Higher)

We again turn to the relative value advantage of Canadian stocks vs. U.S. stocks. Yes, Canada has already outperformed the U.S. by 8% in the last year, but we still consider the current discount to be excessive not only relative to history but also to the profit growth potential for a number of financial, industrial and natural resource industries.

 

Central Banks Likely on Hold a Bit Longer

For bond investors, all the noise around the trade and policy uncertainty has led to short-term volatility, but at the end of the day, it all comes back to two things: deficits and inflation. Large deficits fueled in part by an ever-growing debt service obligation, especially in the U.S. where interest costs now exceed defense spending, are getting a lot more attention. On top of this, domestic and globally high inflation currently fueled by the renewed U.S. protectionism keeps the prospect of stagflation4 alive, further adding to investors’ concerns.

As stated above, the U.S. Trade Court ruling on tariffs – while encouraging – only adds further to the uncertainty. It may alter the journey, but it does not necessarily change the expected destination. While lower tariffs could be positive for the economy in the short term, it would not necessarily lead to lower inflation and interest rates. Additionally, lower tariff revenues could limit progress on reducing the deficit, which would likely grow due to the impact of the One Big Beautiful Bill Act (OBBBA). The OBBBA will likely be sealing a good part of the fiscal policy over the next decade, risking an additional $3 trillion in deficits and adds to the rapidly growing U.S. debt pile.

The Act still needs to be approved by the Senate by early July, a process that could be slowed down by the intervention of the more debt hawkish senators. The Act includes an increase in the debt ceiling and considering the U.S. Treasury is expected to have exhausted all its emergency funding measures somewhere in August, reaching the $36.1 trillion limit, it will only add to the uncertainty over the summer.

This helps explain the recent move to higher rates in the fixed income market. First, stickier inflation is leading investors to re-assess long-term expectations embedded in the yield curve. Second, despite slower economic growth, the risk of large deficits is leading real yields and term premiums to rise. Finally, the inflation background and the trade uncertainty leave little room in the near term for the U.S. Federal Reserve (and many other major central banks) to ease policy, pushing market expectations for rate cuts in the U.S. to later in 2025.

 

The same could be said for the Bank of Canada. A recent uptick on core inflation measures is likely going to delay the next rate cut a little longer. More aggressive fiscal policies from the new Liberal government could mitigate some of the trade war impact on growth and add to the current inflationary pressures. When combined with the absence of clarity on Canada’s fiscal health (the next budget and fiscal update expected in the fall), mid-to-long-term rates could continue to be under pressure, which supports a more defensive portfolio duration.

 

 

Our Portfolio Management Approach

We are fundamental investors that use technical analysis to manage short-term market risks. We believe that risk management is not a choice, but a necessity. While we cannot control how much downside the market provides during a correction, we can control how much of the downside your account receives. We aim to avoid 60% or more of the decline in any significant downturn. Without our process, there is a good chance you will experience 100% of the downside from the market. We will help you navigate the risks and rewards of the market so that you can stop worrying about your money and start living your life.

 

Transactions

We increased the level of cash in the accounts as the market approached old highs. The following is a chronological list of the trades:

• Sold BMO S&P/TSX index fund
• Sold Transalta and Capital power – technical break downs,
• Sold Ishares core S&P 500 index for a nice profit. Bought at $54.0307 sold at $59.722
• Sold Lockheed Martin for a small loss, not participating in market advance

Returns on our 60/40, 70/30 & 80/20 Portfolios before fees:

Interesting Charts

 

 

Technical Comment

Market Overview: S&P 500 Emini Futures

The market formed a monthly Emini bull entry bar closing in its upper half. The bulls need to create a follow-through bull bar in June to increase the odds of a trend resumption. The bears see the current move as a retest of the all-time high (Dec 6) and want it to form a lower high.

 

The Monthly Emini Chart

 

• The May monthly Emini candlestick was a bull bar closing in its upper half with a small tail above.
• Last month, we said the market could still trade slightly higher. Traders would see if the bulls could create a strong bull entry bar in May, or if the market would trade slightly higher but close with a long tail above or with a bear body instead.
• The market formed a decent bull entry bar in May.
• The bears got a strong selloff in April, but the large reversal and long tail below April’s candlestick indicate they are not as strong as hoped.
• They hope to get a retest of the April 7 low, even if it only forms a higher low.
• They see the current move as a retest of the all-time high (Dec 6) and want it to form a lower high.
• They want the bear trend line or the March 3 high to act as resistance.
• They must create strong bear bars to show they are back in control.
• The bulls see the market forming a major higher low.
• They hope the selloff (Apr 7) has alleviated the overbought conditions.
• They want the market to continue in the broad bull channel followed by a breakout above the all-time high.
• Since the bulls got a strong entry bar in May, they need to create a follow-through bull bar in June to increase the odds of a trend resumption.
• For now, traders will see if the bulls can create a follow-through bull entry bar.
• If they do, the odds of retesting the all-time high will increase.
• Or will the follow-through buying be disappointing and the candlestick close with a long tail above or a bear body instead?

Planning Article

Most families understand the importance of having a Will – even if many put off creating one – but few ascribe the same weight to drafting a power of attorney (POA). More often than not, a POA is an afterthought, but in Chris Markou’s experience, not having one in place can be disastrous if you’re ever in a position where you can’t make decisions on your own.

The laws regarding substitute decision-making vary among the Provinces and Territories and the terminology is slightly different. The document may be referred to as a POA, Health Care Directive or Mandate and the person being appointed may be referred to as an attorney or mandatary.

 

Chris Markou, Director of Estate Planning at BMO Private Wealth, believes a well-thought-out POA – a legal document that identifies a person who can make health or financial decisions (or both) on your behalf when you can no longer make them yourself – may be even more important than a Will. When you don’t have a Will, there is at least a system in place to distribute your wealth, even though it may not reflect your wishes. While there are some provisions for healthcare decisions, with doctors defaulting to your family if you’re ever incapacitated, there is no clear pathway to take care of your wealth without a POA.

“It’s almost better to die without a Will than to lose your capacity without having a power of attorney in place,” he says. “The process of going through a guardianship application through the courts is time consuming and costly.”In Ontario, a guardian for property may be appointed by the court or the Office of the Public Guardian and Trustee. A guardian of the person (for personal care decisions) must be appointed by the court. It can be a costly and complex process that can stretch for months, time you and your family may not have when you need to make swift decisions to protect your assets and meet your needs.

Without a POA, no one has the authority to sign any paperwork or tend to your financial affairs. Yet, there are still bills to pay, matters to attend to, investments to manage and more. Sometimes, you may even need to sell property or assets to create liquidity to pay expenses.

Executors versus POA

Many people use the terms executor and POA interchangeably, says Markou, but they are different roles and responsibilities. An executor carries out your wishes after you pass away, and an attorney pursuant to a POA makes financial decisions on your behalf while you’re alive. In many cases, your wishes in death won’t be the same as what you need if you become incapacitated.

Although you can name the same person as executor and POA, the responsibilities of those roles are limited and don’t necessarily overlap. “Your Will does not take effect while you're still alive, however powers of attorney are effective before you die," explains Markou.

Considerations when drafting a POA

An attorney’s authority is limited to what is spelled out in the POA document or what is otherwise permissible by law. Just as you might include clauses in a Will that detail the charities you want to support and how you’d like to see your assets distributed, you might also include clauses that ensure your wealth is being managed as it would if you were making those decisions. In addition to making sure someone is overseeing your investments and paying your bills, you might instruct the POA to continue giving to charity or family members in accordance with your usual gifting patterns, says Markou.

Whatever you put into the document, it’s important to have language that guides the person appointed as your attorney. An attorney has a responsibility to act in your best interest – called a fiduciary duty – so if your wishes are not specified, they may not be able to make financial decisions that you would have made due to legal constraints.

It’s worth thinking through different scenarios your attorney could encounter. For instance, an attorney for property can’t name or change beneficiaries on an investment account. This can become a problem if you’re incapacitated when you turn 71 and have to transition your Registered Retirement Savings Plan (RRSP) into a Registered Retirement Income Fund, as beneficiaries must be redesignated when the account change happens. One solution is to include a clause that authorizes your power of attorney to keep the same beneficiary designation you had on your RRSP.

Choosing an attorney

Attorneys are typically people you trust, such as a spouse, close family member or friend. Some also make their lawyer or accountant their attorney for property or, increasingly, a professional such as BMO Trust Company to oversee your wealth decisions.

There are two types of POAs, one for health and one for finances, and while they can be the same person, many also split the jobs. For example, you may choose a spouse to manage health and an adult child or advisor to oversee the financial side.

It’s critical to make sure the person has the experience and skill set to take on this role – and the time. As well, just as most advisors and lawyers advise clients to review their Will every five years or after any major life event, the same advice applies to POA.

Other roles for the attorney

Depending on your needs, you can also draft a limited power of attorney to carry out your wishes for a specific period of time or for the purpose of a specific transaction. For instance, if you were traveling for a month and knew about a pending real estate deal, you could put a limited POA in place for that transaction while you are absent, explains Markou.

Suppose you own a private business or have business partners. In that case, you might need a separate POA for those assets outlining who could step in to make decisions and vote on your behalf. That’s often a separate document from a shareholder agreement, says Markou.

Likewise, if you own property in different jurisdictions, consider having separate POAs for those assets. Although a POA signed in one part of the country will generally be acceptable in another jurisdiction, that’s not true of every jurisdiction, especially if you have assets outside of Canada. It can be a hurdle, especially if you have to sell an asset, notes Markou.

Ultimately, whether a POA is recognized in another province or outside of Canada depends on the rules of that jurisdiction. There could be a conflict of laws, explains Markou. “It gets potentially messy, so you definitely need to get some proper advice.”

Proving incapacity

A common misconception about a power of attorney for property is that it doesn’t become effective until you lose capacity, but most lawyers tend to make them effective the moment they’re signed to avoid the hurdle of having to prove incapacity, says Markou. “It just delays things and makes it a little more complicated for the person to step in and take control,” he notes.

While that might worry some families that an attorney can take control of assets while you still have the capacity to manage them yourself, you can put safeguards in place to protect against abuse. For instance, since your attorney needs a copy of the original signed document to exercise their authority, families will often ask their lawyer to retain control of the document and release it under certain circumstances or clear evidence that you’ve become incapacitated, Markou explains.

It gets complicated if the POA requires an official to designate you as being incapacitated before it takes effect. Not only do you have to find someone licensed to conduct an assessment, but you also must agree to the process, explains Markou. If you’re in denial or refuse to meet with the assessor, it can be hard to move that process forward.

While everyone needs a Will, most people will go through life and never lose capacity, says Markou. It’s one of the reasons why he thinks POAs are not always top of mind, but in his experience families who have one in place are far better off. “Think about the months and thousands of dollars you might have to spend if you don’t have a POA,” he says. “If people understood that, maybe it would be a little bit more forefront on their mind.”

 

Millennial Minute

This month Ashley wants to share an interesting article from Forbes.com: Millennial Money – Financial inspiration and insight for a generation.

 

Although, again, it uses US statistics, the money crunch is felt all over the world and this could help provide a little more education.

Millennial Money - click here to read!