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Equity markets across the globe rebounded from 2018 and posted strong returns with double digit gains across major indices in 2019. The S&P 500 US index climbed 28.9% in US currency terms (22.7% in C$), while the S&P/TSX Canadian index was up 19.1%. The Canadian dollar appreciated 4.8% versus the US$ over the last year which dampened the returns on foreign investments for Canadian investors.
Our Model Portfolio was up 2.7% in the fourth quarter. For 2019, the Model gained 12.6%, lifted by the strong performance of Canadian and US equities. Though the absolute performance is quite strong, the Canadian banks, who outperformed the broader index many years, unfortunately trailed in the last twelve months, hurting the relative performance of our Model.
The Bank of Canada (BOC) kept borrowing costs on hold in 2019, keeping its key policy rate at 1.75%, despite the Federal Reserve’s (Fed) cuts. Looking into 2020, while growth risks remain skewed to the downside, our economists believe that the BOC is likely to remain sidelined again and that it would take a meaningful shock or the Fed to move again to prompt a move in the Canadian policy. After a decade of declining interest rates, we view bonds as an expensive asset class. Thus, we will continue to hold ‘‘short term’’ bonds, for our typical balanced accounts for liquidity purposes and to help them go through an eventual equity market correction.
As we head into 2020, we continue to believe that the expected return for equities is more attractive than the one for fixed income. While we may not be heading into the roaring 20s, economic growth is still positive and inflation remains subdued. This should allow central banks to keep policy rates that will remain low for a while longer which is supportive for equity markets.
Finally, we have enclosed data on 2019 aggregate returns for various investment profiles on p. 24 of this Quarterly Review.
1. Make 2019 RRSP contribution before March 1st, 2020. The maximum is 18% of 2018’s earned income to a maximum of $26,500. Make 2020 RRSP contribution as soon as funds are available. The maximum is 18% of 2019’s earned income to a maximum of $27,230.
2. Make 2020 $6,000 TFSA contribution as soon as funds are available.
3. Notify us of any anticipated changes to your cash requirements for 2020 or of any material changes to your personal situation that would have an impact on your financial plan.
The calculation of performance data set forth herein has been prepared by the author as of the date hereof and is subject to change without notice. The author makes every effort to ensure that the contents have been compiled or derived from sources believed to be reliable and contain information and opinions, which are accurate and complete. However, BMO Nesbitt Burns Inc. ("BMO NBI”) makes no representation or warranty, express or implied, in respect thereof, takes no responsibility for any errors and omissions which may be contained herein and accepts no liability whatsoever for any loss arising from any use of or reliance on this report or its contents. Information may be available to BMO NBI or its affiliates that is not reflected herein. This report is prepared solely for information purposes. Please note that past performance is not necessarily an indicator of future performance. The indicated rates of return are gross of fees or commissions. Individual results of clients' portfolios may differ from that of the model portfolio as fees may differ, and performance of specific accounts is based on specific account investiture. The noted model portfolio portfolio may not be appropriate for all investors
11 Sources: Bank of Canada, Bloomberg, BMO Capital Markets