Making an RRSP contribution? Here's what I'd do

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The RRSP deadline - Feb. 29 - is quickly approaching. As that date nears, investors are tucking money into their retirement savings accounts, but with particular trepidation this year given the violent selloff in markets.

So what should you do with the contributions? For now, for long-term investors, I would suggest leaving it in cash or money market funds. Keep the old adage, "The trend is your friend", in mind. Right now, the trend for major equity markets is lower.

For those a little less risk-averse, consider investing your money with a staggered approach, as no one knows when we will see a bottom in the markets. Perhaps divide your contribution up in thirds; invest one-third at some point, another third later, and the final third further down the road. Or a 50/50 split may make more sense, especially if it is a small amount. Just keep in mind that you don't have to commit all of your money at once.

In markets everywhere right now, there are simply more sellers than there are buyers. Magnifying the selling pressure are falling portfolio values, which are creating margin calls, or demands from brokers that an investor deposit more cash to cover possible losses. Meanwhile, many are sitting on the sidelines as they do not like uncertainty.

At the core of that uncertainty is deteriorating global economic conditions. Last month, the International Monetary Fund revised its global growth forecasts down by 0.2 per cent for both 2016 and 2017, citing concerns about Chinese economic growth and the negative impact of lower oil prices caused by an oversupplied market. The World Bank also cut its global growth forecast for 2016 due to worries over growth in the leading emerging markets or BRICS nations: Brazil, Russia, India, China, and South Africa.

This uncertainty is leading to questions such as, "Is the U.S. economic headed for another recession?", "How bad is the Chinese economic slowdown?", "How fragile is the European economic growth?", and "Will the Bank of Canada need to take more stimulative measures, putting further pressure on the Canadian dollar?"

Right now, the near-term outlook for global markets is unclear. As a result, the downside risk is elevated and market volatility remains high. While falling stock prices may seem enticing, it is too early to get excited about stocks. Stock multiples and prices may have further to fall before stabilizing.

While it's difficult, if not impossible, to know when to step back into equity markets, there are three key issues that need some resolution before confidence is restored and investors can feel safer delving back into equities.

First up, China. The latest data continues to worry investors. Fourth-quarter gross domestic product data showed economic growth shrinking to its lowest quarterly rate since 2009. On Wednesday, the Baltic Dry Index, a proxy for global trade, fell to another record low. The devaluation of the Chinese yuan is also heightening worries about the health of its economy. Speculation is mounting that the People's Bank of China needs to lower its currency in order to increase export demand and stimulate economic growth. The Chinese yuan is now at is lowest levels since early 2011.

Next, oil. As long as reports of higher OPEC oil production continues, pressure is likely to remain on the price of oil. On Wednesday, the OPEC Monthly Oil Market Report indicated that OPEC oil production increased in January to average 32.22 million barrels of oil per day, according to secondary sources. Right now, there is a high correlation with the price of oil and movement in the equity markets. In Canada, this makes sense since the energy sector represents nearly 18 per cent of the S&P/TSX composite index. However, for the U.S. markets, for instance, the high correlation is due to oil acting as a barometer of economic growth since the U.S. and China are the top two consuming countries in the world. The negative impact of a lower oil price is now filtering its way from pressure on energy stocks into pressure on financials stocks, with concerns that future large loan losses and writedowns will be taken by banks.

Finally, investor sentiment usually needs to reach fearful levels before there can be a meaningful recovery and investors can feel free to step into the market. And right now, the readings suggest people are not fearful, but merely bearish. There is no panic or capitulation in the markets. The Chicago Board Options Exchange Volatility Index, or VIX Index, is a gauge commonly used to measure fear in the markets. It is elevated, increasing from a level of 18 at the start of the year to 28, but until it spikes above 30, it really doesn't show that there is widespread panic in the stock market. Furthermore, each day, I track stocks in the S&P/TSX composite index and the S&P/TSX SmallCap Index to see which ones are breaking down and trading at their lowest level over the past 55 days. There were only a few dozen stocks on the list calculated Wednesday night out of 240 stocks from the S&P/TSX composite index and the 214 stocks in the S&P/TSX SmallCap Index.

Until these key issues, among others, are addressed, downward pressure will persist for stocks' valuations. While this is likely a buying opportunity for long-term investors, there is no need to rush in and watch your RRSP contribution erode in value.