FILE - This July 16, 2013, file photo, shows a Wall Street street sign outside the New York Stock Exchange. (AP Photo/Mark Lennihan, File)The Associated Press
Stock markets around the world fell on Tuesday, dragged lower by fears that spiking bond yields will puncture the rising balloon of share prices.
Shareholders fret that interest rates are beginning a sustained increase. If so, that would be ominous news for today's levitating equity markets.
Over the past decade, stocks have climbed higher and higher because of TINA – the notion that There Is No Alternative to buying shares when bonds are paying next to nothing.
But if bonds start offering payouts that aren't so comically low, the balance of power shifts. The question is how much of a rise in bond yields it will take to tempt investors away from stocks.
For now, everyone is watching the 10-year U.S. Treasury bond, a global benchmark for long-term expectations. On Monday, its yield rose above 2.70 per cent, breaking through a key resistance line.
On Tuesday, the 10-year Treasury yield continued to hover around 2.72 per cent, a big increase from the 2.04 per cent it was paying in September and the most it's delivered since May 2014.
The recent surge in yields reminds some observers of similar spikes just before Black Monday in 1987 and in June, 2007, on the eve of the financial crisis.
To be sure, nobody is predicting a catastrophe of such magnitude right now. The global economy is humming along at its best clip in years, while corporate results are coming in strong.
But stocks, especially in the United States, look vulnerable to a correction. They are extremely expensive in comparison to their long-term earnings. Bonds are looking more and more enticing, especially after the recent run-up in yields.
Read more from the Globe and Mail's Ian McGugan
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Stocks to ponder
Postmedia Network Inc. (PNC.A-T; PNC.B-T) The most recent quarter for Postmedia Network Inc., the publisher of most of Canada's major-market daily newspapers, was not bad, at least not compared to the carnage it has recently reported. Revenue fell more slowly, and some measures of earnings were up. CEO Paul Godfrey said unequivocally, in the company's news release, "We have a strategy and it is working." He pointed to meaningful growth in the small share of the company's revenue drawn from digital offerings, as opposed to the print-related sales that continue to decline sharply. Postmedia's ability to transform into a model for legacy media companies will take time – and the most pressing question, really, is how much time the debt-laden company has. David Milstead reports.
McDonald's Corp. (MCD-N). McDonald's Corp., three years into a dramatic turnaround effort, has left investors hungry for more. Though the company matched Wall Street estimates for U.S. comparable sales growth last quarter, the shares fell the most in more than four months -- a sign the bar has been raised for the fast-food giant. After kicking off a rally in 2015, McDonald's now carries a rich valuation compared with its peers, Bloomberg Intelligence analyst Mike Halen said. Investors also have grown accustomed to seeing McDonald's beat estimates, rather than merely matching them. The last time the company didn't exceed U.S. comparable sales projections was July, 2016. Bloomberg News reports.
The Rundown
Exchange-traded funds: A crowded trade
Exchange-traded funds have gone big-time with celebrity endorsements at a recent conference. With nearly $5-trillion (U.S.) in assets globally, growth in ETFs has become a dominant trend of the era, as vast sums of money spurn what's now perceived as the stodgy, outmoded mutual fund in favour of its flashy younger cousin. But as with any investing force that captures the imagination of the masses, there are growing fears of unintended consequences. Just as the frenzy for internet stocks in the late-1990s fuelled the crash that was soon to come, today's fiercest critics suspect that ETFs may be sowing the seeds of a future stock market rout. Tim Shufelt investigates.
Giddy investors beware: Bumps ahead for U.S. stock markets
If you're feeling nervous about the U.S. stock market, you have some excellent company. Jason Voss of CFA Institute, the major professional body for money managers, said on Friday that a key indicator of market valuation was close to turning negative. "The last time that occurred?" he wrote. "Just prior to the Great Recession." To be sure, market indicators abound, but the one that Mr. Voss is referring to has good reason to be taken seriously. It's the so-called equity risk premium, a measure of how much extra return investors expect to get from stocks compared to safe government bonds. Ian McGugan explains.
Four ways the limits to aggressive investing are being tested
Surging investor confidence in early 2018 is starting to look like reckless enthusiasm. Investors have lately shown a willingness to take on risk in search of home-run returns, and the investment industry is serving up products to capitalize. The stock markets are not the problem, particularly the Canadian market. Annualized returns over all periods – from the past 12 months to the past 20 years – are far from excessive and could even be called modest. The U.S. market has been a lot stronger in the past decade, but it's now supported by a growing economy. Remember, it's recessions that usually cause a bear market. Strong market fundamentals support aggressive investing, but there's a limit. Rob Carrick explains four examples of how these limits are being tested right now.
For the first time in a decade, developing nations are beating the TSX
The past decade has seen the S&P/TSX composite closely track the performance of emerging markets equities, once currency effects are accounted for. In recent months this has changed, however, as developing world markets have left domestic equities in the dust. Scott Barlow takes a look at the charts.
What tobacco stocks can teach investors
You can hate tobacco stocks, but don't hate the sound investing strategies they represent. Many investors see tobacco stocks as a clear violation of their ethical principles: Owning them is tantamount to aligning yourself with cancer and addiction. Fair enough. But these stocks also embody time-tested approaches to successful investing that appear especially important today, when stock valuations are at their loftiest since the 1990s and investors are enamoured by high-risk concepts such as marijuana stocks and bitcoin. David Berman reports.
Mackenzie Investments reverses course, dips into passive ETFs
Mackenzie Investments is updating its strategy for exchange-traded funds to include passive investments, a segment of funds former chief executive Jeff Carney once said the company would not consider. Earlier this week, Mackenzie announced it was almost doubling its ETF shelf with the addition of 13 new funds, six of which began trading last Wednesday. The remaining seven funds will launch later next week. Clare O'Hara reports.
RRSPs are getting a bum rap as a tax trap
Regret is something you're supposed to feel for not contributing to RRSPs. But for years now, Jamie Golombek has been hearing from retirees who rue the day they started down the road of using registered retirement savings plans and, in turn, registered retirement income funds (RRIF). But he's crunched the numbers and it shows that this is just not the case with RRSPs, even if you don't fall into a lower tax bracket upon retirement. Rob Carrick reports.
Big banks ignoring central bank's lead, not raising GIC rates
Interest rates are going up, but savers are not benefiting. The Bank of Canada raised its key rate by a quarter percentage point, to 1.25 per cent, earlier this month, the third rate hike in the past year. Even before that announcement, our Big Six banks jumped the gun by hiking their fixed-term mortgage rates by an average of 15 basis points, to 5.14 per cent in most cases. That means more pain for borrowers, but guess what? Investors in guaranteed investment certificates aren't going along for the ride. The online posted rate on an RBC non-redeemable GIC remains stuck at 1.6 per cent, where it has been for months. You'll get the same offer from Toronto-Dominion Bank and National Bank. Bank of Montreal is even stingier, at 1.5 per cent, and you'll receive only 1.25 per cent from CIBC. Gordon Pape explains.
Conservative investors, check out this parking spot for your money
One of the best value in conservative investing today could be the one-year GIC. Don't bother looking for evidence of this at your local bank branch, where posted one-year rates on guaranteed investment certificates have been below 1 per cent for the most part in January. You have to go to smaller, alternative outfits for the best one-year rates. Oaken Financial offered 2.5 per cent for a one-year term as of late January, while a bunch of online banks run by Manitoba credit unions were just below that level. Examples include Hubert Financial at 2.45 per cent and AcceleRate Financial, Achieva Financial, MAXA Financial and Outlook Financial at 2.4 per cent. Rob Carrick reports.
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Ask Globe Investor
Question: If I own shares of a company (such as Sears Canada) that has gone out of business and has been delisted from the stock exchange, how can I sell the shares to claim a capital loss for tax purposes?
Answer: Selling the shares may not be necessary. According to the Income Tax Act, you can claim a capital loss if one of the following conditions is met:
- The company went bankrupt during the year in which you file;
- The company is insolvent and subject to a “winding-up order”;
- The company is insolvent; it no longer carries on business; the fair market value of the shares is nil; and “it is reasonable to expect that the corporation will be dissolved or wound up and will not commence to carry on business.”
In such cases, you can deem to have disposed of the stock at the end of the year "for proceeds equal to nil and to have re-acquired it immediately after the end of the year at a cost equal to nil," the Income Tax Act states. Because you would still own the shares, you would be responsible for any capital-gains tax in the unlikely event the shares subsequently increased in value and you sold them.
According to TaxTips.ca, you should include a signed letter in support of your tax return – even if you file electronically. "The letter should state that you want subsection 50(1) of the Income Tax Act to apply to the particular transaction," TaxTips.ca says.
Another option is to ask your broker to help you dispose of the shares. Your broker may ask you to fill out a "deed of gift" form that transfers the shares to the broker at a value of zero. In this case, you could claim the capital loss, but would no longer own the shares.
When you have a capital loss, you must first apply it against capital gains in the same year. If you still have capital losses left over, you can carry them back up to three years or forward indefinitely to offset taxable capital gains in those years.
--John Heinzl
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What's up in the days ahead
CN Rail's stock just slammed on the brakes. For long-term investors, this could be a good time to hop on board. John Heinzl looks at the investment case in Wednesday's Globe Investor.
Click here to see the Globe Investor earnings and economic news calendar.
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Compiled by Gillian Livingston