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U.S. legislation that would provide funds for workers without employment income remains stuck in Congress - but whether it eventually passes or not, Morgan Stanley believes investor portfolios are in trouble.

Morgan Stanley’s Michael Wilson has been among the most bullish strategists, correctly predicting the strength and sustainability of the post-March 23 market rally. In a Monday research report, however, he argued that the equity market highs for 2020 may be behind us. He expects that “valuations will come down faster than [profit forecasts] can rise” for the remainder of the year.

The CARES 2 act, legislation designed to provide financial support for Americans left without income because of the pandemic, is central to Mr. Wilson’s caution on markets. In the event the bill does not pass, the negative consequences for consumer spending would form a major hurdle for corporate revenues and stock prices.

If the bill does become law, Mr. Wilson projects that the subsequent jump in inflation expectations will push longer-term bond yields higher. The problem here is that U.S. price-to-earnings ratios, and thus stock prices, have been rising to the extent that bond yields have fallen.

Lower bond yields have helped drive markets higher, making equities more attractive by comparison (I posted the relevant chart on social media here). Based on that pattern, the higher yields Morgan Stanley suspects when fiscal stimulus reaches U.S. consumers means lower equity prices.

Mr. Wilson still believes that March marked the beginning of a new, multi-year bull market. While the S&P 500 as a whole will likely struggle in the months ahead, the strategist is confident that the ongoing global economic recovery will support the values of stocks with improving profit forecasts.

Mr. Wilson provided a list of companies he expects to outperform the market – although admitting they have so far underperformed – as U.S. and global economic growth recovers. These stocks include Ally Financial Inc., Baker Hughes Co., Boston Scientific Corp., Capri Holdings Ltd., Discover Financial Services, Elanco Animal Health Inc., Evercore Inc., National Vision Holdings Inc., Five Below Inc., Harley Davidson Inc., JPMorgan Chase & Co., Phillips 66, PVH Corp , Ross Stores Inc. and Yum China Holdings Inc.

-- Scott Barlow, Globe and Mail market strategist

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Stocks to ponder

Converge Technology Solutions Corp. (CTS-X) This is a little-known technology stock that has been delivering spectacular revenue growth and stellar returns to its shareholders. Year-to-date, the share price is up 64 per cent, and in 2019, the stock price rallied over 155 per cent. The stock has five buy recommendations with an average one-year price target that implies a potential 34-per-cent gain. Despite the stock’s robust price appreciation, it trades at a reasonable valuation, at a discount relative to its industry peers. Jennifer Dowty has this full profile of the stock. (for subscribers)

The Rundown

Why Canadian stocks are performing better than you think

It might not feel like it, but the average Canadian stock is actually outperforming its U.S. counterpart so far in 2020. Tim Shufelt reports. (for subscribers)

Others (for subscribers)

The highest yielding stocks on the TSX, plus risk data

Monday’s analyst upgrades and downgrades

Monday’s Insider Report: Trustee invests over $13-million in this REIT trading just below its record high

Others (for everyone)

Hedge funds see opportunity in battered New York, San Francisco apartment markets

Tesla traders bet on Musk battery pitch to spark rally

Globe Advisor

With so much cash sitting on the sidelines, when – and how – should investors get back in?

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Ask Globe Investor

Question: My wife and I hold Apple Inc. shares in our registered retirement savings plans. After rising sevenfold, the shares are now worth US$1.25-million. Because we don’t have much personal cash – and because we want to lower our exposure to the stock market – we are thinking of selling two-thirds of the shares and withdrawing the money to improve our home and cottage, and to help our children. Are we crazy? Is there a way to lessen the tax hit? I am 65 and my wife is 57, we live in British Columbia and our combined annual income is about $475,000. About half of that consists of dividends and capital dividends from my company that are split with my wife, but these dividends are unlikely to be as high in the future. Including the Apple shares, my RRSP is worth about $2.3-million and my wife’s is about $1.4-million.

Answer: To answer your first question, no, I don’t think you’re crazy. You’re in the enviable position of having substantial income and savings, and it appears you can easily afford to spend a portion of your RRSP nest egg. You might also consider tapping your tax-free savings account first, as TFSA withdrawals are not taxed.

As for your second question, there may be ways to reduce the tax hit on RRSP withdrawals. However, given that you have substantial income and are proposing to withdraw more than $1-million (in Canadian dollars) from your RRSPs, you will almost certainly be sending a large chunk of that money to the government.

How large? Go to and click on “British Columbia.” You can then pull up a table of combined federal and provincial marginal tax rates for B.C. residents. Note that the top marginal tax rate of 53.5 per cent for “other income” – which includes RRSP withdrawals – kicks in at individual income above $220,000.

Here’s the bad news, according to Dorothy Kelt of “If they’re already in the top tax bracket … there might not be much they can do” to reduce the tax on RRSP withdrawals.

Now for the good news. If you or your wife are not currently in the top tax bracket – or you expect your income to drop in future years – you have more flexibility. You could potentially spread your RRSP withdrawals over several years, with the goal of keeping your income below key thresholds, Ms. Kelt said.

For example, if your individual income – including RRSP withdrawals – is between $214,368 and $220,000, your marginal tax rate on withdrawals would be 49.8 per cent. For income of $157,748 up to $214,368, the rate would be 46.02 per cent. Skipping down a few brackets, if your income were to drop to between $95,812 and $97,069, your marginal tax rate would be just 32.79 per cent. (These brackets are for the 2020 tax year and are subject to change in future years.)

Because you own a private corporation – which may provide other tax-planning opportunities such as reducing taxable dividends from your company – it’s important to get professional tax advice, Ms. Kelt said in an e-mail.

“They should be dealing with a Chartered Professional Accountant (CPA) with extensive experience with Canadian-controlled private corporations, high-income individuals and estate planning. It’s never too early,” she said.

A final thought: Nobody likes paying tax on RRSP (or registered retirement income fund) withdrawals, but remember that the money you originally contributed to the RRSP wasn’t taxed. The bargain you struck with the Canada Revenue Agency, in effect, was that it would let you keep and invest the deferred tax but the government would, in turn, have a claim on the growth of your RRSP. Fortunately for you – and for Ottawa – you’ve done exceptionally well with your Apple investment.

--John Heinzl

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Compiled by Darcy Keith