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It’s been a fabulous start to the year for investors – as long as you ignore all those simmering worries about a possible recession.

S&P 500 index funds are on pace to close out their best quarter in seven years, having returned nearly 12.5 per cent in 2019 through Wednesday, and many other investments from junk bonds to foreign stocks have also bounced back from their dismal end to 2018. But the returns would have been even better if not for concerns that slowing growth around the world may drag down the U.S. economy.

The quarter’s twists are just the latest for the markets, which have yo-yoed from record heights to fear-induced sell-offs for more than a year.

The big swings have left stock and bonds looking fairly valued, said Frances Donald, head of macroeconomics strategy at Manulife Asset Management. She’s optimistic markets can keep climbing this year, but she anticipates more swings along the way. When she talks with big institutional investors, the mood is usually one of nervousness, she says.

“The 2020 recession calls, whether they’re right or wrong, have permeated all individual investor mentalities,” she said.

The Fed was again one of the market’s main drivers, and it flipped to hero from antagonist in the eyes of many investors.

As last year was closing, investors were worried that the Federal Reserve would raise interest rates too quickly and choke off the economy. The central bank raised short-term rates in December for the seventh time in two years, and the S&P 500 fell more than 19 per cent from late September through Dec. 24, nearly taking down the longest bull market for U.S. stocks on record.

But on Jan. 4, Fed Chairman Jerome Powell told a conference for economists that the central bank would be flexible in deciding when to raise rates. It was an immediate balm for investors, and the S&P 500 leaped 3.4 per cent that day. It kept climbing until hitting a peak on March 21, the day after the Fed said that it may not raise rates at all this year.

All the while, companies were turning in yet another round of blockbuster profit reports aided by lower taxes. Earnings per share for S&P 500 companies surged 13 per cent during the last three months of 2018 from a year earlier, led by big gains for energy and communications companies.

But the momentum for stocks stalled last week when a surprisingly weak report on the European economy and other worries triggered concerns about the global economy. Investors sought the safety of bonds, and that in turn triggered the alarm on one of the market’s more reliable recession indicators.

-- Read the rest of the article by Stan Choe from The Associated Press (for subscribers).

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Stocks to ponder

People Corp. (PEO-X). This stock may soon surface on the negative breakouts list (stocks with negative price momentum) if the share price continues to retreat, making it a stock to watch as the valuation is becoming increasingly attractive. This small-cap stock is well covered by the Street. In Februrary, two analysts – CIBC World Markets’s Stephanie Price and Desjardins Securities’ Gary Ho – initiated coverage on the company, bringing the total number of analysts covering it up to nine. The stock has a unanimous buy recommendation with over 30-per-cent upside potential in the share price anticipated over the next year. Winnipeg-based People Corp. provides employment services such as employee group benefit consulting, pension consulting, and human resource consulting and recruitment services. Jennifer Dowty reports (for subscribers).

The Rundown

‘Investors are their own worst enemies’: Data show Canadians struggle in timing the market

Canadian investors trying to dodge last fall’s sell-off in U.S. stocks did a poor job of timing the market on both the way down and the way back up. Only after U.S. equities suffered their worst correction of the past decade did Canadian shareholders go into heavy selling mode, according to Statistics Canada’s latest international transaction data. By that time, however, the rally was already on, as the S&P 500 index started the year with a double-digit gain while many would-be market timers were still retreating from U.S. equities. “It’s typical. Money flows in after stocks have gone up and it flows out after the market goes down,” said Murray Leith, director of investment research at Odlum Brown. “Investors are their own worst enemies.” Tim Shufelt reports (for subscribers).

Beware TFSA day traders: The CRA may be coming after you

Investors found carrying on a business – such as day traders – will now be held legally responsible for any tax owing on income earned in a tax-free savings account. In the 2019 budget, the federal government proposed the changes stating the TFSA holder is “typically in the best position to determine whether the activities of the TFSA constitute carrying on a business,” and therefore should be the one held responsible for paying any amount owing in tax. While the Canada Revenue Agency allows securities trading it deems to be passive to occur within a TFSA, it has deemed day trading (buying and selling a security over the course of a day to profit from small price moves) to be a business, and will tax it accordingly. Clare O’Hara reports (for subscribers).

The yield inversion is bad news for Canadian banks. Here’s what investors should do about it

The bond market is signalling trouble ahead for the economy, weighing on Canadian bank stocks that are already facing high consumer debt levels and a wobbling housing market. Yes, these are uneasy times. But the best bet for bank investors is to stay put. On Friday, the yield on the three-month U.S. Treasury bill moved higher than the yield on the U.S. 10-year Treasury bond, marking an unusual phenomenon in the bond market known as a yield curve inversion. It often signals that a recession is brewing. The Canadian yield curve also inverted Friday, and remained so as of late Tuesday, portending a similarly gloomy outlook for the economy. Since banks borrow at short-term rates (in the form of deposits) and lend at long-term rates, a flat or inverted yield curve can compress profit margins on loans and weigh on bank profitability. Worse, if a recession follows, then traditional banking activities can dry up. David Berman reports (for subscribers).

From GIC holders to home buyers, these are the winners and losers in the bond-yield collapse

For years, investors worried about rising interest rates. Well, surprise: Rates are now falling farther and faster than anyone expected, and the drop has sweeping implications for the economy, the stock market and consumers. Taking their cue from slowing growth and a more dovish tone from central banks, bond yields have taken a remarkable dive. The yield on the five-year Government of Canada bond, for instance, has plunged more than a full percentage point, to about 1.46 per cent from a recent peak of about 2.49 per cent in October. Such a violent downward move is often associated with a sharp slowdown in the economy. The fact that portions of the yield curve are now “inverted” – the yield on 10-year government bonds is below the Bank of Canada’s overnight rate of 1.75 per cent as well as three-month Treasury bills – has only heightened those concerns. John Heinzl reports on the winners and losers (for subscribers).

How investors can save more for retirement by getting to know their future selves

For many Canadians, their golden years of retirement may end up being more tarnished than gleaming. The average household in Canada socks away only a few thousand dollars each year, and a quarter of all households spend more than they earn, according to a recent Statistics Canada report. These facts amplify findings from the 2016 Canadian census and results of a recent CIBC poll, both of which show that about one-third of all Canadians have no retirement savings outside of government- and employer-sponsored pension plans. Why are people’s efforts when it comes to saving for the future so inadequate? Psychology sheds some light. Read Lisa Kramer’s view.

Others (for subscribers)

They came, they saw, they pillaged: Why activist hedge funds are the new corporate raiders

‘20 must-know market stats for investors’ - Merrill Lynch

Strategy seeks momentum stocks that remain reasonably priced

Canadian dollar faces period of ‘broad and sustained depreciation’

WWE’s next battle royale: Investor fans vs. shorts

Thursday’s Insider Report: CEO takes advantage of price weakness and invests over $700,000

Wednesday’s Insider Report: Insiders make million dollar trades in these three stocks

Thursday’s analyst upgrades and downgrades

Wednesday’s analyst upgrades and downgrades

Thursday’s small-cap stocks to watch

Others (for everyone)

Buffett says Apple content plan hard to predict, touts airline safety

Struggling small miners may lead to bigger industry woes

Ask Globe Investor

Question: Where can I find out if a company’s dividend is eligible for the enhanced dividend tax credit? I got caught with A&W Revenue Royalties Income Fund (AW-UN-T).

Answer: Your best bet is to read the news release announcing the company’s latest dividend. The release – usually available in the investor relations section of the company’s website – will indicate whether the payment is an “eligible dividend” (which is the case for most publicly traded Canadian companies) or an “non-eligible dividend” (as is the case with A&W). The good news is that non-eligible dividends still qualify for a tax credit, but it’s not as generous as the enhanced dividend tax credit. Also keep in mind that some distributions – such as those from real estate investment trusts – may not contain any dividends at all, but usually include a mix of fully taxable income, capital gains and return of capital.

--John Heinzl

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What’s up in the days ahead

Get ready dividend fans: this weekend Rob Carrick presents the 2019 ETF Buyer’s Guide for Canadian dividend funds.

Click here to see the Globe Investor earnings and economic news calendar.

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Compiled by Gillian Livingston

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