Chalten Investment Review – Q3 2016

Welcome to the Chalten Investment Review for Q3 2016.   A reminder first, that the purpose of this review is not to explain why market movements happened in the past, nor is it an attempt to predict what’s going to happen in the future – rather just a humble characterization of the environment in which we invest and the challenges it poses to individual investors trying to make sensible financial planning decisions. 

It seems like a long time since we left Q2 bouncing back from “Brexit” inspired volatility.  Just following the news over the summer you’d think the volatility should have continued with conflicts around the world escalating, an increasingly ugly US election campaign and looming voting day and no shortage of extreme market calls coming from the financial press.  In contrast (and against our best guess at the end of Q2), the financial markets were relatively boring in Q3, registering healthy gains across most asset classes.  How is this possible?  Has Benjamin Graham’s fabled “Mr. Market” been on an extended summer vacation?  Doesn’t he at least read the newspaper while on holiday like the rest of us?  The truth is that ultimately nobody knows why markets move and where they’re going next.  Spending time trying to figure it out is a fruitless exercise.  For example, we’ve been getting a lot of questions about the impact of the US election and whether it’s worth positioning portfolios to protect against adverse impacts from or to take advantage of election results.  The short answer is no, it’s not.  The evidence shows clearly that there is no systematic short-term or long-term benefit from trying to bet on the outcome of a US general election.  As the good folks at Dimensional Fund Advisors put it in their recent quarterly update, “At best, any positive outcome based on such a strategy will likely be the result of random luck. At worst, it can lead to costly mistakes. Accordingly, there is a strong case for investors to rely on patience and portfolio structure, rather than trying to outguess the market, in order to pursue investment returns”.  We couldn’t agree more strongly.  As the media furor rises over the next few weeks it will be as important as ever to stick with your long-term investment plan. 

We continue to believe the best way to combat risk and uncertainty is to target an asset allocation that is suited to your individual risk tolerance and financial situation and to diversify globally across asset classes.  We wrote during Q3 about how success is less about hitting home runs and more about keeping out of trouble, and how psychological biases can trip up investors without a clearly articulated investment plan.  We also wrote about the dangers of holding too much cash in your portfolio.  All these topics are relevant for the current environment and we encourage you to read these pieces if you haven’t done so already or to reread them if you have already seen them.      

Q3 Market Review

Equity markets started the quarter confidently with strong gains in July across the globe.  Although we still don’t have an interest rate increase from the US Federal Reserve, expectations for a 2016 rate hike have increased – however don’t count on it happening before the November 8 US election.  Europe decided not to employ further monetary stimulus in Q3 and economic results continued to reveal a low growth, low inflation environment.  The markets often like boring and, looking at European equity market performance, this seems to be one of those times.  Emerging markets continued to have strong performance also.  Measures of market volatility decreased dramatically as global markets retreated further from concerns over the impact of Brexit.  Bond markets were calm and returns steady.  The Canadian dollar weakened slightly against the USD over the quarter against a backdrop of weaker economic growth forecasts for Canada published by the International Monetary Fund (IMF). 

  • In Q3 the total return on the Canadian stock market was 5.45% overall and, similar to in Q2, positive in each individual month of the quarter.
  • In the US, the Q3 total net return on the S&P500 in Canadian dollar terms was 5.3%.
  • The Q3 total net return for the S&P Global ex-US BMI Index of stocks rebounded 8.7% in Q3 after being down in Q2.
  • The Canadian dollar lost 1.5% against the US dollar during Q3.
  • Q3 total returns for Canadian bonds were just over 1% this quarter, lagging behind the return from US and Global bonds in CAD terms. We’ll repeat what we said at the end of Q2 – yields on bonds remain at historic lows, but returns can still be positive and attractive if yields can continue to fall and demand for the asset class remains robust. 

Financial Planning topics of interest

Thinking of purchasing your first home or downsizing ahead of retirement?  House prices have become a bit more of a moving target in Canada’s major urban centers after moves by government authorities at both the provincial and federal level to attempt to protect us from exuberance and speculation in the housing market.  In BC, the government implemented a foreign buyers’ tax at the beginning of August.  Federally, the government has put in place a variety of measures including the expansion of stress tests on mortgage affordability, the closing of loopholes exploited by foreign buyers trying to claim primary residence exemption and imposing new restrictions on mortgage insurance.  For many Canadians, a significant portion of their net worth is or could soon be tied to real estate so it’s very important to keep abreast of the evolving landscape as you make financially significant decisions about real estate.


In summary, with much going on in the world, the market seems to be taking it all in stride.  As we suggested at the end of Q2, we still believe that this fall’s US election will continue to bring some interesting twists and turns as the situation plays out.  And so we’ll also reiterate our caution to “remember to watch with interest, curiosity and fascination but not with an eye towards speculation with your investments!”