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Investment Commentary for April 2019

Asset Mix Changes

Last week both the Canadian and US yield curve inverted where short rates exceeded longer maturities. For most of the past economic recessions, an inverted yield curve occurred 6-18 months before the onslaught of an economic slowdown. Consequently, this signal should not be taken lightly and brushed off as is frequently the case with economists stating that things are different this time.

This week the inversion of the curve went away in both Canada and the US with longer rates now slightly exceeding shorter maturities. However, the negative yield curve is still present in Europe where their economy continues to suffer.

US corporate bond spreads for both investment and High Yield securities had been creeping up in late December. However, year to date corporate spreads over US Treasuries have been coming down once again. Historically when corporate spreads widen this is a danger signal for an economic slowdown. The recent reduction is spreads is a positive sign that the economy may not be as weak as many pundits are saying.

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April 2019 - What to Do with Financial Stocks

The financial sector remains the largest component of the TSX Composite Index at 31.70%. US Financials represent the third largest equity sector of the S&P 500 at 12.7%. For my North American sector weights, I continue to advise 55% in the US and 45% in Canada. This works out to be 21.25% of the total equity North American component, the single largest group on a weighted basis.

Historically the Canadian banks have been more consistent performers over time with considerably less risk than their US counterparts. During the last recession of 2008 no Canadian bank cut its dividend, but in the US it was a completely different situation. In order to avoid a total financial meltdown, the stronger US banks were forced by the US Government to acquire their weaker competitors. In that venue Bank of America bought Merrill Lynch to avoid a bankruptcy of the latter company. JP Morgan, the best capitalized US bank was also required to acquire financial institutions that were on the verge of collapse. The term “ Too Big to Fail “ was coined at that time.

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