There is no more mistletoe hanging above the markets.
The romance U.S. fund investors once had with the stock market was put to rest in 2018 when buy the dip turned into sell the rip.
For evidence, look no further than exchange-traded funds (ETFs), which hold baskets of stocks across the market and have been a primary buyer throughout this bull market.
In 2017, investors often added more cash to the funds when the performance sank. Stocks glided higher.
Equity ETFs during the year were responsible for more demand than pension funds, mutual funds and foreign investors, according to Goldman Sachs Group Inc. research. And throughout the bull market, ETFs have been consistent buyers even when other investors dropped out.
But this year investors were faced with the prospect that U.S. Federal Reserve rate hikes, high corporate borrowing, rising relative yields on short-term bonds, U.S.-China trade tensions and slowing growth could leave a strong U.S. economy flailing.
Fund managers failed to successfully navigate markets that swung between record highs and dramatic lows – the average stock and bond fund will report negative returns for the year. The average U.S.-based equity fund is down 6.3 per cent in the year through Dec. 11, while its bond counterpart is down 0.9 per cent, Lipper said. The market has only fallen further since then.
So ETF investors, among the main sugar daddies supporting this near-decade rally in U.S. stock prices, refused to play the role of buyer of last resort. While demand is still positive for the year, ETF buyers were less willing to step in during the worst moments.
Individual investors are the most pessimistic about stock performance they have been in more than five years, with 49 per cent expecting the market to fall in the next six months, according to a survey by the American Association of Individual Investors.
Tom Roseen, head of research services at Lipper, said investors are not going to wait around for another period like the 2008 financial crisis, when some stock funds lost more than half their value.
“They’re not buying the dip like they were, and they’re selling,” he said.
The wariness of the ETF buyer has only added to a market decline as the Fed pulls back from policies meant to encourage investors to take risks after the financial crisis. And the weakening investor psychology could keep markets on edge well into 2019.
-- Trevor Hunnicutt, Reuters
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The Rundown
The week’s most oversold and overbought stocks on the TSX
The S&P/TSX Composite fell 4.1 per cent for the trading week ending with Thursday’s close and sits lower by a miserable 10.2 per cent, including dividends, for 2018. The benchmark as a whole is now officially oversold according to Relative Strength Index (RSI) with a reading of 26 that is below the buy signal of 30. The overbought RSI Sell signal of 70 is way off in the distance. There are fully 70 of the index’s 246 stocks – 28 per cent – that are trading in oversold territory by RSI this week. The top 20 are listed in the table below. Widely held companies at the top of the list include Transalta Corp., Bank of Montreal, National Bank, TD Bank and CIBC. Scott Barlow looks at TSX buy and sell signals. (for subscribers).
Investors are fleeing this US$1.3-trillion debt market - and it could mean big troubles ahead
Investors are pulling their money out of securities that pool low-grade corporate debt, creating stress in one of the riskiest corners of North America’s debt markets. Since mid-November, mutual funds and exchange-traded funds that allow retail investors to bet on so-called leveraged loans have seen a total of about US$9-billion in outflows by U.S. investors. That includes a withdrawal of US$2.5-billion from leveraged-loan funds in just five days in early December, setting a new weekly record for net outflows. Tim Kiladze explains (for subscribers).
Cheer up: This is how long markets typically take to bounce back from a correction
Investors might be excused for thinking their portfolios were condemned because stocks fell through the floor in recent weeks. The S&P 500 and S&P/TSX Composite Index are both in corrections. That is, they’ve fallen by more than 10 per cent from their highs. It’s hard not to be fearful on such occasions. After all, the downtrend might continue and grow into a crash like those experienced in 2000, 2008, or – gulp – 1929. But the past provides some succour to investors because returns following months when the market was already in a correction have been pretty good. Norm Rothery reports (for subscribers).
Others (for subscribers)
Seeking attractive dividends, profit growth? Check out these utilities and pipeline stocks
Friday’s Insider Report: CEO invests over $2.2-million in shares of this depressed stock
Friday’s analyst upgrades and downgrades
Others (for everyone)
Canadian dollar hits 19-month low as falling oil prices offset GDP gain
Market’s negative reaction to Fed rate hike was ‘overblown,’ Mnuchin says
Ask Globe Investor
Question: I have a tax-free savings account (TFSA) and have contributed the maximum allowable since inception ($57,500). I have used this account to invest in higher risk/higher beta holdings in my overall portfolio, preferring to have interest bearing investments in my RRSP and dividend paying securities held in my cash account to allow me to benefit from tax advantages for capital gains and dividends.
Unfortunately, while I have had some winners in my TFSA portfolio, I have generally had investments held there which have not panned out as well as I would have liked. I know I cannot write off capital losses incurred in the TFSA against income or against capital gains generated in my cash account, but here is my question.
If I liquidate all assets and withdraw all funds in the TFSA, effectively closing the account (proceeds would be about $40,000), and if I waited until the following calendar year, would I be entitled to contribute to a new TFSA an amount equal to the lifetime contribution limit (currently $57,500 plus amounts for 2019 and beyond as they become available) since I would have no other TFSA investments. Or would my contribution limit be capped at the amount I withdrew plus any future years' contribution limits for 2019 and onward?
Answer: You would only be allowed to contribute the amount you withdraw plus the 2019 contribution limit (which will likely be bumped to $6,000 due to inflation).
Check out the Canada Revenue Agency’s contribution rules.
You will see that you are limited to the current annual limit plus withdrawals made in the previous year and any unused contribution room you may have. The key word is “unused.” You used all your contribution room over the years. Closing the TFSA does not change that.
--Gordon Pape
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What’s up in the days ahead
What a week in the markets! Most investors are surely in need of some cheer, so this week, Ian McGugan will look at reasons to be optimistic as a new year approaches for your portfolio.
Click here to see the Globe Investor earnings and economic news calendar.
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Compiled by Gillian Livingston