Allan Small of Allan Small Financial Group, iA Private Wealth, shares his views on RRSP time and stock-market resilience
As the quote famously attributed to Benjamin Franklin goes: “In this world, nothing can be said to be certain, except death and taxes.” Translated to the Canadian context, we could replace “taxes” with “RRSP season,” which in a strange sense could be very different while staying exactly the same this year.
Over the past 12 months, different studies have borne out a K-shaped picture of Canada’s economic recovery. Those who were better positioned from a financial perspective when COVID hit have been more able to weather the crisis than those who were living paycheque-to-paycheque. Many who were able to keep their jobs have seen a savings windfall as they were forced to stop commuting, outside entertainment, and other aspects of the pre-pandemic world; others who lost their jobs or have had their hours cut, and didn’t have an emergency fund prepared, weren’t so lucky.
But Allan Small, senior investment advisor at Allan Small Financial Group with iA Private Wealth, estimates many of those divergences will end up cancelling each other out with respect to RRSP season.
“The COVID-19 pandemic has affected different people differently, but I expect that overall contributions are going to be much the same,” he told Wealth Professional. “It’ll be interesting to see what happens next year, because the amount people contribute depends on their previous year’s income, and many people have seen reductions to their income in 2020.”
Beyond the issue of contributions, Small said Canadians are grappling with a lot of difficult questions. The federal government has thrown out a barrage of lifelines over the last 10 months, including rent subsidies, wage subsidies, and sickness benefits, to name some. For those who have come to depend on that aid, the most pressing issue is how long they can expect to keep receiving them; in the case of recipients who were later told they were ineligible or inadvertently double-dipped, it’s how they can pay the money back.
“I've spoken about this to many people over the last few months saying that this is not free money,” Small said. “It has to come from somewhere; at some point, someone will have to pay tax on these subsidies. Many investors I’ve talked to are fearful that they will see their taxes go up, whether it's property tax, capital gains tax, GST, HST, or corporate tax. I think that’s causing a lot of anxiety.”
With the cloud of COVID-19 and its economic impacts continuing to hang overhead, it’s safe to say many Canadians are just living day to day. With the twin concerns of health and wealth weighing on their minds, many people are focusing on what’s in their control, and trying not to be overwhelmed by their fears and anxieties.
“I think most people would agree that there is light at the end of the tunnel,” Small said. “But I think where the discrepancy comes in is how long the tunnel is before we get to that light.”
At times like this, people will cling to any good news they can get; over the past year, that’s come from the stock markets, which have rallied impressively since their historic downturn last March. As Small and others have noted, the broad stock market has behaved in a way that’s almost defiant of the weakness in the underlying economy. But just as the economy is developing in a K-shaped trajectory, the stock market has similarly diverged.
“The stock market definitely has been split with respect to stay-at-home stocks versus what we call vaccine stocks,” Small said.
While he makes it a point to keep clients’ portfolios well-diversified, he said technology has been the best investment for growth as well as protection. Sectors that might have been regarded as defensive, such as utilities and bank stocks, have not withstood the impact of the pandemic well; meanwhile, tech stocks have gained mightily off a pandemic bump, and have grown to represent as much as a quarter of the S&P 500’s market cap.
“Let's face it: if you're looking for growth today, I think you have to have a piece of technology in your portfolio, whether it's social media stocks or other forms of tech,” Small said.
Since the announcement of successful candidate vaccines in mid-November, the stock market has continued to advance. Aside from exuberance around a prospective end to the pandemic crisis, investors turned their attention to the narrative supporting vaccine and reopening stocks. They saw embers of hope as widespread immunization against the virus, both in the U.S. and at home, edged closer to reality.
“I think that the rollout being as slow as it has been over the first few months has brought a bit of a damper to investors,” Small said, acknowledging setbacks to the rollout of vaccines in Ontario and elsewhere across Canada. “There’s definitely been some disappointment, and the news that mass vaccinations won’t happen until perhaps mid-March or early April has taken people back a little bit to the pessimistic view.”
Still, he said, there are reasons to be hopeful. For one, the current progress on the vaccine, as lurching and sluggish as it has been, is still progress. Investors can also still hold on to the fact that as bad as the economy is right now, the stock markets are continuing to benefit from a confluence of supportive forces, including low interest rates, low inflation, accommodative central-bank policies, and governments continuing to pump money into their economies.
“I just believe that when you look at the stock market, and if you're someone who is looking to invest in the stock market, the environment has never been better,” Small said.