Canadian Investors and the Fiscal Cliff

Wall street and the Fiscal Cliff

courtesy www.financialpost.ca

Written by Rob, The Dividend Apprentice

It seems that nearly every major news article over the past couple of weeks has been talking about the U.S. and its impending fiscal cliff. This “cliff” refers to the ending of several tax cuts (which will, upon their expiry, act effectively as tax increases) along with a number of major spending cuts by the U.S. government. All of this is set to happen on or around January 1st, 2013.

If left unresolved, these issues will combine into the perfect economic storm. It would force the average American household to become more cautious about spending, and at worst plunge the U.S. into a full-on recession. Also looming on the horizon is the next possible extension of the U.S. debt ceiling, which currently sits at $16.4 trillion USD and is predicted to be surpassed in February or March of 2013.

The U.S. has a history of pushing major financial decisions to the eleventh hour. In reality, no one actually expects them to default on national debt obligations or fail to reach a decision on changes to tax law, but the simple fear of these issues can cause significant market reactions.

Should a poor outcome occur, a recession by the world’s largest economy would inevitably pull the majority of the world’s economies down with it. Stephen Harper is actively seeking trade agreements around the globe, including most recently China and India, but with 75% of Canada’s exports currently heading directly south, a further slowing U.S. economy could have a dramatic effect on Canada. Mark Carney, governor of the Bank of Canada, says the fiscal cliff is the most imminent threat facing the Canadian economy.

Not surprisingly we’re already seeing the initial reactions from the stock markets, with large sell-offs happening both here in Canada and in the U.S. In the first day of trading directly after the presidential election, the TSX fell over 150 points, while the DJIA plunged over 300 points. Experts argue that this would have happened regardless of who won, as both candidates have diverging views of how to handle the country’s debt. However, the DJIA has since continued to slip, losing another 200 points to land at 12,800, while the TSX has been holding its ground around 12,200.

Though the U.S. will certainly have some tough times ahead, it isn’t all doom and gloom for Canada. A recent report by the OECD (the Paris-based Organization for Economic Co-operation and Development) predicts that Canada will lead the G7 nations in annual growth of its gross domestic product through the next 50 years, averaging +2.2% per year. In part, Canada’s wealth of natural resources is said to account for that growth.

What will all this mean for Canadian investors, and what can we do to prepare? First and foremost, stick to the plan. Continue to hold those big blue-chip dividend stocks, for the dividend income, even if the share price drops a little. As stock prices fall, now is the time to watch your favorite companies for the right time to enter a position, or to add to your current holdings. If it’s a solid blue chip company that’s been around for decades, it will still be there next summer when the dust settles. So take this opportunity to be patient, find the great deals and buy in on the dips. This will give your portfolio a nice bump when things rebound.

Readers, what’s your take? Have you been buying or topping-up, or holding cash and waiting for more sales?

20 Responses to “Canadian Investors and the Fiscal Cliff”

  1. $25000 dividends

    Nov 13. 2012

    Great article.

    I have been buying McDonald`s in my Canadian RRSP account, Intel and also Crescent Point Energy. Looking forward to further dips.

    • The Dividend Ninja

      Nov 13. 2012

      Hey 25K, thanx for dropping by!

      I think MCD is a great buy, but not so much CPG or Intel. I wrote about Intel last year, and I think the results of technology changes, and Intel’s miss on the mobile market are catching up. I’m not sure its really a value play:

      http://www.dividendstocksonline.com/2011/09/is-intel-a-good-buy/

      Crescent Point is one of the better oil and gas producers, but yikes the yield is high and the payout ratios are ridiculous. I have no idea what it’s cash flow is, but it has to fund the dividend from somewhere. Don’t need a risky oil and gas play in my portfolio. ;)

      Cheers

  2. Rick

    Nov 13. 2012

    I think that it is a good time to keep a eye on long standing value stocks and buy.I don,t think we will see the 1930,s.The powers to be will act

  3. John Reynolds

    Nov 13. 2012

    Hi Guys, I’m in the UK and enjoy reading the dividend ninja. This news is exactly what I am expecting as a possible massive downturn across the globe in stocks, which I fear is very deflationary. Sorry guys, just my take on the global debt crisis. I personally am currently 60% in cash, ready to sell all stocks (blue chip dividend stocks in the uk) as I am already seeing our ftse100 rounding over making lower highs which is reflective in the stocks I currently own. I only hope I am wrong!

    Good luck to all going forwards.

    • The Dividend Ninja

      Nov 13. 2012

      Hey John, what if your wrong and this is the middle of another bull market, and this is only a short-term correction? What are you going to do with all that cash? How will you know where the bottom is when you decide to buy back in? What if your wrong and the bottom is only another dip,and then drops lower?

      I only ask, becuase I do not believe the markets are predictable at all. I think a much better approach is not to second-guess the market,and keep with the plan. I kind of like having the monthly diviend income roll in month after month.

      Cheers

  4. farcodev

    Nov 13. 2012

    Great post!

    For my part I bought yesterday and today, some new stock and some other for cost averaging.

    It’s certainly a great period for bargains :D

    • Rob

      Nov 13. 2012

      Hi Farcodev, and thanks!

      You’re right! If you’re someone who uses dollar cost averaging to balance out buying prices throughout the year (which I am, as well) the next few months will be great.

      • farcodev

        Nov 14. 2012

        You’re welcome!

        Exactly, as long as the irrational ones on other sites continue to shout “short it! it’s the fiscal cliff!” :D

    • The Dividend Ninja

      Nov 13. 2012

      Yes Farcodev, topping up on the dips is a great approach. Have you been considering adding any U.S. dividend payers via the RRSP?

      Cheers

      • farcodev

        Nov 14. 2012

        Not yet, I considering, for now, more a non registered investing account to put them for the next year.

        I know that it’s taxed, and even more than 15% actually if Obama apply the new tax on dividend :(

        But I’m a bit wary about the RRSP (I don’t have one yet, only a TFSA) and the way it lock the user, without counting that you don’t know, at the end, to which level your retirement income will be taxed when you’ll be required to take them.

        So for now I try to take the pros and cons of these two ways before to commit to a final decision.

        • Rob

          Nov 14. 2012

          Keep in mind Farcodev, that any changes to US levels of taxation on dividends will not affect us here in Canada, even if we hold US stocks. It will only change how much Americans pay on their income tax to the US Government. You’ll still pay the same you always have here in Canada regardless of the outcome in the US. So don’t let that be a factor in any decisions you make. ;)

          • farcodev

            Nov 14. 2012

            Oh OK. I said that because I seen on a blog, that talked about the fiscal cliff, that the dividend tax will be 34% instead of 15.

            Thanks for this information!

  5. Dan Mac

    Nov 13. 2012

    Interesting timing as I have a post on my views of the upcoming “fiscal cliff” posting on my site tomorrow! Personally I am not worried because I believe Congress won’t let the US “go over the cliff.” I think something will be done even if it means just kicking the can down the road a year or two.

    I’m planning on sticking to my strategy and hopefully using this as a buying opportunity to get some great companies at decent prices!

    • The Dividend Ninja

      Nov 13. 2012

      Dan, looking forward to that post! :) Like yourself, I ignore the news and stick with the plan. I always invest my capital when I have cash available – rather than worrying about timing. I beleive this approach will pay big dividends over the long run.

      Cheers

  6. It would be very helpful for long-term dividend investors, if stock markets sold off due to scares related to the fiscal cliff in the US. I like purchasing quality dividend stocks at bargain prices.

    • The Dividend Ninja

      Dec 11. 2012

      Even better if the Fiscal Cliff does happen! I will be backing up the truck as well. :)

      Cheers

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