Bonds get no respect. On the Sunday Reads.

Bonds are the Rodney Dangerfield of the investment world. They get no respect. Dangerfield was an American comedian, known for his self-deprecating one-liner humour, with his catchphrase “I get no respect!” Bonds don’t get a lot of respect or love these days. Bonds are supposed to keep an eye on the stock markets and provide support when the stock markets become a joke. But bonds failed to show up in the 2022 stock market correction. Bonds almost always rise to the occassion – they go up in price when stocks stink the joint out. But inflation is like kryptonite to bonds. And real inflation made an appearance in 2021 and 2022. Bonds did not come to the rescue of portfolios. For that, bonds get no respect. But perhaps bonds will return to their former glory in the next stock market correction.

Yes, I switched my analogies or metaphors (or whatever I was doing in the opening paragraph) from a comedian you’ve never heard of to comics and superheroes. Check out those links to get up to speed.

Bonds are the adult in the room

I’ve had a few readers who are early in their investment educational stage ask ‘what the heck are bonds and do I need them?’ So I updated and rewrote this post …

What are bonds? And as per the headline, bonds are the adult in the room, and they keep an eye on those unruly and overly emotional kids – the stocks. Have a read and feel free to fire away with any questions in the comment section of that post, or in today’s post.

With inflation now ‘under control’ it’s possible that bonds will be more adult-like in the next major correction. But for now, stocks and bonds are moving in the right and same direction (up, up and away) as they both enjoy disinflation (when inflation is slowing). Here’s a chart showing Canadian stocks (XIC.TO) and Canadian bonds (XBB.TO).

Once again, inflation is the wild card. Here’s a post from early 2021 – everyone hates bonds. In that post I suggested or guessed …

I’d guess that we get a head fake burst of inflation due to pent up demand and increased savings rates that occurred during the pandemic. And then we might get back to the largely disinflationary, low inflation trend.

Hey looks like I’m “right” so far 😉 It was scary reading that post again as I was worried about what the heck I might have guessed. So far, so good.

I also told ya’s how to manage the inflation risk if things did get out of control (they did) …

That Purpose inflation-fighting ETF was up 24% in 2021 and 15.9% in 2022.

But that pales in comparison to the suggestion of Canadian oil and gas stocks from late 2020, up about 400%. 🙂

Here’s the script. Bonds keep an eye on stocks until real and unexpected inflation arrives, and then dedicated inflation fighters (gold/commodities/REITs/energy stocks) keep an eye on bonds. It’s all part of an all-weather portfolio.

What’s next?

We’ve entered even more unpredictable times in recent weeks as President Trump unleashed a global tariff war. Canada will respond with counter tariffs and perhaps additional export taxes. Mexico will respond, Europe will respond, China will respond. Yes, it’s a world war. Good Grief! as Charlie Brown would say.

Massive tariffs can be inflationary. Massive tariffs are economic pot holes. You can guess where I’m going with this. No one knows how this ends, or when it ends.

But now you know who keeps an eye on stocks and who keeps an eye on inflation.

The key, as always, is to embrace an investment plan and stick to it like glue. A younger accumulator should hold their nose and keep buying stocks as much as they can while investing within their risk tolerance level. You might not need bonds and dedicated inflation fighters (stocks do inflation hedge job very well over longer periods).

If you hold an all-weather balanced portfolio, you might rebalance between stocks and bonds and inflation assets. Each will have their day. You’ll have to check with an astrologist to know the calendar dates and order of events.

Putting a stop to the auto sector

When the rubber hits the road, this economic tariff policy might face reality head on. Linda Hasenfratz, executive chair of Linamar Corp., an Ontario-based supplier to the major automakers.says we will see almost immediate layoffs in the auto sector. Canada and the U.S. are intertwined when it comes to producing vehicles. For decades, Canada and the U.S. have had free trade in autos, and Mexico joined the pact in the 1990s. The agreements allowed the auto industry to become fully integrated — parts often cross borders five or six times before a vehicle is assembled. From a Globe & Mail article …

“It would just create an exorbitant amount of cost, and our customers can’t afford to absorb that,” Ms. Hasenfratz said in an interview Saturday. “Consumers certainly aren’t going pay it, so demand will disintegrate. So in my opinion, it wouldn’t be more than a week before we would see vehicle production in North America grind to a halt, and that means millions of people laid off, the majority of which would be in the U.S., and I can’t see how that’s a good thing for America.”

Also from that article – Vehicles are Canada’s second-most valuable export, worth $51-billion in 2023. About 93 per cent of this is sent to the U.S., the Canadian Vehicle Manufacturers’ Association says. Canadian plants made 1.5 million passenger vehicles in 2023, and employed 128,000 people making autos and parts.

A good week for earnings …

It was a busy week for earnings south of the border, and it was a good week.

Out of the 101 S&P 500 companies that reported earnings this week, 77 of them beat EPS estimates, while 61 of them beat revenue estimates.

U.S. stocks were up about 0.6% for the week, with the tech-heavy Nasdaq 100 up 1.35%. Canadian stocks also (surprisingly) had a strong week up 1.6%.

The performance by sector and factor …

Here’s the earnings beats by sector …

More on the sinking Loonie

On Friday, the loonie ended 0.2 per cent lower at 1.4524 per U.S. dollar, or 68.85 U.S. cents, after moving in a range of 1.4374 to 1.4558. For the month, the currency was down 1 per cent, its fifth straight month of declines. That is the longest monthly losing streak since 2016. On Thursday, it touched its weakest level in nearly five years at 1.4592.

Here’s a one-year chart …

Many analysts suggest a Dollar could cost you $1.50 before long. But who knows? And who cares (much) if you’re hedged?

Of course Cut The Crap Investing retirees / snowbirds did not let the weak loonie stop them at the border.

Can’t tax that

The capital gains tax hike in Canada is on hold says MoneySense.

The federal government says it is deferring the implementation of a hike to the capital gains inclusion rate to next year and plans to introduce new exemptions to ensure most middle-class Canadians do not pay more tax if the rate becomes official. The deferral announced by Finance Minister Dominic LeBlanc on Friday delays the implementation of the change from June 25, 2024 to Jan. 1, 2026.

It all appears a bit complicated but that post will help you sort things out. And as always, check with your accountant.

The Sunday Reads

We’ll check in with Dividend Hawk after a busy week on the earnings front. Canadian bank dividends rolled in, and a few dividends were delivered by pipeline (TRP.TO). We shared in all of those. You’ll find earnings summaries from so many companies from General Mills (GIS) to Starbucks (SBUX) to Canucks such as METRO (MRU.TO) and Canadian National Railway (CNR.TO).

At Banker on Wheels it’s (ironically) the U.S. against the rest of the world.

Banker also linked to Morningstar’s – how to determine a safe withdrawal rate in 2025.

GenYMoney takes a look at Frederick Vetesse’s rule of 30: a better way to save for retirement.

Mr. Vetesse is the author of Retirement Income for Life: Getting More Without Saving More.

Also on the retirement front, from The Retirement Manifesto – The top 5 regrets of retirees and how to avoid them.

At Findependence Hub, a 2024 review and 2025 kick off. And from BMO, why you might be wary of the U.S. market in 2025.

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