December 2015

Market Update

The Canadian stock market has endured a challenging year. While we started the year on a positive note, continuous downward pressure from falling oil prices resulted in major declines in the resources sector. Canada experienced negative GDP growth during the first 6 months of the year (termed a “technical recession”). A market meltdown in China coupled with continuing concerns about global growth resulted in a 10% market correction in August. However employment and housing remained surprisingly robust, and GDP growth picked up in the later part of the year. The Canadian stock market recovered somewhat in October and November, but volatility remained. Since the beginning of December the price of oil has fallen from $42 US a barrel to below $36 US per barrel. The Canadian stock market has mirrored the decline in oil prices, and has also fallen significantly in the last two weeks. While the US market has performed better than Canada, it also experienced significant volatility, with overall performance flat year-to-date. Other markets (Europe, Asia, Far-East) have also been quite volatile, and have posted mixed results.

Interest Rates

The Bank of Canada lowered rates twice in 2015 as a defensive measure in response to declining oil prices and the drop in GDP, and the Bank Rate now sits at .75%. Interest rates in Canada will likely remain unchanged for all of next year, with the potential for a rate increase in early 2017. Interest rates in the US will almost certainly rise next week. While this is a strong signal that the US economy is in full recovery, it may cause some short term volatility in the stock market as this also signals that the era of “cheap money” may be coming to an end. The increase in US interest rates may also cause the Canadian dollar to weaken further against the US currency.Canadian

Preferred Shares

The decrease in interest rates in Canada had an adverse effect on the market value of many Canadian preferred shares as most of these securities are now issued with a dividend rate that is set in relation to the 5 year government of Canada bond rate. The 5 year bond rate has dropped in tandem with the bank rate, and so has the dividend paid by many preferred shares. New preferred shares are now being issued with a rate reset that has a floor rate (the dividend cannot fall below a certain level) and as a result, the market value of existing preferred shares has declined by 15% to 20% this year.

Tax-Loss Selling

We have an allocation to Canadian Preferred Shares in several of our portfolios and we have crystallized the loss that we have experienced this year in order to be able to apply this loss against capital gains. Clients will see transactions related to the sale of this security in their non-registered accounts only.

Tax-Free Savings Account Contribution Limits

The Liberal government introduced a Ways and Means motion in parliament that will reduce the TFSA contribution limit for 2016 and future years. The new limit will be $5,500 per year effective for 2016, and this amount will be indexed annually, but will only increase in increments of $500. The limit of $10,000 for 2015 did not change. The cumulative TFSA contribution limit since the program was introduced in 2009 is currently $41,000 (2009 to 2015), and will increase to $46,500 on January 1, 2016.

Changes to Personal Income Tax Rates

The Ways and Means motion also contained some additional tax measures including a reduction in the middle income tax bracket from 22% to 20.5%. This will benefit taxpayers who have taxable income of $45,000 to $200,000. There is also a new federal tax rate of 33% on taxable income over $200,000.

We will provide further tax updates as well as a more detailed assessment of our investment strategies early in the New Year. In the interim, please accept our best wishes for a safe and happy holiday season, and a Happy New Year.

Ryan Lamontagne Inc.




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