Why Politics and Investing Are Incompatible · Before the election, investors generally viewed Mr. Trump unfavourably, which the stock market made very clear. When FBI Director James

ODLUMBROWN.COM

ODLUMBROWNREPORT

02 2017

INSIDE THIS ISSUE

Page 1Why Politics and Investing Are Incompatible

Page 3How to Interpret Your RRSP Deduction Limit Statement

Page 4Odlum Brown’s 23rd Annual Address

If you had predicted a year ago that Donald Trump would be elected President of the

United States, and that the stock market would reactfavourably, you would have received some strangelooks. Yet in the month following Mr. Trump’s victoryin November, the Dow Jones Industrial Averagejumped by nearly 8%. Certain sectors, most notablyFinancial Services, returned much more.

There are legitimate reasons why investors are so enthusiastic. Mr. Trump and his Republican allies will pushto lower the corporate tax rate from 35% to 20%, or perhaps even lower. He has talked about building more infrastructure, which ideally will boost economic growth. He hopes to ease the government’s regulatoryregime, which may lead to more investment. Even the International Monetary Fund has raised its estimates forAmerican growth, driven by a positive view of Mr. Trump’s economic plans.

This isn’t the first time investors have made a big bet in the wake of political events. There are numerous examples throughout the past 100 years. However, these bets tend to be unreliable at best, and at times havebeen horribly misguided.

A Look Back Through HistoryOne doesn’t have to go back very far to find a foolish political bet. When Barack Obama was first elected presidentback in November 2008, the business world was bracing itself for, as put by ABC News on November 5, 2008,“stronger oversight and regulation of the financial sector, a tax structure that is less friendly to companies, increased spending on entitlement programs and more labor-friendly policies.” The Dow sank 5% the day following the election.

Four months later, on March 6, 2009, The Wall Street Journal published an article titled, “Obama’s RadicalismIs Killing the Dow.” As it turns out, that day would have been the perfect day to buy stocks; the Dow doubledin value over the next three years.

There are other examples. When President Obama was re-elected in 2012, the Dow declined by 2.4%. Again,that would have been an excellent time to buy stocks. When Bill Clinton was first elected in 1992, the Dowdropped by 1.2%. By the time he left office, it had more than tripled, much of the gain having come from thetechnology bubble.

Some of the worst political bets were made in the 1930s. When Franklin Roosevelt was first elected in 1932, theDow sank by 4.5%. Then, over the next four years, it nearly tripled as America recovered from the worst of theGreat Depression. So, when FDR was re-elected in 1936, stocks rose by 2.3%. Once again, this was a mistake. Fromthat day until the start of World War II, the Dow declined by 22%, mainly due to the Recession of 1937-1938.

The ultimate mistake was made in 1928, after Herbert Hoover won the presidency in a landslide. The Dowjumped by 1.2% the next day, only to fall by 76% over the next four years. It was easily the worst four-yearpresidential term as far as the stock market was concerned, despite investors’ initial optimism.

When looking at all of the presidential election results since 1928, a few things stand out. First of all, investors’immediate reactions have no predictive value and, as we’ve seen, can sometimes be spectacularly wrong.Secondly, investors tend to like Republicans more than Democrats: the seven worst one-day post-election returnsoccurred after Democratic victories. Finally, the four-year returns after Election Day are mostly influenced byfactors unrelated to politics. The presidential terms of Herbert Hoover and Bill Clinton – which featured the1929 stock market crash and the technology bubble, respectively – are just two examples of this.

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Why Politics and Investing AreIncompatible

So Why Do Investors React So Strongly?There are some important biases at play. To start, people are naturally drawn to cause-and-effect narratives.These stories are far more compelling than statistical patterns. So, it’s only natural to believe that a new president’s policies will influence stock market returns, even when history shows that unrelated events have afar greater impact.

Political ideology also plays a key role. This is likely why investors seem to prefer Republicans to Democrats, eventhough stock market returns have historically been about the same for each. Investors, just like anyone else,can easily get worked up over politics, and whenever emotion influences trading decisions, it’s unsurprising tosee stock prices react wildly.

This phenomenon is more pronounced in presidential elections specifically, because investors tend to reactmore strongly to an easily recognizable face, such as Mr. Obama’s or Mr. Trump’s, than to a political ideology orparty in general. Look no further than what happened in 2010, when the Republicans clobbered the Democrats inthe mid-term elections. The stock market barely budged the next day, in contrast to the days following the 2008and 2012 presidential elections, even though the mid-term election results have had a big impact on publicpolicy over the past six-plus years.

Where We Stand TodayBefore the election, investors generally viewed Mr. Trump unfavourably, which the stock market made veryclear. When FBI Director James Comey announced an end to a probe into Hillary Clinton’s emails, whichseemed to increase her chances of getting elected, markets rallied. Then, as the actual election night resultsrolled in, overseas markets were in free fall. The tide only started to turn during Mr. Trump’s victory speech,which was generally well-received.

Nowadays, investors are, for the most part, confident in Mr. Trump and his economic policies. However, he willface some steep political barriers as he attempts to get his ideas through Congress. Some of his policies, suchas his plans to boost infrastructure spending, may prove to be ineffective. Other policies may bring about someunpleasant side effects. Yet these details seem to receive relatively little attention from investors.

Our ApproachMr. Trump may succeed in lowering tax rates and boosting economic growth, both of which would be positivefor stocks. That said, investors jumping on the Trump bandwagon do not have history on their side.

Our approach is very different. We prefer to invest in strong, high-quality companies, ones that have brightprospects no matter the political environment, and then hold them for many years. If we started making betsbased primarily on political events, we would, in all likelihood, be playing a fool’s game.

BENJAMIN SINCLAIR, HBA, CFA

Equity Analyst@OBDifference

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= Republicans= Democrats

INVESTORS’ FIRST IMPRESSIONS OF PRESIDENTS, 1928-2012: UNRELIABLE AT BEST

WHY POLITICS AND INVESTING ARE INCOMPATIBLE Continued from page 1

Correction Notice

Regrettably, we have identified

miscalculations in the 1, 3, 5, 10 and

20-year compound annual return figures

that appeared on page 1 of the January

Odlum Brown Report (November numbers

were used in prior years rather than

December numbers). The year-to-date

and since inception figures were correct.

The differences between the originally

published and correct figures are not

material. Nonetheless, we apologize

for the error. Please visit

odlumbrown.com/research/newsletters/17-01

to view the accurate figures.

Mr. Trump may succeed in lowering tax

rates and boosting economic growth, both

of which would be positive for stocks.

That said, investors jumping on the

Trump bandwagon do not have history on

their side.

“

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Source: Odlum Brown, Bloomberg

After filing your income tax return each year, the Canada Revenue Agency (CRA) issues a Notice of Assessment (NOA) which includes

your RRSP Deduction Limit Statement. Your RRSP limit is also available online through CRA’s My Account and the MyCRA mobile app.

The statement shows how much you are entitled to contribute and deduct for theupcoming tax year and whether you may have over-contributed. Let’s look at anexample statement for 2016 that an individual taxpayer received with their 2015NOA.

What are unused RRSP contributions?Unused RRSP contributions, denoted as “(B),” are contributionsmade in previousyears that have not been deducted on your income tax return. You may choose tocontribute but not deduct the same amount in a given year if you:•have excess funds available;•would like to defer tax on income earned within the RRSP as soon as possible; and•expect higher taxable income in future years against which an RRSP deduction may be more advantageous.

How much can I CONTRIBUTE to my RRSP?Maximum contribution = [RRSP deduction limit for the year (A)] – [Unused RRSPcontributions (B)] + $2,000.

If (B) – (A) is greater than $2,000, any over-contributions above $2,000 are subjectto a penalty of 1% per month.

For information about the treatment of excess contributions, including voluntarydisclosure and taxpayer relief provisions, please visit the CRA website at cra-arc.gc.ca.

How much can I DEDUCT on my tax return?Your RRSP deduction limit for 2016 is the maximum amount that you can deducton your 2016 tax return, referenced “(A)” on your statement.

Company Pension PlansContributions to a pension plan give rise to a pension adjustment (PA) whichreduces your RRSP deduction limit for the following year. In our example, the PAfrom 2015 reduces the deduction limit for 2016.

Group RRSPsEmployee group RRSP contributions are tax deductible. Employer contributionsare included in the employee’s income and offset by an RRSP deduction. Unlike a pension adjustment, group RRSP contributions reduce the current year’sdeduction limit. Therefore, care must be taken to not over-contribute when making group and self-directed RRSP contributions.

MICHAEL EREZ, CPA, CGA, CFP

Manager Odlum Brown Financial Services Limited

This material has been prepared for informational purposes only and is not intended to provide tax advice. You should consultyour tax advisors before engaging in any transaction.

Odlum Brown Financial Services Limited is a wholly-owned subsidiary of Odlum Brown Limited, offering life insurance products,retirement, estate and financial planning exclusively to Odlum Brown clients.

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How to Interpret Your RRSP Deduction Limit Statement

ODLUM BROWN FINANCIAL SERVICES LIMITED

2016 RRSP Deduction Limit Statement

RRSP deduction limit for 2015 $30,000Minus: Employer’s RPP contributions for 2015 -Minus: Allowable RRSP contributions deducted in 2015 ($16,000)Unused RRSP deduction limit at the end of 2015 $14,000

Plus: 18% of 2015 earned income, up to a maximum of $25,370 $25,000Minus: 2015 pension adjustment ($12,000) $13,000

$27,000Minus: 2016 net past service pension adjustment -Plus: 2016 pension adjustment reversal -

2016 RRSP DEDUCTION limit $27,000 (A)Minus: Unused RRSP contributions previously reported ($7,000) (B)and available to deduct for 2016

Available CONTRIBUTION room for 2016 $20,000

In the example above, the taxpayer made $7,000 worth of contributions in previous years that have not yet been deducted from income.

Using the example above, the taxpayer could contribute up to $22,000 ($20,000 + $2,000) for the 2016 tax year without penalty.

Reminder: The RRSP contribution deadline for the 2016 tax year is March 1, 2017.

Using the example at left, the taxpayer could deduct a maximum of $27,000 (A). They could do this by deducting all $7,000 of their unused contribution room (B), as well

as contributing and deducting another $20,000 for the year.

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DISCLAIMER & DISCLOSURE

Odlum Brown Limited is an independent, full-service investment firm focused on providing professional investment advice and objective research. We respect

your right to be informed of relationships with the issuers orstrategies referred to in this report which might reasonablybe expected to indicate potential conflicts of interest with respect to the securities or any investment strategies discussed or recommended in this report. We do not act as amarket maker in any securities and do not provide investmentbanking or advisory services to, or hold significant positionsin, the issuers covered by our research. Analysts and their associates may, from time to time, hold securities of issuersdiscussed or recommended in this report because they per-sonally have the conviction to follow their own research, but wehave implemented internal policies that impose restrictionson when and how an Analyst may buy or sell securities theycover and any such interest will be disclosed in our report inaccordance with regulatory policy. Our Analysts receive nodirect compensation based on revenue from investmentbanking services. We describe our research policies in greaterdetail, including a description of our rating system and howwe disseminate our research, on the Odlum Brown Limitedwebsite at odlumbrown.com.

This report has been prepared by Odlum Brown Limited andis intended only for persons resident and located in all theprovinces and territories of Canada, where Odlum BrownLimited's services and products may lawfully be offered forsale, and therein only to clients of Odlum Brown Limited. Thisreport is not intended for distribution to, or use by, any personor entity in any jurisdiction or country including the UnitedStates, where such distribution or use would be contrary to law or regulation or which would subject Odlum BrownLimited to any registration requirement within such jurisdictionor country. As no regard has been made as to the specific investment objectives, financial situation, and other particularcircumstances of any person who may receive this report,clients should seek the advice of a registered investment advisor and other professional advisors, as applicable, regardingthe appropriateness of investing in any securities or any investment strategies discussed or recommended in this report.

This report is for information purposes only and is neither a solicitation for the purchase of securities nor an offer of securities. The information contained in this report has beencompiled from sources we believe to be reliable, however, wemake no guarantee, representation or warranty, expressed orimplied, as to such information’s accuracy or completeness.All opinions and estimates contained in this report, whetheror not our own, are based on assumptions we believe to bereasonable as of the date of the report and are subject tochange without notice.

Please note that, as at the date of this report, the ResearchAnalyst responsible for the recommendations herein, associatesof such Analyst and/or other individuals directly involved inthe preparation of this report may hold securities of the issuer(s) referred to directly or through derivatives.

No part of this publication may be reproduced without the express written consent of Odlum Brown Limited. Odlum BrownLimited is a Member-Canadian Investor Protection Fund.

Odlum Brown Limited respects your time and your privacy. If you no longer wish us to retain and use your personal information preferring to have your name removed from ourmailing list, please let us know. For more information on ourPrivacy Policy please visit our website at odlumbrown.com.

Odlum Brown’s 23rd Annual AddressWe are pleased to invite you and your guests to the 23rd Annual Address, featuring presentations from:

Debra Hewson, Murray Leith and members of our research team will share our approach to building strong, resilient portfolios that will thrive over the long term.

DEBRA HEWSONPresident and Chief Executive Officer

MURRAY LEITHExecutive Vice President and Director,Investment Research

CHILLIWACKMonday, February 20, 2 PMCoast Chilliwack Hotel Rosedale Room 45920 First AvenueRSVP to Taylor at 604-824-3376 by February 10.

SOUTH SURREYTuesday, February 21Two Sessions – 3:30 PM and 7 PMMorgan Creek Golf Course3500 Morgan Creek WayRSVP to Caitlin at 604-844-5336 by February 14.

KELOWNAWednesday, February 22, 2 PMCoast Capri Hotel Ballroom 1171 Harvey AvenueRSVP to Chantal at 250-861-5700 by February 15.

WEST VANCOUVERThursday, February 23, 7 PMKay Meek CentreMain Stage Theatre1700 Mathers Avenue RSVP to Caitlin at 604-844-5336 by February 16.

VICTORIAMonday, February 27, 2 PMDelta Victoria Ocean Pointe Resort Ballroom 100 Harbour RoadRSVP to Monica at 250-952-7775 by February 20.

COURTENAYWednesday, March 1, 2 PMCrown Isle ResortBallroom399 Clubhouse Drive RSVP to Terina at 250-703-0637 by February 22.

VANCOUVERThursday, March 2, 2 PMThe Fairmont WaterfrontWaterfront Ballroom900 Canada Place WayRSVP to Caitlin at 604-844-5336 by February 23.

RSVP electronically! Visit odlumbrown.com/rsvp to register online.

Space is limited.