Rocky Roads Ahead - Market Commentary
Markets have seen a volatile start to 2022, with a pull back in the first few weeks of the new year. While we often see that at the beginning of the year, we thought we could outline some of the current issues behind this volatility and our strategies to see our clients through the storm. We can also look back at previous market events and see that every time there has been a recovery and the markets continue to climb. We experienced good returns throughout the last year, so a correction is neither unusual nor unexpected.
Inflation and Central Bank Policy – throughout the entire COVID pandemic, we have seen central banks add liquidity to markets and keep rates low in order to keep the economy on track. As we start to come out of the pandemic, or at least the pandemic phase of COVID, the central banks will have to decrease their open market purchases. This is not a surprise to markets and has been signaled by the US Federal Reserve and the Bank of Canada, but the timing and speed of this has recently come into question with the rising inflation statistics, which has caused markets to re-price their expectations. The market does not like surprises or unknowns and has reacted accordingly. In 2013 when the US Fed tightened their monetary policy the markets threw a “taper tantrum”. Although there have been lessons learned, and the US Fed is working to be more transparent with the markets, the speed of change has not allowed them to do this as well as they would have liked. Many economists also think the Fed is a little behind the curve in starting to change their policy. While neither the BOC nor the Fed chose to raise rates during their January meeting, both warned that rate hikes were coming. We could see up to 100 bps in Canada and 150 bps in the US over 2022. Volatility and a pull-back is normal market behavior for the beginning of a tightening cycle. Inflation is also a concern as it has reached levels not seen in 30 years. While some will benefit and some will not, this is again a case of markets not liking surprises.
We are currently underweighting fixed income in our portfolios, as fixed income will typically be negatively impacted by rising rates. We are looking at more unconstrained funds, which means that the portfolio manager has more leeway to look for best opportunities across different geographic regions and investment types. We do still believe that fixed income plays an important role in a portfolio, and that is especially highlighted during a pull back in the equity markets. With GIC’s, we are recommending a short term (1 year) so that our clients are not locked into a low rate over multiple years. We don’t see enough of a rate reward with GIC’s right now to lock in for the extra years.
COVID unknowns – Omicron came at us hard and fast, just when we thought we were getting close to the end of the tunnel. Top scientists cannot tell us with any degree of certainty if this is the last variant to cause problems, or if there will be more waves. Omicron is causing other secondary issues across many sectors of the economy. Increasing levels of vaccination around the world in 2022 and beyond, will continue to decrease economic interruption from COVID.
Supply Chain Issues –Social media is full of pictures (real or fake) of empty shelves. Personal experience at the grocery store has shown some empty shelves, in very specific spots, but still a great variety and quantity of food. Supply chain issues cross many sectors and are caused by temporary or permanent plant COVID shutdowns, lack of certain basic materials used in the manufacturing process, lack of workers, or climate events, like we saw in British Columbia late last year. Governments, especially President Biden, have shown they are committed to alleviating supply chain issues. China has shown a tendency to deal without breaks swiftly and harshly, which will protect the supply chain in the longer run but can cause short term disruptions.
Labour Supply Issues –There has been a major shift in the labour markets, which is causing worker shortages in many industries, but some more than others. There are also temporary worker shortages, with Omicron, when many employees may be off at the same time, either sick, or self-isolating due to close contact. Some small businesses have had to close for a time, or stop taking orders, due to a lack of workers.
The COVID pandemic will end, even though when and how are unknown at this time. It’s hard to see that when we are right back in the middle of it again. Our Investment Thesis stands strong and will serve our clients well in the long term. We entrust the picking of individual companies to the professional Portfolio Managers and their teams, who have the research capacity to make these informed decisions. We choose to work with partners that have proven and repeatable investment processes, which will perform over the long term.
Geo-political concerns – The current tensions surrounding the Ukraine are adding to the uncertainty in the markets. This happens on a regular basis and has proven to be temporary. We don’t try to “time the market” but for those investors with cash, this may be a good opportunity to put some of that money to work for the longer term. While we don’t know the outcome, we have seen this before and we will see it again.
Once again, our Investment Thesis remains unchanged. It is designed to guide clients through these temporary bumps in the road. We invest for the long term and employ different forms of diversification. While we can’t diversify away all the market risk, investing in different regions, different asset classes and using different management styles will minimize the bumps in the road.
As a recap of last year, North America markets did well, international markets had a flat year, and China struggled. Fixed income returns will continue to be muted while rates are rising, but in the longer-term fixed income investors will start to see higher yields on cerates and inflation stabilize. We think that Canada will do well coming out of the pandemic, and there could be some profit taking in US equities as they have performed well. The most recent pullback has particularly affected speculative technology stocks and “Meme” stocks, as investors return to companies that provide solid value and earnings.
The rising inflation makes it even more important to stay invested in the markets, as holding cash will cause a decrease purchasing power, just when many things will become more expensive. Our outlook has always been, and continues to be long term, not short term, along with the use of diversification to decrease risk. This strategy has proven successful even in periods where there is short term volatility or corrections.
Andrea Looker, CFA
Associate Investment Advisor
Adamson Wealth Group | iA Private Wealth
This article is a general discussion of certain issues intended as general information only and should not be relied upon as tax or legal advice. Please obtain independent professional advice, in the context of your particular circumstances. iA Private Wealth Inc. is a member of the Canadian Investor Protection Fund and the Investment Industry Regulatory Organization of Canada. iA Private Wealth is a trademark and business name under which iA Private Wealth Inc. operates.
