Eye On The Markets

Retirement Income Planning, Calgary

Eye on the Markets

This is a special blog to simply track the markets and market sentiment as we navigate a fundamental shift taking place in the economy and the markets in 2022. We are providing the weekly numbers and some commentary. 

 

Week ending May 20

DOW was down -2.77%
NASDAQ was down -3.18%
S&P 500 was down -2.78%
TSX was down +0.4%

Year To Date Numbers:

DOW -14.55%
NASDAQ -28.28%
S&P 500 -18.66%
TSX -4.89% 

Interesting to note, the TSX was slightly positive on the week and has performed the best so far in 2022. This is mainly due to the energy sector. The banking sector is off by about 15%, and other sectors are similar.

How many crises have there been in the past 50 years?

A lot. There's one just about every year. There's always a crisis somewhere and we have overcome everyone so far and we'll come through the current one as well. Be patient, stay the course, and avoid looking at your portfolio too often. 

 

Week ending May 13

DOW was down -1.49%
NASDAQ was down -0.99%
S&P 500 was down -1.41%
TSX was down -1.43%

Year To Date Numbers:

DOW -12.00%
NASDAQ -23.29%
S&P 500 -16.11%
TSX -5.35% 

What's the story of the week? 

After a volatile week, the markets actually rallied on Friday. Still down on the week, but at least a little bit of positivity to end the week. The story is the same - supply chain disruptions, inflation, rising interest rates, and recession. There's so much talk of a recession that it is more likely to be a self-fulfilled prophecy.

There is a larger fundamental mega-trend taking place in the economy and the markets. It's detailed below in more detail. It's a wait and hope kind of scenario right now.

The volatility isn't expected to go away anytime soon. The best thing to do is wait it out. There may be some opportunity to reposition your portfolio and do some capital loss harvesting, however, it's not a good idea to sell and try to time the bottom. One thing I am hearing often is that the next decade will not be anything close to the last decade when easy money and growing asset prices made everyone rich. You will need to be a lot more selective moving forward.

Encouraging factoid from the week: There have been 16 instances since 1940 where the markets have declined by more than 16% in a 4-month period. Out of the 16 times, the markets were higher 6 months later in 12 of those cases. If history proves us right, there's a 75% probability that the markets improve over the next 6 months. 

Week ending May 6

DOW was down -0.24%
NASDAQ was down -1.52%
S&P 500 was down -0.18%
TSX was down -0.36%

Year To Date Numbers:

DOW -10.07%
NASDAQ -23.29%
S&P 500 -14.04%
TSX -2.84% 

What's the story of the week?

Although the volatility was dramatic, the markets were only slightly down on the week. It's the highs and lows throughout the week that are note-worthy. The NASDAQ had and swing of over 7%. The DOW was over 4%.

We all see the volatility. We understand that there is run-away inflation. We know about the geopolitical risk. The supply chain problems in China. But, what does it all mean and what should you be doing?

Uncertainty

This is for sure the underlying issue. The market seems directionless and leaderless. Central bankers are trying to figure out what to do and their message is constantly changing. 

Inflation

The powers that be are finally admitting that inflation is a problem. Their only tool for combating inflation is raising interest rates. The problem is they know it isn't the only problem. the supply chain issues caused by a lock-down in China coupled with the energy crisis in Europe are also significant culprits. They can raise the rates and still see inflation increase. 

The debt bubble is losing air

Ever since the financial crisis of 2008 governments in the developed world choose to print more money and throw it at every problem. All of this money in the system has created another financial crisis - an unintended consequence. Historically low-interest rates. Which has resulted in hyperinflated prices across all asset classes. All of us have had easy access to cheap money. For individuals, this has meant the ability to buy a home. This ability has driven up real estate values faster than at any time in history. It has fueled the technology sector and driven up the stock values of tech companies way beyond what they were worth. Overall, we have a stock market that has seen gains beyond the historic averages. 

The party's over

It was fun while it lasted, but it ain't no fun no more. Prices across all asset classes are ready to come back to earth. At this point, we are seeing a correction take place in the stock market. Interest rates coming back to more historic norms. Common sense coming back to the markets. Value back in style. Real estate is slowing and will most likely continue to slow.

How long will this take?

That's a guess. It will depend on how quickly they raise interest rates and how much they slow the flow of money into the system. The central banks would prefer to ease their way out of this situation. In a sense, they prefer to let the air out slowly rather than burst the balloon altogether.

What does it mean for you?

A mean-reversion is looking more likely to happen. If you think in terms of long-term averages, the stock markets tend to deliver about 8-9% per year if one were to stay invested. In the past decade that average is much higher. Real estate has a long-term average growth of just above inflation - maybe 3-4%. It's not so much that everything is doomed and we'll see years of declines, but rather, the returns will be much more muted to bring the long-term average back in line with historic norms. A slower growth rate. There is a fundamental shift taking place.

What should you do?

Stay the course. The temptation is to try and time the markets. Get out now and buy back in at a lower price. That's a gamble and very difficult to predict. It's easier to stay in than to buy back in if you are all in cash. No one is able to predict the bottom until long after the bottom has occurred. 

Own quality companies. Larger bluechip companies are able to weather the storms better. Diversify across geographies and sectors. Own what people need. Energy, food, fertilizer, precious metals, shelter. 

There is no reason to panic or be fearful. What is taking place is a good thing and it's for the best. It's a great buying opportunity as everything is on sale. As Warren Buffet would say, "Be greedy when everyone else is fearful..."

Dividend-paying companies are certainly more attractive.

Consider more guaranteed sources of income.

Annuities are now back in play and should be looked at to generate some more cash flow. One annuity quote that I have been tracking has a monthly payment that is 9% higher right now than it was 3 months ago.

Be more conservative in your planning estimates for the next decade.

Avoid large drawdowns from your portfolio. Alternatively, you can use a LOC in the short term.

Capital loss harvesting. This may be the time to realize some losses and use them to offset future gains or carry back those losses to offset gains from the past 3 years. I don't mean selling quality companies, but rather getting rid of any junk you may have. 

There is good news

The economy here in North America is still strong and running on all cylinders. We are at full employment. The pandemic is over and we are enjoying life.

Conclusion

The volatility and uncertainty will always be present in the markets. It has always been there and always will be. It's beyond your control. What is within your control is how you plan. Have your total financial house in order with an income plan, an investment structure, tax strategies, risk management plan and an estate plan. These are within your control and it is something we help clients achieve. You can learn more about that process by clicking here.

 

Week ending April 22

DOW was down -1.74%
NASDAQ was down -3.60%
S&P 500 was down -2.6%
TSX was down -3.11%

Year To Date Numbers:

DOW -7.58%
NASDAQ -18.91%
S&P 500 -10.94%
TSX -.24% 

It's been a wild week. The markets were all up by mid-week and then a sell-off by Friday. (DOW is off by 4.68% from the week's high. NASDAQ is off by 6%. S&P 500 is off by 5.21%. TSX is off by 4%.) The VIX went from 24 to 19 and then back up to 28 by Friday. An interesting point to make about the Markets is that the TSX, although negative, is still the best performing index in North America. Mainly due to the energy rebound.

What happened?

The Fed started talking about bigger increases to the prime interest rates. They are hinting at .5% increases at their next 2 meetings.

The stock market hates uncertainty and lately, it's all there is. Every time Jerome Powell speaks it can send the market in one direction or another.

Inflation

We all know it is running too hot and the central banks are using interest rates as the only tool to cool the economy. It's a 2-sided coin. The economy is at full capacity as there is still a lot of money in the system, however, growth is showing signs of slowing down. On the other side of the coin is the supply constraints. Much of China is still in lock-down, trying to wipe out COVID. 

All of those yellow dots on the image below are a ship either waiting to load or be unloaded in the port of Shanghai. There's an incredible backlog of supply and it's impacting everything - including the markets.

Recession

Most experts do not see a recession soon, however, the risk is increasing. 

An inverted yield curve.  

An inverted yield curve means that a short-term U.S. treasury is paying a higher interest rate than long-term U.S. treasuries. The inverted yield curve was first coined as a recession indicator by financial economist Campbell Harvey of Duke University in 1986. It's been a reliable indicator of a recession, but it's not infallible.

Geo-political risk.

The fallout from Russia is having a huge impact on the markets and will have repercussions in many parts of the world, especially Europe. This risk is creating an energy crisis and a food crisis.

Keeping it in perspective

Things may look bad in the short term, but to put things into perspective, there have been some great returns over the past 5 & 10 years.

5 Year cumulative returns

TSX up 35%

S&P 500 is up 79%

NASDAQ is up 112%

DOW is up 61%

The 10-year annualized returns:

TSX: 7.04%

S&P 500: 11.97%

NASDAQ: 14.39%

DOW: 10.28%

 

What should you do?

Nothing at this point. It's premature to jump the gun and make emotionally charged - fear-based decisions. There's a war in Ukraine. Bottlenecks in China. Peak inflation. Rising interest rates. A hot economy. Many of these issues can resolve themselves in the next few months, so it's a waiting game, and you have to be patient. At this point, it isn't prudent to crystallize losses and move to alternative investments and miss the recovery. Weather the storm. 

One thing we know about the markets is their ability to come back fast.

 

Week ending April 1

A turning point in the markets?

This past week we saw some increased volatility and the markets ended the week pretty flat. 

Week of March 28:

DOW was down .04%
NASDAQ was up .59%
S&P 500 was up .11%
TSX was up .01%

YTD Numbers to April 1:
DOW was down
-4.83%
NASDAQ was up -9.92%
S&P 500 was up -5.23%
TSX was up 3.37%

This is the first time in 13 years the TSX has led the US markets after the first quarter. Mainly due to commodity price inflation. Canada has a lot of what the rest of the world needs. Is the worst behind us? There's never any way to tell. The markets react to world events and it's impossible to forecast the next natural disaster, conflict, or pandemic. 

One key indicator - The VIX

The VIX measures the degree of volatility in the markets. Over the past 3 weeks, the VIX has come down significantly. It peaked out at 36.45 on March 7th and is now at 19.63 as of Friday, April 1.

We can never predict what may happen and there are always events beyond our control, but what this tells us is that things are stabilizing in the markets and that the wild swings are lessening a little. The bottom may have happened and we are seeing some growth take place. Many indicators are showing an improvement in the economy and good economic numbers to come.

Most experts do not for-see a recession in the next 12 months. The sanctions on Russia will have lasting impacts on the rest of the world - and most likely, will change the global economy forever. Some, like Larry Fink, CEO of Blackrock is saying, it's an end to globalization. 


"In simple terms, globalization is the process by which people and goods move easily across borders. Principally, it's an economic concept – the integration of markets, trade and investments with few barriers to slow the flow of products and services between nations."

I think he has a valid point. There seems to be some reasonable merit to this idea. With the pandemic, and now the recent invasion of Ukraine, we can see how disruptive the supply chain has become. Countries are now forced to take energy and food security more seriously. You can't depend on someone else to protect you - as we have seen in Ukraine. You can't depend on some other country to feed you or to keep your home warm.

Geopolitical risk has become one of the biggest risks this year, and that risk isn't going away. Canada is well-positioned to succeed in the new emerging economy. It's a country where people want to move to and live in. We have a fairly decent government - however, the new NDP/Liberal coalition is troubling. On the other hand, there isn't any other viable option. We have energy security and a whole lot of what other countries want. One thing we don't have is food security and we depend a lot on the US and Mexico for that. But hopefully, that will change soon.

Inflation is a big concern now for everyone. Interest rates are heading up. Fixed income solutions for retirement income are a great challenge. With that being said, rising interest rates will eventually be good for retirees. 

Be patient. Set goals. Make a plan. Enjoy your life.

 

Leaving your future to chance is not a plan!

What every soon-to-be retiree needs is a comprehensive plan that deals with the issues and questions outlined above. The proper order of taking income can ensure you have a sustainable level of income throughout life that can ensure you don't overspend and become a burden to others or underspend and die the richest person in the graveyard.

Check out our fee-only planning service here.

Willis Langford BA, MA, CFP

Educational Tip - Recency bias is a cognitive bias that favours recent events over historic ones. A memory bias - recency bias gives "greater importance to the most recent event". Trial lawyers who get to offer the final closing argument before the jurors deliberate have an advantage because of this.

"When it comes to investing, recency bias often manifests in terms of direction or momentum. It convinces us that a rising market or individual stock will continue to appreciate, or that a declining market or stock is likely to keep falling. This bias often leads us to make emotionally charged choices—decisions that could erode our earning potential by tempting us to hold a stock for too long or pull out too soon."

Never make a life-changing financial decision based on emotions (fear, panic, or greed) resulting from recent events. In our current case - a market downturn due to world events. We must always consider the economic cycle and historic patterns.


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