April Showers. Will they bring May flowers? With continued broad declines across most major assets through the month of April, many investors have been left wondering if and/or when the selling will subside. The first question (if) is an easy one to answer. Eventually selling will ease and the declines will stop. That confidence is rooted in historical precedent which has taught us many times that markets inevitably correct. The table below provides visuals illustrating that sizable market declines are indeed quite frequent – good context for today’s backdrop.
Now four months into the year the conversation has largely remained unchanged – the primary focus of investor concerns being inflation. How will inflation impact economic growth, how will it impact business costs, will the war aggravate these issues, and will policymakers be able to combat rising prices without pushing us into a recession? Market speculation surrounding these factors has led to an aggressive discounting of these risks as investors gear up for high inflation, higher interest rates to combat said inflation, and the ever-increasing likelihood of a near-term recession. These worries have led to one of the worst calendar year starts since 2008 and has left investor sentiment at near 35-year lows.
Despite reasonable corporate earnings, a tight labour market, a strong consumer and healthy personal balance sheets, this week it was reported that US GDP contracted by 1.4% in the first quarter, down from +6.9% at the end of last year. This marked the first drop in the economic output since the beginning of the pandemic in 2020. With a recession technically defined as two consecutive quarters of negative economic activity and with numerous headwinds at large – from fading fiscal stimulus, to central bank tightening, the Russia/Ukraine war, and more COVID lockdowns in China - the increasing odds of this possible outcome explains some of the investor angst seen this month.
So now that recessionary talk has migrated from fringe conversation to more likely scenario, what might this mean for investors looking ahead? First, while the word recession evokes some pretty strong emotions, it’s important to remember they can range from mild to severe. In light of strong individual balance sheets and tight labour markets, a mild recession would seem very plausible. Secondly, it is important to remember that the stock market is forward-looking. While it is currently pricing in recessionary risks, it will eventually, and unpredictable switch to pricing in the recovery that follows. We saw this in 2020 with the stock market pricing in a recovery well in advance of the economy. Today’s market is pricing in tomorrow’s slowdown, but we would expect that tomorrow's market should eventually price in the opposite – as the economic slowdown that dampens inflationary pressures, levels off interest rate hike expectations, and ultimately leads to economic improvement. This demonstrates the dynamic feedback mechanisms within our economy and reminds us of the ebb and flow encountered during a normal cycle.
So when will the selling stop? That answer is less straightforward. Market corrections are never fun to endure especially following several years of positive returns. Corrections can pull at our emotions, make us think the worst, and can have us second-guessing the best-laid plans. However, as shown in the chart below, history has taught us that staying the course and sticking to the plan is almost always a better approach than trying to time the market. As Jack Bogle famously said: “Time is your friend; impulse is your enemy”.
While short-term volatility could easily persist as the market assesses risks and outcomes, our expectations of long-term positive outcomes remain unwavering. While valuations reset against attractive corporate earnings and solid long-term drivers, fundamentals should eventually regain control and help push the pendulum back in the opposite direction. Until then, we’ll continue monitoring leading indicators for further hints of what lies ahead while keeping a vigilant eye on the prospects for our core portfolio positions.
A Powerful Estate Planning Tool: Alter Ego & Joint Partner Trusts
In its simplest form, a trust provides a method for an individual (the settlor) to transfer legal title of property to another person (the trustee) who in turn has a fiduciary responsibility for administering the property on behalf of the beneficiary. When you transfer property to a trust, you no longer legally own it, even though you can continue to control and benefit from it. There are two types of trusts: testamentary trusts and inter vivos trusts. An inter vivos trust is a trust created during your lifetime as opposed to a testamentary trust, which is created in the will at death. Alter ego trusts and joint partner trusts are examples of inter vivos trusts.
Benefits of alter ego trusts and joint partner trusts:
• Tax-deferred rollover of assets into the trust
• Control over the trust’s assets
• Alternative to a power of attorney
• Reduce probate fees
• Protect assets from creditors
Click here to learn more about what these trusts are, who can use them, tax considerations and other advantages offered by both Alter Ego and Joint Partner Trusts.
Please reach out to us should you have any questions about these trust structures.
Electric Resto Mods
The last five years have certainly seen electric vehicles attract the attention of consumers. While Tesla is leading the charge - and executing impressively - the pivot in legacy autos is gathering steam in an attempt to catch up. Clearly this is easier said than done as reflected by the spike in Tesla sales following a flood of competitor ads during the Super Bowl. Tesla did not have any ads in the show.
Which leads us to this month’s diversion. How can incumbent automakers recapture the mind share of prospective buyers? Nostalgia might be one answer. The VW’s ID buzz and Ford’s retrofitted 1978 F-100 (video below) have us thinking they might have hit on something.