Welcome to Fall - a name thought to originate from the change in seasons and the phrase 'fall of the leaf'. Observing global markets this past month, you could also be forgiven for thinking it aptly describes their direction. In last month’s market communication, we pondered whether “…investor enthusiasm and the subsequent market rally had gotten ahead of itself.” Concerning inflation, we also commented, “…real-world data is messy, and investors tend to act with both emotion and bias, we expect market volatility to remain elevated until broad macro trends are clarified.” Fast forward a month and with downside volatility rearing its ugly head again, it would appear that this line of thinking wasn’t off the mark. Based on historical average returns, September has the unique distinction of being the worst month for equity market performance. With this year’s issues well documented: ongoing/escalating tensions between Russia and the West, the burgeoning energy crisis facing Europe, the myriad of economic issues in China, and rapidly tightening global financial conditions, it seems that this September hasn’t veered from this pattern. Just another difficult month, in a historically challenging year, as stock markets fall back through the lows established in June. Indeed, our communications this year have addressed the above issues and how they contribute to declining asset prices, but inflation and policy response remains the primary focus (and worry) of investors everywhere. With the current inflation cycle proving more pronounced and persistent, central banks, including our own Bank of Canada, have continued with their attempts to cool demand in hopes of stabilizing prices. The tool of choice? Interest rates. The outcome? A hike cycle of historical significance in both speed and magnitude:
This year has demonstrated that if anything is at odds with risk assets, it’s a sustained uptrend in interest rates. And central banks seem intent on raising them further until either inflation returns to target or employment deteriorates significantly. Despite September inflation data indicating a continued easing across both Canada and the US, meeting the central bank conditions for taking their feet off the brakes will require more time. For now, further tightening remains the course. It has been this continued “hawkish” stance that has resulted in ongoing market volatility. Herein lies the problem. We have observed a marked deceleration across many leading economic indicators in recent months – implying economic weakness on the horizon. Slowed manufacturing activity, declining new orders, increasing inventories, falling freight costs, declining commodity prices, tumbling used car and real estate values, and an increased number of layoff announcements and unemployment claims – all portend a swiftly slowing economy. Central bank policy efforts have certainly contributed to this slowdown, although the full impact of the last six months of policy change has yet to be fully felt. In light of this, we must ask what the full economic impact might look like six months from now and how this problem might compound if interest rate increases continue at the current pace. This is where we find ourselves heading into the fall – asking the question, what are the risks of a central bank policy mistake? Are policymakers paying too much attention to retrospective data and the inflationary episodes of decades past instead of deteriorating growth with a heightened risk of overtightening? Of course, we will only have these answers with the benefit of hindsight. However, based on the data we monitor and the analysis we value, we see a heightened risk of this outcome. For these reasons, we have spent much of September tweaking the positions across our discretionary models to better reflect these growing risks. It is understandable that this year’s market volatility might be causing you to feel an increased level of stress. Our goal is to help you navigate these challenges and encourage you to schedule a phone call or appointment should you wish to discuss our market views and your portfolio, your financial projections, or simply to say hello. - Jack
RESP's Unpacked: The benefits and drawbacks of individual and family RESPs
There is almost nothing more exciting than becoming a grandparent. You’ve “been there and done that”, and now it’s time to spoil your grandchildren without having to worry about the endless responsibilities that parents have to bear. As a grandparent, you may be thinking about how you can contribute to your grandchild’s future in a meaningful way. Registered Education Savings Plans (“RESPs”) make a great place to begin. To illustrate these points, we wanted to share a thoughtful conversation our Senior Financial Planner, Alysha To, recently had with Globe Advisor (article here). Alysha does an excellent job of explaining the nuances of RESPs, plan types, as well as Tax and Estate planning considerations not often addressed. We hope you find this discussion interesting and encourage you to contact us should you have any questions to ask Alysha about RESPs.
The Merge: Crypto Goes Green
Though challenging market conditions haven't spared Crypto Assets, that hasn't dampened the spirit of developers nor slowed innovation across the space. There’s nowhere more evident of this than within the Ethereum community. Following six years of planning, development and testing, its network (the Ethereum Blockchain) implemented one of the largest technological upgrades Crypto has ever seen – an event that became known as “The Merge”. What makes The Merge so important that even Google created a countdown clock for everyone to track its progress. Post-merge, the Ethereum blockchain will now use a new Proof-of-Stake consensus mechanism to validate all transactions. In short, this change is expected to significantly reduce the network’s carbon footprint with expectations that it will consume 99% less energy. A huge achievement! As there are other discussion points worth highlighting, we’ve included a video (below) that details the nuances of the merge and why this transition will further cement Ethereum as the backbone of decentralized applications for years to come.
