2022 Wrapped

There have been a lot of challenges for investors in 2022.

In a few words, according to Ben Carlson of a Wealth of Common Sense, here are just some of the reasons why this has been a challenging year for the markets:

  • The highest inflation in four decades
  • Double-digit losses in both stocks and bonds
  • Federal Reserve officials publicly rooting for the stock market to fall
  • Interest rates rising rapidly
  • War in Ukraine
  • Continued lockdowns in the world’s second-biggest economy
  • Record high gas prices
  • A slowdown in the housing market
  • Ponzi schemes (FTX) and crashes galore

I guess more than a few words! The underlying point here is that despite some recent reprieve in the markets, with so many factors in play, there have been few places to hide this year – no matter how well diversified.

As we enter the final stretch of the year, it seems safe to say that the poor market performance seen in 2022 will surely join the annals of history alongside other bad periods. Less clear is what we can expect for the year to come. There is little doubt that 2022, inflation and interest rates will forever be entwined. Although not the sole causes of poor market performance, these variables certainly have had the most significant impact. While these trends have started to ease, as evidenced by recent economic data, there are still many questions to be answered.


Among the most important questions is how slowing inflation will affect the pace of tightening by global central banks and if the damage done by this year’s policy will lead to a synchronized global recession next year? While the jury is still out on these questions, the litany of leading economic indicators flashing red is suggesting economic weakness lies ahead.


Since the 1980’s, the 2-10s Treasury curve inversion has preceded all major recessions.

The mere mention of the word recession can be enough to incite people’s anxiety about what it will mean for the economy, the markets and their portfolios. A recession by definition implies contracting economic activity, but there is no such equivalence to how this might impact the markets beyond what we have already seen. Our analysis of the equity markets in the near term remains very binary in outcomes. In the event of a recession, will earnings declines catalyze the next leg down or have stock price declines lead earnings declines? As the markets look forward, one might assume the latter, but without knowing how 2022’s unprecedented financial tightening will impact the severity of the looming recession, this remains uncertain. We are, therefore, as cautious heading into the new year as we are ending the current one.

Certainly, there is no denying that a bear market can feel grim at times – as if it will never end. However, time and time again, we’ve seen this isn’t the case. This too will pass:

As we wait for a resolution to the current bear market and analyze the implications of a global recession on stocks, what can we do? It is said in our industry that there is always a bull market somewhere. Looking out into the new year, we believe that conditions are setting up for that to emerge first in the bond markets. As we’ve discussed throughout this year, rising interest rates have not only caused stocks to struggle, but bonds have also had a historically bad year:

Rather than boring everyone with a lesson on bond price/yield dynamics, suffice it to say, should both growth and inflation continue to decline into the new year, we would expect that bond yields will follow (a nice reprieve for those holding variable debt). In terms of bond prices, this could translate into a “mean reversion” year of positive returns. These dynamics are already visible as we move into year-end and we continue to reposition our discretionary portfolios to capitalize on these positive trends.

In the past few years, it has seemed that nothing has felt “normal”. As people that are focused on interpreting unfolding world events, we understand this well. Despite this, markets, just like everyday life, can often act like a pendulum overshooting both in positive and negative directions. With a cautious eye to the new year, we remain optimistic that momentum is turning the corner while reminding ourselves (via Google's 2022 year in search) that despite our challenges, when we look closer, there are still many positive developments to be found all around us today:

▷ Play Video

Season's Greetings to all of our valued clients, friends and readers who take the time to read our (almost) monthly publication. We wish you all a happy holiday season and a new year filled with joy and prosperity.

 

- Jack


2023 TFSA Limits Announced:

A spike in inflation has led the CRA to increase the TFSA contribution limit for 2023 – the first raise since 2019. With inflation driving this year's 6.3% outsized indexation increase, 2023’s contribution limit will increase to $6,500 from its current level of $6,000. Accordingly, an individual who has never contributed and has been eligible since the plan’s launch in 2009 has $88,000 of contribution room in 2023. You can find more on the recent announcement here.

Should you have any questions about your TFSA account, contribution room, or have question about how to make contributions, we encourage you to give us a call to discuss further.

 

Cash is Trash King!

It wasn’t that long ago that famed investor Ray Dalio coined the phrase “cash is trash” in recognition of the impact of long-term loose monetary policy and growth in debt on the dollar's purchasing power. Perhaps the one silver lining of this year's rising interest rates is that for the time being, this is no longer the case (depending on where you look that is).

Commercial banks have been quick to move lock step with Central Banks when increasing borrowing rates. Deposit rates however, have yet to follow, with most major banks still hovering at close to zero interest paid on cash deposits. While great for their business, this has left many savers – including me - frustrated as inflation steadily erodes the value of their hard-earned savings.

As with many Canadians, I strive to allocate any spare capital to my investment accounts in order to maximize the benefits of long-term compound growth. However, I also believe in keeping some extra cash on hand to deal with the occasional unexpected expense or unforeseen emergency. Grown frustrated by the trivial rate offered in my banks' savings account and with a growing number of attractive alternatives, earlier this month I took action - allocating some of my savings into a High-Interest Savings Account ("HISA") within my Richardson Wealth account. It's just one of the pre-approved HISA products offered by our firm and is currently paying an attractive annual rate of 4.34-4.59% - a big increase from the 0.10% earned in my bank account. I chose this option due to its attractive rate and daily liquidity, but Richardson offers other cash alternative options ranging from T-Bills to GICs that can offer similar or even better compensation depending on your investment timeframe and liquidity needs. Should this strike any interest, we’d invite you to arrange a time for a conversation to determine if these cash management solutions are a good match for your needs.

~Jack

Note: Cash management solutions offer different rates day to day and across different account types.


The Importance of Winterproofing this Year:

As the end of the year grows closer – and colder - many of us with friends and family in continental Europe are well aware of the preparations being made for the upcoming winter months under the new normal imposed by Russia’s invasion of Ukraine and subsequent restrictions on Natural Gas. Despite some optimism that a warm winter and current supplies will suffice, nations continue to launch awareness campaigns to promote energy reduction & forced rationing, while citizens retrofit homes with alternative energy sources.

Despite being geographically distanced from these issues, having learned first-hand through COVID how quickly regional issues can become a global problem, many Canadians are starting to wonder whether this European energy crisis will impact them at home. A recent interview done with Energy Analyst Joel MacDonald suggests yes, that Canadian home energy costs to spike by up to 100 percent on average this winter While the shock value of that headline is intended to draw in eyeballs, and regional differences across our country do come into play, the messaging is one of importance – that persistence of these global issues and their impact on energy markets will eventually wash up on our shores What that means for the future of Canadian utility bills? While time will tell, for now, pricing pressures are looking up.

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