Quarter Four Recap & 2022 Opportunities
Hello investors,
Firstly, let me thank you for your patience in getting this market recap sent out. Instead of kicking off the New Year with a bang, goal setting and checking in with clients about their financial objectives for the year, it felt like I really stumbled into the New Year by testing positive for Omicron and spending about 5 days bed-bound and a week of slow recovery. What’s that old saying; “the best time to get started was yesterday, the next best time is today.” So, with that behind me, I’m looking to kick off the rest of the year right and that starts with a recap of the markets and an outlook for the financial landscape in 2022.
Q4 RECAP
Quarter 4, 2021 saw the equity markets continue their unprecedented rally from October through December. At Lane Cuthbert Financial we remained in a conservative position on portfolios with an expectation that the markets would have a strong pull back. They did not. Which is wild because that brought the total return of the S&P 500 for 2021 to approximately 27%! Absolutely insane!
If you recall the annual return of the S&P 500 in 2020 (the year where the mascot was a dumpster on fire) was 16.7%. In a year where businesses were suffering, operating at less than 25% of their capacity, with travel restrictions decimating the tourism industry, no air travel, no cruises, the market responded by giving 2x the annual average return. And now again in 2021, headlines will tote that the strong returns were due to the “great reopening”, but the economy only ‘reopened’ for like 2 months…during the summer before Omicron showed up in the Fall and locked many sectors back down.
These returns continue to be unprecedented and unwarranted. For the S&P 500 to return more than 3x its annual average while the economy is merely a shadow of its former self must be driven by alternative factors. Put simply, the government’s quantitative easing program and low interest rate environment has only served to throw gasoline on the dangerous fire.
Since the instigation of the government’s aggressive QE program of buying $120 BILLION dollars PER MONTH in bonds and basically 0% interest rates over the past 26 months, the S&P has rallied over 121%. The last 2 times the market has seen this angle of ascent and these rates of return was in the 90’s leading up the dotcom bust and in 06’/07’ leading up to the financial crisis of 2008.
Admittedly, we did not get the returns in 2021 that our clients expect to see but we also didn’t expect governments to keep interest rates this low for this long. Remember when they said the pandemic would be over in 3 months…23 months ago…
With that said, I don’t know if we’ll see a 2008 style financial crisis “crash” when government’s start tapering their bond buying but the risk certainly still remains to the downside, considering the market has now rallied over 613% since the last recession and the government is taking assertive action against inflation.
My expectation of a rate hike having adverse effects of a recessive move in the market could lead to 2 different places where we intend to make a shift from a conservative position to a more aggressive opportunity buyer of equities. The first would be a ‘technical support level’ which to be reached would require an almost 30% drop in the equity markets. The other very real possibility is that the market retests the COVID low from 2020. To get there the broad market would need to fall 50%.
Oppourtunity
Our strategy hasn’t changed but the conditions in the market certainly have. Up until this point we’ve remained in an ultra-conservative position in portfolio’s concerned over unexpected market corrections and while that still remains true for North American Markets, an opportunity has presented itself as market conditions have changed.
The Fed chair Jerome Powell has begun to reveal his hand and future decision-making process. Originally, the government had mentioned that it would taper its bond buying once inflation hit 2%, but every time they talked about taking action their timeline was vague and misleading. In Q4 2021 inflation spiked around 9.6% (real rate). The Fed’s have begun to lose control of their inflationary targets and are being forced to take action to curb inflation.
At the last FOMC meeting the Feds committed to 3 rate hikes in 2022 and 2 or 3 rate hikes in 2023 along with a reduction until ceased on their bond buying program. We’ve now been told an action and a timeline. With that clarity of information there are a few areas of opportunity that we’ll be taking advantage of:
Precious metals:
I know how touchy the crypto crowd can get with negative comments, so prepare yourself. Avid Bitcoin followers will tell you that Bitcoin has replaced gold as the digital ‘safe haven’ to protect investor assets. However, if you look over the past 10 years, Bitcoin has seen a surge of over 1,259,540% (that’s 125,954% per year) growth, meanwhile, gold has had a measly 8% (0.8% per year).
In high inflationary environments, precious metals have historically acted as a safe haven to protect against the erosion of inflation. Contrary to the Bitcoin (which has over-inflated itself) I believe that gold’s true value has been subtly forgotten and that we’ll enter back into a super cycle of growth on precious metals as investor realize that cryptocurrencies lack physical attributes and as the government takes aggressive steps to fight inflation.
2. Banking sector
Banks make money through multiple streams of revenue; however, their main pillar of income generation is through lending. In a flat or inverted yield curve environment, banks struggle to make profits borrowing at flat or high short term rate and lend money at lower rates long term. But in an increasing interest rate environment, this steepens the yield curve and allows banks to get back to the bread-and-butter income source: borrowing short term for low rates and lending out money long term at higher rates (think 30 year mortgages). If interest rates are basically at 0%, where is the only place that we can go from here? (It’s a trick question because technically we could go to negative interest rates, but I highly doubt we’ll do that in Canada, and no other country that has done negative rates has been successful with it.) Right, so the only place we can go on rates from here is up. And when rates rise, banks will see their staple profits return.
3. Asia markets
Warren Buffet’s most famous quote is to buy low and sell high. The Asia market saw the same growth that the rest of the world enjoyed during the beginning of the pandemic, however, they took a different course of action in Q3 2021 by surprising their economic landscape with severe rule changes and ‘forcing a crash’ on their markets.
A stark contrast to the S&P market. I believe what the Chinese government is doing is attempting to create an environment that is appealing for investors looking for new opportunities. If the S&P is at record highs with a potential ‘taper tantrum’ on the horizon, large institutional investors may be looking to sell out of their North American equity positions and move most of their assets into the Asian markets.
Also, when the US government had a very accommodative stance the S&P rallied 121%; the Chinese government has made announcements that it will take an accommodative stance to support its economy which I believe will provide more upside opportunity in portfolios in 2022.
As if this needs to be said, but this pandemic has been long and tediously dragged out. And while I firmly believe that an ultra-conservative position was most prudent in protecting my client’s assets, I have not been satisfied with the returns that we’ve generated in your accounts. I am, however, optimistic that these coming changes that we’ll begin to see in 2022 have presented the opportunities we look for that provide low risk, high probability for profitable investments in our client’s portfolios.
I thank you for your continued support and look forward to another opportunity to serve you, and your family’s wealth accumulation goals.
If you would like to book an appointment to review your personal portfolio or discuss your portfolio in more detail, please send an email to Lane@LaneCuthbert.com to schedule a time.