Thirty-five years ago in October my early investment experience leapt ahead as markets fell more than ever (in nominal terms). Newspapers and other media declared capital markets dead. Everyone around me seemed shocked … except one person who assured me this would recover and markets would reach new highs. It was true. While the S&P 500 had fallen 29% it still finished the year up 2%, and added another 12% and 27% in the two following years. This pattern repeats. A brief glimpse of this pattern occurred in a single day while I was preparing this letter; news was incredibly gloomy as markets opened the day, more than offset by a sunny and strong rise in the afternoon. News would starve without headlines but really, what’s in a day, a week, a month or season? Pessimism or hope, fear or greed, but with time it comes to the same prosperous result. I wouldn’t say that so confidently if we owned high-risk assets now down 80%, but now and always we focus on strong fundamentals (resilient earnings, modest debt, strong balance sheets, vitally growing enterprises) which assure good recovery and a strong future.
This stormy year comes with a promise. Consider an insight I recently heard. On the first day of class an engineering professor said, “You all have one question in mind, and that’s how to build in a way that is anti-seismic, but I cannot teach you that. Instead I am going to teach you how to build what is seismic-resistant. The first cannot be done; the second is why we’re here.” Buildings and bridges cannot avoid earthquakes any more than they could avoid climate change and calamitous storms like Ian or Fiona, but they can be built to “resist” and withstand storms so the damage will be modest and repair is certain. The very same is true of our investment portfolios.
NINE-MONTHS IN REARVIEW.
As 2022 opened we were expecting “modest” results after our double-digit gains of 2021. Interest-rates were rising gently from all-time lows (dampening bond returns). Equities were pressing forward slightly ahead of target. Corporate earnings were rising, dividends were gaining, employment numbers were strong, job-openings were massive, China was relaxing covid protocols, global shipping prices were down by a third, and some inflation (outside energy, homes, automobiles) was compensating for earlier risks of deflation during covid. But on Feb. 24th Putin rebooted his 2014 war against Ukraine. Much can change in half a year – it’s nearly 8 months now – and investment markets have tumbled. At Sept 30th nine-month market results were as follows:
- Canada TSX: down 13.1%
- US: DOW -21%; S&P500 -24.8%; Nasdaq -33%.
- Euro Stoxx 500 -23%. Global 100 -23.7%.
- Emerging markets down 31%.
- High tech / Communications down 40-42%.
- Bonds: Canada -12.5%; S&P500 -18%; Global -20%.
- Prior worst records for bonds: 1937, 1788.
Perspective: looking back, looking ahead:
- 2019 gave us double-digit returns.
- 2020 covid results were modest yet safe.
- 2021 again rewarded us with double-digit returns.
- 2022 nine months – nothing fun.
- 2023-2024: rebirth, new cycle, new growth.
That’s where we have the promise. As day follows night, health follows illness, peace follows war, and optimists grow wealthier than pessimists (it’s true!) so also we see promise. Not just as Putin is being pushed back. Not just as pandemic is weakening. Not just as inflation weakens and interest-rates will ease to a neutral position. Not even the simple fact that equities are forward-looking, anticipating good news yet to come. All these are promising, but even more with three key considerations:
#1 is our dividend yield and other income to our accounts. In June we shared the acronym “Patty”, meaning “pay attention to the yield”. Dividend/income yield is 20-25% higher today than a year ago. Yield is fundamental and more predictive than the size of an account on a given day. When the yield of blue-chip assets rises so strongly it absolutely drives equity values higher.
#2 we’ve come through a very rare period when stocks and bonds were both negative for a calendar half-year. Since 1950 – seventy two years – stocks & bonds were simultaneously negative like this only nine times (6% of all periods, bottom-left quadrant) so we know this is rare and we also know it doesn’t last. As you see in the picture (courtesy of RBC-GAM) stocks and bonds rise simultaneously in roughly 46% of all instances (top-left of picture). Bonds on their own rose 20% of the time, and stocks alone rose 23% of the time. Seeing the two top quadrants we realize, equities rose 69% of all periods, more often and also more strongly than bonds. Add the dividend yield and it fuels equities to new heights in a fresh new business cycle. We will then be in the top-right quadrant with exceptional strength in both equity and bond markets.
#3 Newton’s third law says that for every action in nature there is an equal and opposite reaction. Investing is unique however because for every downturn there is a greater and opposite upturn. We’ve previously illustrated this as using a yo-yo while walking up stairs; bottoms are higher than they used to be, and market peaks reach higher than they’ve ever been before. Clear proof is also in the Andex charts (LINK). Let’s ask what happens after market crashes like 1957, 1973-1974, 1980, 1982, 1987, 1990, 1998, 2000-2002, 2008, 2015, 2020? Answer: Recoveries. That’s what happens. Think of it as a natural law of capital markets.
SURE AS THE SEASONS.
2022 hasn’t been the modest year it might have been. It hastened by a year or two the slowdown or modest recession we’re now seeing, and as this is digested we’ll quickly be into the early steps of a new and very prosperous bull market. This is the cycle; one cannot predict if it goes longer or shorter but the existence of this cycle is as definite as spring and summer, fall and winter. In all these seasons our decisive strategies and mandates have reduced risk, preserve income, and promise resilient recovery.
Yours always in Financial Security for LIFE.
Brian Weatherdon, MA, CFP, CLU, CPCA. 905-637-3500
627 Guelph Line, Burlington, Ont. L7R 3M7. 1-877-937-3500
Certified Financial Planner, Certified Retirement Coach
Author: A Lifetime Of Wealth — And How Not To Lose It (2013). Protecting Life, Loved Ones, and Future Dreams (2013). Your Business, Your Retirement: Halton Retirement Study (2015).
** This monthly letter touches on key strategies in Canadian and global investing and financial planning. This letter is not an offer to sell any kind of security, insurance, or program. Historical returns and risk measures are not a valid guide to future performance. Returns are from publicly available sources and research from a variety of firms including but not limited to Canada Life, CIBC, Dynamic, Mackenzie Financial, RBC / PH&N, and more. Opinions in this letter belong solely to the author and no other body is responsible for the content expressed here. We value opportunity to coordinate with your legal and accounting advisers to further your financial goals in home and business. We are grateful always to receive your comments and questions.