The Decade of the 2020's

Covid – war – inflation – global geopolitics.

It's been a tough start to this decade.

Below are the 2022 returns on a list of asset classes.

 

 

S&P 500  (SPY)  -20%

NASDAQ  (QQQ) -33% 

Russell 2000 (IWM)-22%

Vanguard Emerging Markets (VWO) -20%

Vanguard Emerging Markets Bond Fund (BND)-14%

Gold (GLD) +0.3%

US Dollar (UUP) +8%

Commodities (CRB Index) +18%

Source: CIBC Private Wealth Investment Strategy Group (ISG) Jan 2023

Thomson Reuters

 

I've lived and invested in the markets for over 50 years, always with fascination, and hopefully, as the decades moved on, with some knowledge. Fundamentally, I believe markets, both local or global, have many cycles like most aspects of our lives. Some are short, some medium, like one or three years, others longer, 5-10-20 years.

We hear in the public press – lots of references to this or that bubble – a variation yet of more cycles. As a young professional investor in the 1970s, I was introduced to markets whose index returns over 10+ years, were essentially zero. Unfortunately, I believe there is a high possibility that I will end my career in a decade when the indices may experience a similar outcome. Obviously, this is only an educated guess. It is part of the operating philosophy behind our investment outlook going forward. If this unfolds, it does not mean that as investors we cannot obtain a reasonable return on our capital, but it does mean that we must adjust our lives and investments to a new cycle.There appears to be two important cycles entering their final stages. Pax Americana is in decline. Our world for 75 years has prospered under "American Rule ". We have moved from a unipolar world to a world that is splitting into two different spheres, simplistically put, the western and eastern worlds, or a democratic block, led by the US and an autocratic bloc, led by China. This means that the period of globalization of the past 30 years is over. Obviously, this has significant implications, across the broad spectrum of humanity----investment markets being part of that.

The unfortunate reality is that another massive cycle is peaking. This is the indebtedness much of the western world has accumulated.

Most believe it started 35 years ago with Alan Greenspan as the federal reserve chairman. Historians have written that Greenspan's tenure from 1987 to 2006, led to the .com bubble burst and the opening of the printing presses. Greenspan initiated "easy money". This easy money then exploded during the Great Financial Crisis of 2007–2008, only to be driven to "free money" before and after Covid. Then, in 2022, it stopped, inflation appeared and the World Entered Another Cycle.

 

INVESTMENT IMPLICATIONS

 

There is the real possibility during the decade ahead, in our bifurcated world, supply chains continue to be challenged. Hard assets/commodities, will become more valuable as countries move to secure their own source, and stock pile these assets which are needed for modern economies to function. Some act as reserve assets, in a world populated with paper. These assets are scattered around the world, yet over the past 10 years or so, global capital markets have for an assortment of reasons, not invested many dollars in the space. They include among others – uranium, zinc, copper, silver, aluminum, rare earths, gold, oil, natural gas ,agriculture, etc.. ,

We have and will continue to have exposure in these sectors.

 

The years ahead, with higher structural inflation and interest rates, will likely lower/take away the returns of a traditional defensive sector – fixed income

We see that the probability of achieving decent fixed income returns over the balance of this decade will be challenged. Therefore, keep bond exposure short term, 1–3 years. If we get a 2023 bond rally( probable), use it to reduce both duration and size.

 

Another possible reality of the decade ahead is that the cycles may be shorter and more violent. Again, we can function in this environment if it does occur. During the past 20 years, it has been correct to buy the dips and hold long-term. For sure this is still a valid approach with many great companies. But we must also be opportunistic – be prepared to take partial and/or entire profits more often, than over the past 20 years. Remember when I was a rookie broker, the five Canadian banks over some eight years returned essentially their dividend...but had 30-50% moves up, only to give it all back. And we don't have to go back to the 1970's...in 2022 CIBC traded a high of $83.75 and a low of $53.60, BNS traded a high of $95 and a low of $63.20.

 

We have over the past year or more, been immersed in building a process to integrate the use of ETFs in our models. These are exchange traded funds, which give us the ability to get specific exposure to different parts of the economic engine that drives market returns. For example; utilities, solar, healthcare, banks, cloud, computing, cyber security, oil, uranium, Japan, Dividend Growers, palladium, and the list goes on. These give us fast, professional access to assets that make up the entire economic cycle. Different parts of the economy, and therefore markets move at different times through an entire economic cycle. Investing in different asset classes, with the ease of an ETF during the entire business cycle, think 3-5 years, should augment our returns.

 

The best thing about this cycle, probably my last one, (I'm assuming it's a long cycle), is that I get to see it through with a smart, experienced, honest partner, who has an excellent grasp of the economic landscape – is measured in his approach, passionate about the markets – and does not like to lose. The fact that he is my son is truly a blessing. May the balance of this decade, bring us health, peace, happiness, laughter and a decent return on our capital.

 

Sincerely,

F. Peter Lacas

 

This information, including any opinion, is based on various sources believed to be reliable, but its accuracy cannot be guaranteed and is subject to change. CIBC and CIBC World Markets Inc., their affiliates, directors, officers and employees may buy, sell, or hold a position in securities of a company mentioned herein, its affiliates or subsidiaries, and may also perform financial advisory services, investment banking or other services for, or have lending or other credit relationships with the same. CIBC World Markets Inc. and its representatives will receive sales commissions and/or a spread between bid and ask prices if you purchase, sell or hold the securities referred to above. © CIBC World Markets Inc. 2023.

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