January 18, 2023Education Economy Commentary Quarterly commentary Year In review
New Years’ Resolutions and Lessons from 2022
As we enter the new year with wishes of a more prosperous 2023, I thought it would be a good time to look back at some points to remember as we navigate the upcoming year. With so much uncertainty, we have to remember there is one thing that we can control, and that is your investment plan.
I have made a list of some of my favourite facts, data and some comments on keeping the emotional portion of investing in check for the coming year.
Let’s change the narrative on higher rates
Higher interest rates aren’t favourable for equity markets or fixed income in the short-term. All of us have felt that to varying extents this year, but let’s look at the glass half full when it comes to rates. For the past 30 years, rates have been in a slow free fall. Each year, the yields on bonds and GIC’s have become lower and lower which in turn lowers client’s expected return given their percentage of fixed income. With rates now higher, we are finally earning a return on our fixed income and going forward, we will be able to provide a higher yield for similar if not lesser levels of risk. This is a long-term win and should be celebrated by those with long-term investments, however all that is dominating the news recently is how higher rates are negative. For some, yes it will stretch the budgets, but for many of our clients this will be a long-term positive for portfolios.
We are going into a recession, sell!
I won’t argue the high likelihood that we wind up in a recession at some point in 2023. The real argument has switched to how hard the recession will hit us, and if we are already in the midst of one right now. It’s hard to call a recession with the number of available jobs, but that number has been slowly creeping down. What we have to remember, is that the market is forward looking and tries to price in all available information. The idea of a recession, or “doom and gloom” in 2023, does not mean we can get ahead of it by selling our portfolios and waiting patiently for the recession to pass. Remember the S&P 500 correction this year was 28% peak to trough and according to Bloomberg, the average magnitude is 33%. Below is a graph of the length of recessions and the thick black line is the inflection point of the market. As you can see, this inflection point is quite often somewhere in the middle. Trying to time in and out of a recession is often a fool’s game.
Turn off the Talking Heads
Sit in our position long enough and news can often become more of a foe then a friend. It’s great to stay up to date, but remember that putting someone on a national network does not mean that they have a crystal ball. Like everyone, they have an opinion. It could be right or it could be wrong, but most often it is meant to sell something whether that something is themselves or a company that they have ownership in. Famous CNBC host, Jim Cramer, has recently had an inverse index made out of the apparent success of taking the opposite side of his trades. Kevin O’Leary, a famous Canadian entrepreneur, has recently been in the media for being a spokesperson for the now infamous FTX scandal. I watch the market before it opens, after it closes, and often before I turn my lights off at night. I’ve watched headlines on news stations say “market cheers inflation data” when the futures indexes are higher, and then hit refresh 10 minutes later to see that they’ve changed it to ‘market jeers inflation data and the futures are in the red. Don’t let the news sway your strategy.
Push against Consensus
The above leads me to my next point, which is pushing against the consensus. In my 16 years in the industry, I’ve never felt the market to be so negative on the future prospects. At one point in the year, I may have trended on agreeing with them. However, if I’ve learning something over the years, it’s that pushing against consensus is what achieves consistently good results. People often don’t understand that the market is just a basket of companies. Companies that have earnings, cash flows, assets, and are given potential values. Over time, these values will be higher and lower but if the earnings grow and the cash flows grow it results in a higher value of the shares over time. When the overall investor gets negative on the market, they generally stop buying and, whether it is right or wrong, may even start selling when the news is negative. Negative news generally doesn’t turn on a dime, it takes time and it will dominate headlines. During this notion, it takes all of one’s mental fortitude to not go with the herd, but it’s where money is most often made. Don’t be surprised if you see us as buyers throughout the first portion of 2023. The consensus has gone much too far one way, more than I can remember seeing it since 2008, and going against that consensus is what we feel will likely become the right move as head into 2023.
“Things are getting less bad”
The last time we had an inflation scare was 1982. At that time, the S&P 500 dropped by 27%. Volker, who was the fed chair at the time, was very hawkish and consistently moved up rates to slow inflation. On October 5th of 1982, when inflation was still near 7%, he came out and said, “we may shift tactics”. Within 4 months’ time, all of the losses in the S&P were recovered. Things weren’t better, they just started to show data that said it would be “less bad”. All it took was 3 words from the fed chairman and the market recovered. Keep this in mind when we think about pushing against the consensus as mentioned above, and what could happen in 2023.
As we enter 2023, we understand that putting investment dollars to work in an uncertain environment can be very challenging. Remember, as equities or fixed income move lower, the valuation risk in the markets becomes much lower as well. Often markets will bottom before the economy rebounds and taking advantage of this time period often provides investors with an opportunity for better long-term returns. As mentioned, the market generally looks 12-18 months ahead so we can’t look 6 months in front of us when we talk about our strategy for 2023. We believe that the best course of action going forward is putting dollars to work based on your current risk tolerances and timelines, and avoiding the temptation to listen to the noise, exit the markets, and wait on the sidelines.
I think the coming year is offering investors a lot of opportunity over the short- and long-term. Cash and short-term investments are yielding 3-4%. Fixed income corporate investments are yielding higher, with some of the return coming from tax efficient capital gains. A lot of high-quality equities are trading at discounts we haven’t seen since pre-pandemic, and the long-term outlook for a lot of these companies is very positive. We urge our clients to not let the shorter-term uncertainty derail their investment plan, which is meant for the long-term. At some point, we will see a recovery which may just take a small shift in data or wording from a central bank. Our view is that 2023 will come with some volatility but will ultimately deliver good results for our clients. Try to look past the first 6 months of the year and we feel we’ll start to see some positive change and in turn, positive markets.
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Adam Slumskie is an Investment Advisor with CIBC Wood Gundy in Sault Ste. Marie. The views of Adam Slumskie do not necessarily reflect those of CIBC World Markets Inc.