[On screen:  Prominently on the top, the logo of CIBC Private Wealth, Wood Gundy. Below the logo, in a smaller but bold font, the text reads “THE JOHNSON, JOHNSTON AND MACRAE INVESTMENT GROUP.”]

[Text on screen: View From the Street: October 2022 ]

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[On screen: Ryan Johnston is sitting at a desk in a well-lit office. He wears a black suit, white shirt, and a dark, patterned tie. Glasses frame his focused expression. Behind him, a window reveals a view of a water body and greenery. The office has a modern vibe with a computer setup featuring multiple monitors, a desk phone, and an adjustable desk lamp. A glass-blown figurine and a small potted plant add a personal touch to the workspace. ]

RYAN JOHNSTON: Hi. I'm Ryan Johnston of The Johnson, Johnston and Macrae Investment Group. I'd like to welcome you to Episode 2 of our new video broadcast series, View From the Street, where we will address your questions about money and markets. In today's episode, we'll be exploring the question, "Will the recent market decline impact my ability to withdraw funds from my investment portfolio?"

To answer this question, let's take a closer look at how we build and manage investment portfolios to meet our client's casual objections, particularly in uncertain markets. One consideration is time horizon, or the period of time one expects to hold an investment before requiring any income from the portfolio.

[Text on screen: Time Horizon: The period of time one expects to hold an investment before requiring any income from the portfolio. ]

RYAN: This is key to determining the appropriate asset allocation. We have the firm belief that an investor should have at least a seven-year time horizon before investing in equities, that is stocks.

While equities may offer long-term growth of capital, and a steady and growing dividend income stream, they can be a volatile asset class in the short-term. Selling stocks to meet withdrawals in a down market is one way to guarantee a permanent impairment of your capital. When looking at past market declines, and the eventual recovery, the path is varied. The March 2020 sell-off rebounded quickly, but in other cases, it's taken years for major stock, and to cease to call back lost ground.

For instance, after the global financial crisis started in 2007, it took 1,376 trading days for the S&P 500 to surpass its previous peak. After the dotcom crash in 2000, it took even longer, 1, 803 trading days or more than seven years. A better strategy when funds can't be committed for at least seven years is to consider fixed-income assets for your short-term needs. Now that interest rates have moved higher, bonds offer a viable source of cash flow.

Another component of meeting our client's withdrawal requirements is through the cash flow they're receiving from dividends. We are firm believers when investing in companies which have the ability and willingness to return cash to shareholders. In general, we target companies that can grow dividends at an average annual compound rate of at least 5%. This provides our clients with a growing cash flow to help offset the effects of inflation.

As always, close communication with you is crucial. We do believe that financial planning, and portfolio management go hand-in-hand, and that the planning process allows us to gain a full understanding of your specific goals so that we can build and manage your investment portfolio in a manner that gives you a high assurance with respect to meeting your withdrawal requirements.

I hope you found this video helpful. We encourage you to submit any questions that you'd like us to address in upcoming broadcast. I'm Ryan Johnston of The Johnson, Johnston and Macrae Investment Group, and this has been your View From the Street.

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[On screen: The CIBC logo. CIBC Private Wealth, Wood Gundy. Underneath, THE JOHNSON, JOHNSTON AND MACRAE INVESTMENT GROUP.

Underneath the disclaimer: 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. 2022. CIBC Private Wealth consists of services provided by CIBC and certain of its subsidiaries, including CIBC Wood Gundy, a division of CIBC World Markets Inc. The CIBC logo and "CIBC Private Wealth" are trademarks of CIBC, used under license. "Wood Gundy" is a registered trademark of CIBC World Markets Inc. Moe Johnson is an Investment Advisor with CIBC Wood Gundy in Kingston, ON. The views of Moe Johnson do not necessarily reflect those of CIBC World Markets Inc. Ryan Johnston is an Associate Investment Advisor working with Moe Johnson, Investment Advisor. If you are currently a CIBC Wood Gundy client, please contact your Investment Advisor. Clients are advised to seek advice regarding their particular circumstances from their personal tax and legal advisors. ]

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MOE JOHNSON: Hi, I'm Moe Johnson of The Johnson, Johnston and Macrae Investment Group. This is the first edition of our new broadcast, View from the Street, where we address your questions about money and markets. A lot of clients have been asking about inflation. For instance, what is the future direction of inflation? On July 13th, the Bank of Canada took the unusual step of raising the overnight rate of interest by 1% or 100 basis points to 2.5% in their efforts to slow the rate of inflation. This is the biggest increase implemented since 1998. The bank took the opportunity to also raise its expectations around inflation suggesting that the CPI or Consumer Price Index would hover around 8% for the next few months.

On the same day, the US reported a rate of inflation of 9.1% for the most recent 12 months. A higher number the consensus forecast. As a result, The Federal Reserve Board, US equivalent to our Bank of Canada, raised rates by 75 basis points or three-quarters of 1% on July 27th. How will inflation impact my investment portfolio in terms of bonds and stocks? Historically, interest rates paid on bonds eventually play catch up with the rate of inflation. In fact, over the last two years interest rates on short-term bonds have gone from under 1% to about 4% currently. Although 4% is still below the rate of inflation, investors finally have a viable option to invest in a relatively low risk asset and earn a reasonable return.

Will bond rates return higher in the future? The answer to that question is yes. If inflation continues to hover in the high single digits. We have found in fact, that over the last 50 years, interest rates generally lag the upward move in inflation. Our message to clients is this, keep your average bond maturities very short term, say in the one to three year area in anticipation of still higher interest rates ahead.

Now for stocks. Stock market 101 suggest that as inflation interest rates move up, stock valuations, that is price earnings ratios, move lower. In fact, we've seen so-called growth stocks many of which have no earnings at all, fall in both price and valuation disproportionately. In this environment, we continue to focus on companies with good growth prospects and reasonable valuations. Those that can raise dividends and also possess strong balance sheets and cash flow.

Importantly, with rising costs for virtually all companies, we want to see strong pricing power in these companies. That is, the ability to pass on cost increases to their customers. Thank you for tuning into this episode of View from the Street. We encourage you to submit your questions or suggestions for topics that you would like us to discuss in upcoming broadcasts. In the meantime, I'm Moe Johnson and this has been your View from the Street.

 

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