As 2022 begins we find ourselves on the cusp of closing out the second year of the COVID-19 pandemic with some clients asking, "Is there any good news out there?" This time is different but similar to the clock turning from 1999 to 2000, when the story was everywhere that computers would crash as clocks hit midnight and we would have an epic collapse of our computer systems infrastructures. At the time, that story also wore people down.
Investors are people first, who have families, fears, desires, passions and hobbies, and for all of those important financial aspects of our life, money does matter. However, another very important facet of life is our health and in the two years since the start of COVID-19 there has been illness and there has been loss, but thankfully we can say that despite all the excess hand wringing, fear mongering and dire predictions by various members of the government and media, the projections of mass human devastation based on expert modeling that was reported never came to pass, again similar to 1999 when those predictions never came true either. Do we mean to minimize those who have passed or have been severely sick? Of course not, yet as we look forward it is critical to note that if we had written in January 2020 that the next two years would be as tumultuous with global events as they have been and that your portfolio would be at all-time highs after those two years, you might have wondered if we had lost our minds.
So where are we at today?
As it relates to investing, COVID-19 does have economic ripple effects if only because governments and their actions have triggered recessions and run-up massive debts. So there are a few facts we must discuss. There seems to be some agreement that the new omnicron variant appears to be more contagious but less severe and intensive care unit counts in Alberta seem to corroborate this as they are down significantly from their September 2021 highs. This less harmful spread is exactly what is required for true herd immunity and a truly open economy that allows all the freedoms that you are accustomed to. These are not political statements, it is simply information that is important to know so you understand how to behave as an investor going forward. We should also expect that a media who wants you glued to the TV and their webpages is not highlighting this good news, as it does not fit their business plan of monetizing fear, which is the business they are actually in.
The profession we are in, on the other hand, is one of being rational and sensible guides, which involves the compounding of sound financial principles so you can live your life and reach your goals. On this financial front, there is a wealth disparity that exists in Canada and the US that is partly a function of negative real interest rates that benefit asset holders, but punish savers, and by proxy, wage earners and renters. Yet the government is mystified as to why home prices are higher than ever and getting unaffordable for many. It is almost like the person who is surprised they are hung-over after going on an all-night bender! There is a simple and direct connection between the action and the outcome. A second driver for rising asset prices is the rapid growth of the money supply by central banks around the world that has exacerbated dislocations in the market place and driven up prices of all assets prices as money looks for a sensible place to be parked rather than rotting in the bank at negative real interest rates. Governments all over the world are purposely deflating the value of your spending power by increasing the money supply, read: inflation. This is not an accident, they are doing this on purpose as inflation is a silent tax to pay for the over spending of governments. Again, this is not a political comment, as these actions have been undertaken by all parties in power over the last number of decades.
So what does a sensible investor do? Look at the facts…
As it relates to long-term money we have three choices in an inflationary environment:
- Ten year Canada bond paying 1.50%1
- Five year GIC paying 0.729%2
- A basket of large Canadian (Canadian Dividend Income Strategy) or US businesses (US Dividend Income Strategy) paying a yield of approximately 3% with dividends growing at 10.7%3 per year for the last five years
Tellingly, you also have the US stock market as measured by the S&P 500, where corporate profits for the third quarter of 2021 are up 20.7% versus a year ago, and up 22.3% versus the pre-COVID peak at the end of 2019, which is a record high. This fact should be on page one of the paper as well as the fact that real household net worth is at all time highs and has also been on a growing trajectory for the last 70 years (see graph directly below). This is also good news.
Corporate profits drive stock prices over time, so if your money is longer term in nature, we think the answer is obvious where your long-term money should be and we also think that we must, as a matter of course, remain cognizant of the fact that stocks fluctuate in value and that your portfolio can drop in any month by 4% to 6%, or more; or annually by 10% to 20%, or more, all in the course of a bull market.
So what that means in real life is that if you have $5 million invested and you get a pullback of 5% in a month, you will see your portfolio decrease by $250,000 to $4.75 million. If you have $2 million invested you will be down $100,000 in that same month and yes, you will notice that and you just need to accept it as the price of admission for long-term returns. You may recall that the March 2020 pullback was much larger than 5%, yet for you disciplined and sound investors your portfolios are at all time highs today. Well done in staying the course!
Have a great year, stay healthy, enjoy the outdoors, your life and your loved ones, and thank you for your trust and we look forward to “seeing you” in late January for our "Kickoff 2022" webinar.
Randy, Ian, and the team at R&R Investment Partners
1. Triple A Canada bond June 1, 2031. As of December 30, 2021.
2. CIBC Full Service 5 Year escalating rate GIC. Yield quoted is the effective yield. As of December 30, 2021.
3. Canadian Dividend Income Strategy. Source: CPMS. As of December 30, 2021.