January 6, 2023
Making Cents of the Market
Happy New Year! Welcome back to the first weekly update of 2023. We hope you all had a wonderful holiday season with family and friends and we are excited for the year ahead!
Make sure to tune into Lori and Simi’s first Making Cents of the Markets of the year on CKNW at 8:35am on Wednesday, January 11th. Ready Set Retire also returns next Friday and is available on Spotify, Acast, and Apple podcasts.
Beyond the Markets
Although the festive season is behind us, re-capture the feeling of excitement by visiting Canyon Lights at Capilano Suspension Bridge. The Bridge is transformed by thousands of dazzling lights for you to enjoy until January 22, 2023.
As a BC resident, your ticket purchase allows you to enjoy admission to the park for a full year! Click here to find out more.
Be in the Know
“Our greatest weakness lies in giving up. The most certain way to succeed is always to try just one more time.” — Thomas A. Edison
An Unprecedented Year for Stocks and Bonds
There is an old story of a young man asking John D. Rockefeller what he thinks standard oil stocks will do. “I think they will fluctuate”.
And fluctuate last year they did. It was the worst year for stocks since 2008, and the worst year for bonds since 1994. Moreover, it was the worst combined performance since 1926 and the first time in history that both asset classes fell over 10% (as measured by the S&P 500 and Bloomberg U.S. Aggregate Bond Index).
Just as rare was the spike in inflation to levels not seen in over 20 years, rising at its fastest pace in 40 years. Roughly speaking, inflation’s meteoric rise was caused by a spike in demand combined with a drop in supply due to the pandemic lockdowns and unprecedented levels of “helicopter money” (the metaphor Ben Bernanke once used when the central banks and governments throw cash out of helicopters to bail out citizens via handouts and budget deficit spending).
Below is a chart of inflations rise across many major economies:
The higher interest rates hurt every industry, except for energy prices. The illegal invasion of Ukraine wreaked havoc on energy supply chains, as well as most other commodities, including grain.
A Further Word on Inflation and Oil
It’s not a great idea to compare today to markets and the economy of 40 years ago, but most of the 1980s was a strong time to invest – the 1987 crash being a major exception. It took a year and a half to recover from that fast crash, while the much-expected recession many economists predicted didn’t materialize. That recovery ushered in the roaring 1990s (not including the Gulf War’s brief recession in 1991), a bull market that pretty much lasted until 2021 (with some interruptions in 2008-2009 and 2020).
The now-falling inflation rate should act as a tailwind in 2023 for both stocks and bonds.
One example of easing inflation pressure is energy prices. Oil peaked at $130/bl and now sits in the $73 range. The natural gas correction has been even starker. Despite a chaotic Christmas cold snap, Northern Hemisphere temperatures have warmed up and are forecast to remain so. Also, China’s reopening is being hampered by a surge in Covid deaths, pushing back the timeframe of its economic recovery (and more oil demand). Tumbling prices is not what Vladimir Putin wanted nor what Europe was bracing for but supports inflation to continue to trend lower.
Natural gas price chart:
Good Jobs, Markets Rally and Legacy Outperforms
We received the December jobs report that showed the labour market continues to show strength while inflation maintains its downward path. This is a best-case scenario for a soft landing for the economy. Markets received the news with open arms as it helped indices finish the first week of 2023 in the green. As far as our Legacy portfolios go, they did a good job too, starting the new year strong as they outperformed markets and their relative benchmark.
Our strategy, which is centered around active management, continues to make a difference as it did in 2022. With last year now in the rear-view mirror, we know it was one of the most challenging years for markets in over a decade. In fact, the worst year since 2008. However, we persevered and our active management certainly helped cushion the impact with US markets down over 20% on average as they wrapped up the year. Our portfolios were not down nearly as much and they experienced about half of the volatility.
Bad years in markets never last and although we feel that markets could continue to be volatile for the first couple of quarters in 2023, we are optimistic that a new bull market could be born in 2023. Markets usually bottom early in a recession and start moving higher long before we have confirmed the recession is over.
A big part of why significant down years also do not last is that some investors end up throwing in the towel (usually at the worst possible time). But once those investors give up, the selling pressure abates. “Smart Money” then moves in and takes advantage of the opportunity. It’s not exactly that simple, but it explains why markets can move higher when all the news is bad.
Long-term investors know that the difficult times must be weathered to enjoy the good times. We all know markets can’t always have positive years, yet some investors can be stunned when it happens. While nobody knows for sure what this year will bring, it would be very difficult to replicate last year’s peak fear of inflation, war, and recession. The same way that our fear of the pandemic peaked and then slowly withered away.
Actively managing risk and volatility is what we do to get clients through tough markets, but we also know that after every bear market brings a very strong bull market. We will remain defensive initially, however, we will be ready for signs that we are entering a new phase of the market cycle, which we believe will begin this year.
Visual of the Week
The comments and opinions expressed in this newsletter are solely the work of Pinkowski Wealth Management, not an official publication of Canaccord Genuity Corp., and may differ from the opinion of Canaccord Genuity Corp’s. Research Department. Accordingly, they should not be considered as representative of Canaccord Genuity Corp’s. beliefs, opinions or recommendations. All information is given as of the date appearing in this newsletter, is for general information only, does not constitute legal or tax advice, and the author Pinkowski Wealth Management does not assume any obligation to update it or to advise on further developments related. Investing in equities is not guaranteed, values change frequently, and past performance is not necessarily an indicator of future performance. Investors cannot invest directly in an index. Index returns do not reflect any fees, expenses, or sales charges. All information included herein has been compiled from sources believed to be reliable, but its accuracy and completeness is not guaranteed, nor in providing it do the author or Canaccord Genuity Corp. assume any liability.
CANACCORD GENUITY WEALTH MANAGEMENT IS A DIVISION OF CANACCORD GENUITY CORP., MEMBER-CANADIAN INVESTOR PROTECTION FUND AND THE INVESTMENT INDUSTRY REGULATORY ORGANIZATION OF CANADA