Market Commentary

Making Cents of the Markets

Listen to our first episode of Ready.Set.Retire! of 2023. To kick start the new year, Lori and Jon sit down to talk all about mutual funds and debunk some common misconceptions.

Together, they discuss the issues with having a portfolio only invested in mutual funds and provide alternative options that could better serve your investment goals!

Listen here or subscribe on Spotify, Apple podcasts, and Acast.

Listen now to the most recent Making Cents of the Markets of the year! We talked about the market’s positive start to the new year and our outlook for what’s in store for the months ahead.

We also discussed mutual funds – the benefits and pitfalls.

Click here to listen.

Beyond the Markets

Greater Vancouver Hot Chocolate Festival

As Raincouver returns, so does the Hot Chocolate Festival. With over 140 hot chocolate designs, there is no better way to spend a wintery weekend than trying as many flavors as possible!

The festival runs from January 14th until February 14th across 95 different locations. Click here to view the virtual map!

 

Be in the Know

“If your ship doesn’t come in, swim out to it.” – Jonathan Winters

Global Cooling?

Inflation is on the hindfoot, retreating and taking refuge in a trench, as the onslaught of unrelenting rate hikes keep firing at it.

America’s consumer price index and core CPI (excluding food and energy) continue to come off the boil (see chart below). Prices of goods are falling, however, services costs remain stubborn.

 

(WSJ.COM)

A help in the inflation fight is America’s budget deficit shrinking to $1.4 trillion in 2022, down from the Covid-spending error of a $2.6 trillion shortfall in 2021.

But there is evidence the spending trend is back on the rise. The now Republican-controlled House is back on its anti-deficit high-horse, one it climbs on top of only when there is a Democrat in the White House. But pressure for less spending is a good thing, especially considering the 41% increase in net interest costs that the nation has to shoulder, thanks to the spike in borrowing rates.

Republicans are right to cite the deficit spending as a factor stoking inflation. They want to see balanced books, something no Republican president has managed since Nixon’s first year in office, and since then only Clinton in his last four years (with no small help from a Republican-controlled Congress). The most recent Republican President broke deficit spending records and saw $7.8 trillion added to the U.S. debt burden. That’s almost two times more than all the student and car loans, and credit cards added together, according to ProPublica.

Recent bi-partisan legislation such as the CHIPs Act and infrastructure bill – both widely considered smart by most experts to be smart moves – will also increase the deficit. So, it will be easier said than done.

What has been easy is the Fed’s ability to hike interest rates to curb inflation. It is expected that their next move will be a 25 basis point hike. It will be difficult to get the balance right and not overshoot as the Fed usually does.

Judging by the benchmark 10-year U.S. Treasury, which peaked at 4.23% but has fallen back to 3.49%, the bond market seems to think they will get it right.

War and Pieces

Whatever the bullish reasons to expect lower global inflation are, an imminent end of hostilities in Ukraine is not one of them.

Not only is Russia’s war going disastrously bad, but so are its finances. Russia’s futile war has flipped what was a budget surplus to a now record 3.9 trillion ruble (US$56 billion) monthly shortfall, according to Bloomberg. That’s 2.3% of GDP, according to Russia’s Finance Minister. Oil price caps implemented last month have pushed Russian crude prices lower, on top of which global prices are down. Further bans on refined oil products such as diesel and fuel oil are expected to take a greater bite from Russia’s revenues and they are expected to squeeze global prices more profoundly than the oil cap. Unlike oil, which is still finding its way onto non-Western tankers taking the oil to non-Western markets, the refined products ship on smaller and more specialized boats. Some can’t travel as far and many are Western-owned so subject to following sanction rules.

To balance its budget in Russia, prices would need to rise to about $85/per barrel, well above the $60/per barrel price cap imposed on them by the G7. Hitting their smaller but higher-margin refined product markets will make balancing its budget all the more elusive.

Russia is now spending 2/3rds of its budget on war, defense, and social programs, according to Bloomberg. Hopefully, this will encourage Putin to re-evaluate his commitment to this pointless war. Markets would certainly welcome that news.

Our Strategy

The Legacy portfolios had a nice boost this week as markets continued to move higher. Investors continue to shrug off recession fears as employment data continues to come in strong, both in the U.S. and Canada. Also, China continues to move away from its zero-Covid policy which has led to optimism that their economy could be in for better quarters ahead.

U.S. CPI data showed inflation slowed to 6.5% in December, in line with forecasts. This compares to the 7.1% reading in November and 9.1% peak in June. While the slowing pace is a welcome relief, it likely does not change the Fed’s desire to raise the benchmark rate from the current 4.25%-4.50% range to 5% and 5.50% through 2024. Markets continue to have a steadfast view that the Fed will be forced to cut by the second half of this year to combat a slowing economy.

Gold continues to shine bright this week as one of our leading sectors so we added 2% more to our position as we feel there is more upside in the near term. Copper is also on the move, due to the end of covid restrictions in China — the world’s largest consumer of commodities. This has triggered a jump in a range of metals exposed to the Chinese property sector such as copper, steel, and aluminum. Our positions in Teck Resources, XBM, and COPX have definitely paid off with a very strong start to the year up 10%, 13%, and 16% YTD respectively!

As we move into earnings season, it will be important to see how companies are weathering the current environment. The results will likely be mixed depending on the sector. We will be evaluating our companies as we get their results and will make any changes as needed.  As active portfolio managers, we are always ready to act quickly on behalf of our clients as we continue to navigate markets!

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