Chart of the Week (COW)
U.S. President Joe Biden completed his first year in office this past week. Biden continued a trend amongst U.S. presidents in which first years in office tend to produce either an outsized return or losses. In fact, amongst the 12 “first years” since 1950, only one – Bill Clinton – saw a return of close to the long-term market average.
COVID-19 Update
Global daily case counts remain on the rise, approaching ~3.4 million/day. To put the numbers in perspective, there have been more than 75-million cases of COVID in the month of January alone, which is more than any three month period over the course of the virus. To the positive, while case counts have skyrocketed, January is on pace to see the fewest fatalities for any month since October of 2020, which is supportive of the thesis that while Omicron is significantly more contagious than other variants, it is also less viral.
Moving to Canada, we have seen an apparent peaking of the Omicron wave, as case counts have been in sharp decline over the past week:
We are somewhat skeptical of this decline as there is a high likelihood that many people with COVID have mild symptoms and thus are not captured in public testing data, but nonetheless, Canada appears to be moving toward the other side of the Omicron wave. Along the same lines as our comments on the global data, Canada has seen close to 40% of all of its COVID cases since December 1st of 2021.
Economic Update
This week saw meetings from both the Bank of Canada (BoC) and the U.S. Federal Reserve. In the case of the BoC, there was some expectation that this week might mark the first interest rate increase by the BoC since the sharp cuts of March 2020. However, the BoC chose to punt on any interest rate hikes (the overnight rate remains 0.25%) until at least its next meeting, which is scheduled for early March. The market is currently pricing in five rate hikes for 2022, but RBC Economics continues to believe that there are likely to be fewer than this; although, they acknowledge that their call of three hikes is probably too low by one.
Similarly, the Federal Reserve held its policy steady (the overnight rate remains 0-0.25%), but also indicated that rate hikes were imminent. In the case of the Fed, there was some hope by market participants that recent volatility in the stock market might cause the Fed to be less willing to raise rates, but the high rate of inflation and a still strong economy in spite of the Omicron surge, kept the Fed on a path toward higher rates.
We would note the challenge that both Central Banks face in 2022. Central Banks have a dual mandate – full employment and inflation at or below a target level of 2%. If employment is too low (in other words, not at full employment), then, all else equal, Central Banks will be more accommodative (lower rate bias). If inflation is too high, then, all else equal, Central banks will be less accommodative (higher rate bias).
Usually, these two things agree with one another. In other words, when the economy is below full employment, inflation is low and the Central Bank can maintain an easy bias; while, when the economy is at or near full employment, inflation is high or rising and the Central Bank can shift to a tightening bias.
2022 poses a challenge – the U.S. remains well below full employment (Canada looks better in this regard), but inflation is well above target and at its highest levels in four-decades. Everyone agrees that rates need to rise as they are at emergency levels and the emergency is over, but getting to the right level without endangering the economy and without allowing inflation to cook for too long is akin to hitting a 3-wood from the deep rough 250 yards to an island green (for those who do not golf – it’s challenging).
Market Update
It was another topsy/turvey week with the markets both in Canada and the U.S. seeing large intra-day moves. The concern of the market largely centers around the aforementioned path of interest rates with most other news as it relates to earnings and the economy taking a backseat (most of this news has been neutral to positive for what it’s worth).
As we have discussed in the past, the biggest risk to markets is the U.S. economy sliding into a recession. Let’s take a look at a chart of sorts and then comment:
Going back to World War II, there have been 55-years in which the S&P 500 has been positive and 22 in which it has been negative. However, if we strip out the years in which there has been a U.S. recession (in red), there have been 54-years of positive returns and only 11 negative years. Further, of these 11 negative years, only three – 1962, 66 and 77 –have seen losses in excess of 10%.
U.S. recession risks remain low; although, the biggest risk to the economic outlook is likely a Fed policy misstep (likely tightening policy too aggressively), so while all of the current indicators – job creation, economic growth, capacity utilization, etc. – remain in the green, we acknowledge that these indicators bear close scrutiny in the months ahead.