Greetings from the whole team at DPWM of RBC Dominion Securities. We hope summer plans are close to back to normal for everyone as Covid slowly recedes from the front page headlines. As summer looms we wanted to provide a market update before everyone disconnects for vacation season.

For a host of reasons discussed below, we are seeing a regime change in the markets. Of particular interest is how speculative investors are bearing the brunt of their failed speculations. During the COVID lockdowns, a whole generation of do it yourself (do it to yourself?) investors / traders, speculators (we don’t know what to call them) was born. They got their investment ideas, and analysis, from social media and chased the hottest things going.

However, things changed, and they seem to have changed for the worse for this group. Crypto-currencies were among their favourites, and one young speculator, who thought he was an investor, and who happens to live under the same roof as me, eventually had to recalibrate his enthusiasm for crypto.

It was only months ago that he was lamenting the “Boomers” who were stuck in their old mindset and didn’t appreciate the limitless opportunities to make really big coin represented by crypto. In spite of his dad’s best advice, he plunked some of his own savings into crypto, ridiculing those who he believed were satisfied to achieve “sub-par investment returns”.

As of last week, the crypto was gone from his account (we give him credit for being able to cut his losses) and he’s returned with what little was left of his crypto adventure to traditional equity investing that, over the long run, will deliver to him those same “sub-par investment returns”.

It is the cost of gaining wisdom to take a flier, or two, and learn those important lessons in risk management and the difference between speculation and investing.

Inflation

The past few weeks have seen an uptick in volatility, both in equity and fixed income markets, as inflation expectations continue to increase. Higher costs as a result of inflation created by both supply chain issues as well as strong consumer demand have forced central banks to pivot sharply on their interest rate policies which have been accommodative for the most part since the financial crisis of 2008-2009. Inflation, which was viewed last year as “transient”, is now public enemy number one and short term interest rates have been moving quickly higher with expectations of more to come over the balance of the year. The chart below shows US inflation data and illustrates just how significant the impact of higher food and energy prices on the US consumer.

Source: New York Times

Yields

For the better part of the past decade investors have been forced to accept very low returns in exchange for the perceived safety of GICs and bonds. Thanks to heightened inflation expectations the yield on the 10 year bond in Canada is currently just above 3.40%, a level last seen in 2011. The yield curve chart below shows how dramatic the uptick in long term yields have been relative to December of 2017. GIC rates are similarly at better than 10 year high yields as shown in the table below. Investors looking forward over the next 5 years can lock in relatively attractive returns from their more conservative investments.

Financial Media

It’s important to remember that the financial media generally does not have investor's best interests at heart. We’ve recently had a number of conversations with clients who are surprised at how moderate the effect of the current market situation has been on their portfolio. The financial media does an excellent job of whipping up the frenzy of blood in the streets and certainly if you don’t have risk management in your investment plan things could look quite grim. The media’s main objective is to capture market share by generating more clicks and attention, this is sometimes accomplished by sensationalizing current events and making bold, if low probability predications of future outcomes. We prefer to follow a more calm and disciplined approach to portfolio management for our clients. Our investment management discipline aims to uncover companies with strong and experienced management teams, long track records of paying dividends and the ability to weather all types of economic environments.

What next?

For long term investors these periods of uncertainty tend to create attractive buying opportunities when looking forward. While investors can never be certain of the ultimate bottom of a bear market investing during these times generally provides very attractive returns for long term investors. The chart below highlights bear markets from the last 60 years in the US and the subsequent forward returns for various time periods. As an investor the rear view mirror is always clearer but the focus should always be out the windshield at what’s coming ahead.

If you have any questions or concerns about your portfolio or would even like an update on the current situation please feel free to reach out to any of the team members. We are always pleased to have a conversation.

 

Have a great summer,

DPWM of RBC Dominion Securities