Edgington Price Biweekly Update

Jan 07, 2022 | Edgington Price Wealth Management Group


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Edgington Price Biweekly Update

Our Latest Insights   January 7, 2022

 

Happy new year, sort of. If you’re experiencing a case of déjà vu, you’re not alone. Canada, and much of the rest of the world, is once again grappling with another wave of rising infections of Covid-19. It feels eerily similar to the beginning of last year, though there are some stark differences that help explain why the markets have not been too bothered to date. Instead, markets have been more preoccupied with a rise in bond yields to start the year, which coincidentally was also the case at the beginning of last year. We discuss these issues more below.

The Omicron variant, discovered just over a month ago, has rapidly become the dominant strain globally. Its high transmissibility has led to an exponential increase in global cases. While it may be much more contagious, it also appears less likely to cause severe illness. This may be a function of the virus itself, and because of the protection offered by vaccines. As a result, while hospitalizations are rising, the rate of change has been more modest compared to the growth in new cases. Yet, health care systems have come under strain in some areas once again given the sheer volume of people getting infected, including hospital staff themselves. As a result, some governments have responded with renewed restrictions in hopes of limiting any further pressure.

There will be an economic cost to this wave and the controls put in place. It will be largely borne by the services side of the economy, just as we’ve seen with prior episodes. Additionally, there may be more disruption, staff shortages, and loss of productivity across various industries in the near-term given the large number of people getting infected and being unable to work. But, each successive wave of the virus to date has resulted in less of a hit to the economy because governments, households, and businesses have learned to cope and function as best as possible. Investors expect these renewed disturbances and the associated impact to the economy to be relatively short-lived. Furthermore, some investors are holding out hope that the Omicron variant could be the catalyst that helps transition this virus from a pandemic to an endemic state, something that epidemiologists have expected to happen at some point in the future. That would mark a meaningful change, where the virus would exist without leading to mass hospitalizations.

Amidst all the attention being paid to the virus, there has been another development of late that may be more important for the broader markets. Government bond yields have been on the rise to start the year, suggesting investors have been selling government bonds, pushing their prices lower and yields higher. Bond yields tend to be driven by expectations of the future. More specifically investors may be anticipating stronger growth, higher inflation, or higher interest rates, particularly in light of the U.S. Federal Reserve which released some notes from its December meeting that revealed the committee may be gearing up to withdraw its supportive policy faster than the consensus view. Rising bond yields are not necessarily a bad thing, but these episodes can create short-term volatility as investors reposition portfolios accordingly.

Most noticeably, we have witnessed some strength of late in sectors like the banks that tend to benefit from higher bond yields as they are a driver of lending margins. Meanwhile, areas like technology and growth stocks in general have seen some weakness given how well they have done and the sensitivities of their valuations to bond yields. This may end up simply being a short-term rotation, similar to what we saw in the year ago period when bond yields witnessed a similar, but limited, ascent. But, it bears monitoring because there’s always the risk of a more meaningful and sustained change in trend.

 

The Current Account

Toyota ended General Motor's 90-year reign as the top-selling carmaker in the U.S.

The Japanese company sold 2.3 million vehicles in the country in 2021, besting its rival by about 114,000 units and increasing its sales by 10% over 2019. By comparison, GM reported a nearly 13% slide in sales as the global semiconductor shortage dented its performance. Toyota has benefitted from an early decision to stockpile computer chips, used in a wide array of vehicle electronics. It also cut parts and production orders less sharply than its rivals due to greater optimism about a revival in U.S. consumer demand. GM—in the top spot since 1931—vowed it would bounce back.

 

So long, BlackBerry.

Diehard devotees of the iconic Canadian smartphone ran out of road Jan. 4 as the Waterloo, Ont.-based company stopped supporting the software behind its original handsets. Devices running the BB10 or BlackBerry OS platform will no longer reliably function, even for 911 calls. At its peak, the BlackBerry had hundreds of millions of customers and the loyalty of world famous users like Kim Kardashian and Barack Obama, who refused to relinquish the device upon his inauguration. But the iPhone and a cluster of Google-powered Android devices soon left it behind. By 2017, BlackBerry stopped making the devices as it focused on cybersecurity, autonomous driving and the Internet of Things.

 

Chart of the week

 

Time for a tune-up? U.S. equities have been on a long winning streak, piling on gains year after year. While we see positive returns continuing in 2022, investors shouldn’t fall prey to a “U.S. bias” as we think international stocks have favorable characteristics that argue for their inclusion in portfolios. (pg 1)

Treasury yields are spiking – As the 10-year Treasury yield has pushed above 1.70%, the growth vs. value trade is once again coming into focus. We highlight what this could mean for investors. (pg 3)

Regional highlights: Canadian rates climb as market expects BoC to stick to its hiking plan; European government bond yields leap higher; Signs China’s growth slowdown is stabilizing. (pgs 3-4)

Please take some time to review the Global Insight Weekly.

 

We appreciate the opportunity to serve you and look forward to continuing to help you accomplish your long-term financial goals.

Should you have any questions, please feel free to reach out.

 

Edgington Price Wealth Management Group
RBC Dominion Securities Inc. | RBC Wealth Management |
7th Floor 2950 Glen Dr, Coquitlam, BC, V3B 0J1 
Phone: 604-257-7478 | Toll Free 1-844-250-7877 
Email: edgingtonprice@rbc.comwww.edgingtonprice.com