Economic update, podcasts, and your tax planning calendar

January 21, 2022 | Elinesky Schuett Private Wealth Management


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In our economic update this week, we discuss the poor start to the year and why investors will have to lean on earnings growth to drive returns. We’ve also included the latest podcast from Stu Kedwell, RBC Global Asset Management’s Co-Head of North American Equities, Where are the dividend opportunities in the cyclical sector?, and a global equities update from Jeremy Richardson, Senior Portfolio Manager and Global Equity Consumer specialist at RBC Global Asset Management.

To continue supporting our newsletter community on tax topics, this week we are featuring an article that includes a number of key dates that are important for your tax planning along with other important tax planning strategies, Your tax planning calendar. We’ve also shared a link to your RBC Dominion Securities tax reporting guide that was shared last week.

We’ve also included a Chatter that Matters podcast that discusses the future of work, featuring Steve Cadigan. While Cadigan acknowledges the dramatic transformation the workforce is undergoing, he feels the conversation has got off on the wrong foot — dialogue around the Future of Work shouldn’t be steeped in fear, but rather framed in optimism and opportunity. Your link to the podcast is below, Steve Cadigan on the Future of Work.

As always, we end our weekly email with a few good news stories from in and around our community.


 

Your economic update

The new year has gotten off to a difficult start. The main culprit has been government bond yields, which have moved to highs not seen since before the pandemic. There continues to be some angst among investors that central banks may be aggressive in tightening monetary policy. Investors should get some confirmation on this front in short order, as the Bank of Canada and U.S. Federal Reserve are set to make announcements within a week. A good portion of the equity market weakness so far has been focused in the technology sector and other so-called growth pockets, where stock prices can be particularly vulnerable to swings in bond yields and interest rates. The other important factor of late has been the fourth quarter earnings season which is now underway. This week, we discuss why earnings may play a more important role going forward in driving equity returns.

There are two forces that typically drive stock prices: valuations and earnings. The former can be described as the value that investors are willing to ascribe to the earnings, cash flows, and dividends that are expected to be generated by a business in the future. As expectations change, and factors such as interest rates rise and fall, so too can the valuations that investors are willing to pay. Not surprisingly, valuations have moved higher for global stocks over the past decade as interest rates have declined.

Today, global equities are not cheap. Some markets around the world are trading above historical averages when looking at various commonly used metrics such as the “Price to Earnings” ratio, but that was the same case a year ago and returns proved to be quite strong last year. So, elevated valuations do not imply an imminent risk, nor do they suggest that returns can’t be reasonably attractive in the short-term.

Nevertheless, higher valuations do have important implications for investors. Historically, equity returns have been less robust over the intermediate to longer-term when the starting point for valuations has been higher, as is the case today. This is somewhat intuitive as it is simply hard to imagine valuations increasing significantly after having meaningfully done so over the past decade. As a result, investors may have to lean on earnings growth to drive positive equity returns going forward, rather than an increase in the valuation investors are willing to pay for stocks. Moreover, any significant move higher in bond yields could reduce the multiple that investors are willing to pay, putting even more pressure on earnings growth. As a result, investors should moderate their return expectations going forward, and pay increasing attention to potential earnings growth.

Fortunately, this coming year should be reasonably good on the earnings front, barring any unforeseen headwinds to global growth. General consensus around expectations targets close to seven percent earnings growth for the world stock market this year. That is a meaningful decline from the nearly 50 percent growth in 2021, however last year was skewed by the sharp recovery from the earnings decline witnessed in 2020. Earnings growth should moderate from the incredibly strong levels seen last year, but should still be close to, or above, historical trends. There is upside potential should inflation moderate more than expected later this year: supply chain pressures ease, inventories get restocked, and restrictions be lifted more quickly.

The tailwinds of very low interest rates and bond yields are shifting. This presents a headwind to asset valuations and will create bouts of volatility as the markets reposition for a changing monetary policy backdrop. Yet, we have confidence in the economic outlook and the prospects for earnings over the months to come.

Where are the dividend opportunities in the cyclical sector?

Earbuds and glasses on a laptop.In this episode, Stu Kedwell, RBC Global Asset Management’s Co-Head of North American Equities, discusses the outlook for dividend growth in cyclical companies, particularly in energy, materials and other commodity stocks. Stu also talks about how ESG is considered when investing into these types of companies in order to evaluate their sustainability over the long term.

Listen to the podcast online: Where are the dividend opportunities in the cyclical sector?

 

Global equity update - January 2022

Global equity updateWelcoming the New Year, Jeremy Richardson, Senior Portfolio Manager and Global Equity Consumer specialist at RBC Global Asset Management, discusses how the Omicron wave impacted global equity markets at the end of 2021 and set the stage for an increase in market volatility into the start of 2022.

Watch the video online: Global equity update - January 2022

Your tax planning calendar

Close-up view of calendarThis article highlights some of the important tax dates during the calendar year and also lists some key strategies that may help you maximize tax savings and tax deferred growth, and eliminate or minimize interest and penalties.

Read the article online: Tax planning calendar (pdf)

Last week we shared a link to your RBC Dominion Securities Tax Reporting Guide.This resource was designed to help you and your tax advisor prepare for your tax return – covering everything from mailing dates, how to access your information, and what to expect in your reporting package. If you have questions about your tax package from Elinesky Schuett Private Wealth Management, please contact Brittany Beach at brittany.beach@rbc.com or 519-822-2024. Brittany will be your first point of contact for all 2021 tax package questions.

 

Chatter That Matters Podcast: Steve Cadigan on the Future of Work

Steve CadiganSteve Cadigan has been at the forefront of talent strategy and company culture for the past 30 years. As the Future of Work is steeped in uncertainty, he offers listeners reasons to be optimistic and excited for the possibilities ahead — whether you're building your career or building a team.

Listen to the podcast online: Steve Cadigan on the Future of Work

IMPORTANT COVID-19 OFFICE UPDATE

Elinesky Schuett Private Wealth Management remains fully operational, with our team working primarily from their home offices at this time. As always, we safeguard our clients’ personal and financial information to protect their privacy and confidentiality.

The health and safety of our employees and clients remains paramount, and at this time we continue to invite you to work with us through video meetings, phone and email, instead of in-person meetings wherever possible

Please contact our office at 519-822-2024 if you have any questions, or to coordinate the pick-up or drop-off of any items that cannot be sent electronically.

 

Community Corner

Each week, we like to share a few good news stories from in and around the community. We hope that they brighten your day!

As always, we are available to connect with you personally. Please don’t hesitate to contact us at 519-822-2024 or elineskyschuett@rbc.com.