RBC Market Update - Week ending February 10, 2023

February 10, 2023 | Vito Finucci


We discuss the surprising start to the year and one of an investor’s greatest assets: time.

First and foremost, we want to acknowledge the devastating earthquake that took place in Turkey and Syria. Our hearts and prayers go out to all those impacted by this disaster.

On the investment front, investors may be feeling somewhat confused given the solid start to the year. It has been a welcome one given last year’s struggles. Global markets have benefited from a combination of subtle changes that have taken place in recent months. It’s also a reminder of an important, but often overlooked factor in investing: time. We explain more below.

At first glance, it may seem that not much has changed over the past year. After all, inflation is still high, interest rates are still rising, and expectations remain for future economic growth to slow. That was exactly the case nearly a year ago. Beneath the surface however, things are different. The pace of inflation is slowing and its trajectory over the next year may take it closer to the more normal levels we were accustomed to years ago than the elevated levels we saw last year. Meanwhile, interest rates are rising, as they were in 2022. But, unlike last year, the scale of the rate hikes are diminishing and policy makers are increasingly talking about “disinflation” rather than just “inflation”. Lastly, expectations for slowing growth and an outright recession remain. But, the global economy to this point has been arguably resilient, and some estimates for economic growth have actually moved higher of late as a result. Needless to say, these shifts, while seemingly marginal, have been key drivers of the greater stability in equity and bond markets in recent months.These developments are a reminder that things can change over time, for better or worse. While that may not seem particularly insightful, there are two more noteworthy takeaways that investors should keep in mind when it comes to the issue of time.

First, it’s important to avoid focusing too much on the short-term and risk letting current circumstances dictate emotions and decision making because things can inevitably change. Most broad bear markets in history have been followed by a bull market, and vice versa. Some of these transitions can take time to unfold, such as with the global financial crisis in 2008/2009. Others can occur more swiftly, such as in the wake of the pandemic.

Secondly, investing can be particularly rewarding if an investor has time on their side. This is primarily because the investing experience over the long-run, particularly in equities, is dictated more by the earnings growth and dividends generated from the underlying businesses rather than the happenings that unfold from one year to the next. The longer-term pace of earnings growth has historically averaged in the mid to upper single digits for the broad equity market as a whole. Add to that the phenomenon of compounding which results in non-linear, or exponential, growth, and it’s no wonder that equities are relied upon in portfolios when growth over time is required. The bottom-line: avoid getting caught thinking too short-term, and for those with time on their side, focus instead on the power of compounding returns over the long-run.

We wouldn’t be surprised if the trajectory of inflation, interest rates, and growth shift yet again at some point this year, forcing investors to reevaluate expectations about the short-term. We remain attentive because market swings, particularly outsized ones, often present opportunities for us to refine portfolios. Nevertheless, it won’t alter our commitment to our clients’ financial plans, which for many, remain focused predominantly on the long-term.

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