As we’ve turned the calendar yet again to one of my favorite months (what’s not to like about October?), we wanted to make sure we sent out some of our current thoughts. I spent a couple of days last week in a virtual conference hosted by our RBC Wealth USA counterparts. Over the two days, several of our US research analysts and strategists presented. I have included a couple of their charts below, but I came away feeling very comfortable about the state of the market and returns for the foreseeable future – there will always be periods of volatility (like we have been seeing since early September), but patient investors should be rewarded.

 

Topics of Discussion

• Historical Draw Downs of the S&P 500
• Economic Dashboard – are we headed to recession?
• The US Consumer – 2/3’s of the US economy
• Inflation – higher in the short and medium term, lower in the long term
• Global Covid 19 Vaccination rate by Country
• Office Vacancies (not vaccines) in Canada by Metropolitan City

Historical Draw Downs of the S&P 500

 

Since April 2020 (hard to believe that was 17 months ago), we have experienced little in the way of volatility. Other than October of 2020, drawdowns (market corrections) have been less than 5% at any given time. Historically, that is quite low volatility. The chart below illustrates the maximum S&P 500 intra-year drawdowns from 1928 to current. As you can see, there is no year where the market does not present some weakness and in many, offers a reason to be pessimistic. For relevance, I began my career as an investment advisor with RBC Dominion Securities in June 2007. From June 30, 2007 to September 30, 2021, the S&P 500 has compounded at an annual return of +9.90%. Even though there was a -48.8% and a -33.9% drawdown during that time, the S&P 500 still returned almost 10% if investors were patient.

 

Economic Dashboard – are we headed to recession?

 

The below table should provide investors with some comfort - although this cycle may prove shorter than the last one (March 2009 – March 2020), we are far from entering any sort of recessionary economic environment. Using my baseball analogy we are likely in the 2nd or 3rd inning. No question we will see some drawdowns along the way (as per above), but we’re unlikely to head into a bear market any time soon (we like to try and reduce risk ahead of these).

 

 

The US Consumer – 2/3’s of the US economy

 

The two day conference I attended last week left me feeling upbeat about the state of the market and potential future returns. During multiple presentations, one of the focuses was the state of the US consumer. “Joe & Jane” Consumer contribute 67% of the US economy (the government is 33%) and when they are in good shape, consumer spending will drive the economy. As per the chart below, the US consumer has the lowest mortgage to real estate price dating back to the last 1980’s. There were multiple other charts that illustrated the same point – the US consumer is in good shape and will be out to spend as any Covid related mandates allow them to.

 

 

Inflation – higher in the short and medium term, lower in the long term

 

Inflation is one of the hottest topics amongst people right now. There is no question life is becoming more expensive by the day. As commodities continue to grind higher, input costs rise and prices to manufacture goods increase. Many of us are also aware of the semi-conductor chip shortage around the world and the cost of shipping containers out of Asia. The price to lease a shipping container form China to the US has risen almost 10x since the beginning of the Covid-19 outbreak. With so many input costs rising and supply chain bottle necks presenting themselves, higher costs for goods and services are going to be present for some time. As per below however; there may be some light at the end of the tunnel. While in the short and medium term there are many factors leading to higher inflation, over the long term there are more deflationary forces. This may be one of the reasons the price of gold and silver has not risen substantially with current inflation.

 

Global Covid 19 Vaccination rate by Country

 

Not much to say here – the table speaks for itself. Maybe we’re finally toward the tail end of this pandemic and corresponding Government intervention.

Office Vacancies (not vaccines) in Canada by Metropolitan City

 

I thought this chart was very telling. Many of us probably assumed this, but to see it provides more color. Maybe this gets better as the pandemic subsides, but maybe it doesn’t. It would be interesting to know how many employees are actually in the leased spaces right now. Bad news for hot dog vendors.

 

 

As always, please let us know if you have any questions about the content herein – or anything else. Please also feel free to share with anyone you think would find it interesting.

We’re looking forward to seeing you all soon.

 

Take care,

John & Angela.