A few weeks ago, my wife & I picked up our weekly groceries for $83.82.
From 1992 until 2022, inflation in Canada averaged just under 2% per year. Stated differently, the average couple that retired in 1992 would have seen their cost of living increase by 1.8 times during a 30-year retirement. So, 30 years ago, the same weekly grocery trip would have cost around $46.31.
While risk is often framed in terms of volatility, I think the risk of losing purchasing power over the long-term is an often underappreciated and overlooked risk. For retirees to comfortably outlive their money, they need to have a plan in place that allows them to pay $2 in 30 years for the things that cost $1 on the day they retire. Since stocks are historically a great long-term inflation hedge, they form an integral part of a sound retirement income plan.
Source: Stocks for the Long Run, by Jeremy Siegel
As clearly demonstrated above, stocks have protected against inflation over the long-term since they are claims on real businesses. These businesses generate real cash flows and lay claim to valuable assets (land, capital, and intellectual property). Now, as we all know, stocks are subject to near-term volatility. This short-term unpredictability emphasizes the importance of an investment plan that delivers income during these inevitable periods of market turbulence (we use a “cash wedge” strategy for this specific purpose). Despite this volatility, US stocks have grown 6.9% annually after inflation over the last 200+ years. I think this historical record makes a compelling case for retirees to lean on high-quality stocks to protect their purchasing power throughout retirement.
Quick Hits
My market forecast for 2023- “Fair, with the chance of a hurricane”. In December, Wall Street research shops published their forecasts for the upcoming year. I take these with a grain of salt, since their crystal balls don’t seem to work too well. With that being said, it’s no surprise that Wall Street is expecting a rocky/tough year for equities with a recession coming (perhaps the most anticipated recession in history?). However, instead of trying to predict the future, I prefer to prepare portfolios for a variety of economic outcomes. And, I think the best way to do this is to buy and hold quality businesses that make money year in and year out. I’ll finish this thought by sharing the street’s 2022 forecasts from 1 year ago; note that the S&P 500 finished 2022 at 3,839.50.
Source: @FerroTV
2022 was a uniquely painful year, since there were very few places to hide. Broad based equity declines are frequent, but usually fixed income acts as a ballast when stocks pull back. However, since interest rates rapidly rose, bond prices dropped (bond prices move inversely with interest rates). Back in May, I interviewed Ryan Harder, one of our Fixed Income Portfolio Advisors. This discussion remains relevant- you can listen here.
December was a weaker month. Despite a softer than anticipated inflation print for November, equity markets dipped in December as the US Federal Reserve firmly reiterated their hawkish stance. Notably, the Federal Reserve increased their terminal rate forecast (the rate after all interest rate hikes are made) from 4.6% to 5.1%. Tom Porcelli, Chief US Economist at RBC Capital Markets opined in a research note that this hiking cycle should be well over by now as inflation appears to be on its way down, and thus the Fed is “fighting yesterday’s war on inflation”. Time will tell, but for now we remain in a high inflation world with rising interest rates.
This FTX situation is a fiasco. FTX was considered a “renowned” crypto exchange and crypto hedge fund, until a wave of withdrawals exposed it as a fraud. I think these 2 covers capture the “fall from grace” rather nicely…(also a friendly reminder to steer clear of crypto).
Source: Fortune Magazine, New York Post
Meanwhile...
Sources: thehilarious.ted & Far Side comics.
- Originally, Jenna & I planned on spending Christmas in Nanaimo with my brother. However, our plans changed after the storm cancelled our flight, and we spent Christmas at home. We eventually managed to get out west, spending a few days with our family in beautiful Invermere, BC- home of the world’s longest ice skating trail.
- Some of the songs I listened to the most in 2022...
If you have any questions, please feel free to reach out.
I can best be reached by e-mail, or by phone at 519-747-1653.
Have a great month.
This information is not investment advice and should be used only in conjunction with a discussion with your RBC Dominion Securities Inc. Investment Advisor. This will ensure that your own circumstances have been considered properly and that action is taken on the latest available information. The strategies and advice in this report are provided for general guidance. Readers should consult their own Investment Advisor when planning to implement a strategy. Interest rates, market conditions, special offers, tax rulings, and other investment factors are subject to change. The information contained herein has been obtained from sources believed to be reliable at the time obtained but neither RBC Dominion Securities Inc. nor its employees, agents, or information suppliers can guarantee its accuracy or completeness. This report is not and under no circumstances is to be construed as an offer to sell or the solicitation of an offer to buy any securities. This report is furnished on the basis and understanding that neither RBC Dominion Securities Inc. nor its employees, agents, or information suppliers is to be under any responsibility or liability whatsoever in respect thereof. The inventories of RBC Dominion Securities Inc. may from time to time include securities mentioned herein. RBC Dominion Securities Inc.* and Royal Bank of Canada are separate corporate entities which are affiliated. *Member-Canadian Investor Protection Fund. RBC Dominion Securities Inc. is a member company of RBC Wealth Management, a business segment of Royal Bank of Canada. ® / TM Trademark(s) of Royal Bank of Canada. Used under license. © 2020 RBC Dominion Securities Inc. All rights reserved.