Welcome to my monthly comment on key issues in the market, and how they affect your investments.
Um, are we there yet?
If you’ve ever been hiking in the mountains before, perhaps you’ve noticed that the closer you get to your destination, the harder it is to actually see it. It’s a very odd phenomenon, which we experienced firsthand only a few months ago. We’d taken off to the Adirondacks in upstate New York, where I’d heard the hiking was challenging and rewarding. From the vantage of the lovely plain below we chose a suitably lofty peak and set out for our adventure. It turned out to be a gruelling, nearly vertical scramble up 1000m of inhospitable rock, and what’s worse, the more we toiled up the side of the hill the further the peak seemed to get. Eventually we lost sight of it altogether. Exhausted, we collapsed for a break and decided we’d better head down. Before we did, I scrambled up for just a few minutes, only to find myself rewarded with a stunning 360º view of the whole region. Sure enough, the peak was there after all, and we were much closer than we’d thought.
Investors are struggling with a peak of their own – inflation. We’ve been waiting for a sign that inflation has peaked and so far it’s not appeared. As you can see from the chart below, it’s just one long gruelling hike up.
That’s led to markets dropping in the US, Europe and Asia, where a fear is setting in that the inflation peak is miles off.
I’m not so sure investors should give in to that level of fear. Here are a few things to consider.
1. The drop in the market we’ve seen so far is broadly similar to other drops we’ve experienced over the past twelve years.
This chart compares all the different pullbacks we’ve experienced since the great financial crisis (GFC). So far, though unpleasant in the short run, these pullbacks have in time turned into recoveries.
2. Periods of market drawdowns are shorter than periods of market growth.
We’ve compared market drops (blue shading) with periods of market growth. It’s clear at a glance which lasts longer.
3. When the going gets tough …
Measuring the comparative grumpiness of investors is now a science, charted through surveys and analysis. That’s captured in the chart below, and as you can see investors are pretty grumpy, particularly in the US. Just like us hiking up our Adirondack peak, they’re starting to give up – just when they’re nearing the inflection point.
4. What about Canada?
Markets in Canada have been resilient for one main reason: Canada is home to large sectors like energy and materials that do well when inflation takes hold. Another contributing factor is that population growth has bounced back after the 2020 COVID year, thanks mainly to immigration getting back on track. In case you’ve never actually seen the figures, here they are (see chart below). Without 400,000 immigrants arriving each year, Canada can maintain economic growth in spite of our tiny birth rate.
Disclaimer. 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 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. ®Registered trademark of Royal Bank of Canada. Used under licence. RBC Dominion Securities is a registered trademark of Royal Bank of Canada. Used under licence. ©Copyright 2019. All rights reserved.