To my clients:

It was an up week for North American stock markets with the Canadian TSX finishing up 0.6%; the U.S. Dow Jones Index finishing up 1.3%; and the U.S. S&P 500 finishing up 0.8%.

As the preceding market synopsis clearly reveals, it was a comfortably placid and benign week in the markets… right? Well, if you check in with the markets regularly (and I sincerely hope you don’t… leave that to me!), you’ll know I’m being facetious. Volatility swung the markets all over the map such that, depending on the day or, more to the point, the specific time you checked-in to take a snapshot of the markets, you’d be forgiven for thinking the markets were destined to finish wildly down or up for the week.

Frankly, while I haven’t fact-checked the accuracy of the anecdotal claim I’m about to make, I don’t ever remember - in my more than 20-year career - markets being this volatile (in the literal meaning of the word with swings both UP and DOWN) outside of recessionary scenarios. Yes, markets were more volatile in March of 2020 when the covid-induced recession took hold; yes markets were more volatile in 2008 when the financial crisis-induced recession took hold; and yes markets were more volatile in the early aughts when the tech-wreck and coincident recession took hold. But as I’ve repeatedly asserted the past many weeks, the current reality is that recession is nowhere in sight.

So, despite the unsettling nature of the markets, I reassert that clients should do their absolute best to disregard this volatility. Distilled to its essence, markets are over-reacting to the pending lift-off in interest rates. To an extent, this overreaction has been encouraged by U.S. Federal Reserve Chairman Jerome Powell who has been jawboning an expectation for strict monetary action to combat inflation, including the clear indication that the first rate increase will come at the next Fed meeting in March. But here’s the thing: despite Mr. Powell’s words, official policy rates have NOT YET been increased; quantitative easing has NOT YET been stopped; and quantitative tightening has NOT YET begun; yet traders of existing bonds in the MULTI-TRILLION dollar bond market have already pushed interest rates substantially higher on existing bonds of all durations. In other words, by merely talking about raising rates and beginning quantitative tightening, Powell has got the markets to do some of the heavy lifting for him in that higher rates are already being transmitted to the real economy. I’m of the view that this is part of the plan and that the tightening cycle (i.e. move higher in interest rates by the Federal Reserve) will not be as aggressive as many fear.

And let’s not forget why this is happening: the economy is strong, with the just-reported 2021 growth rate of the economy coming in at the highest level since Ronald Reagan was President in 1984. While 2022 economic growth will be substantially lower (particularly in the first quarter as a result of Omicron), the anticipated path is still higher than has been the norm the past two decades. And the vast majority of time (over 70%), when the economy grows the stock markets move higher. Outside of recession, annual declines in the market are mild the remainder of the time. Again, it is only when recession is associated that markets move lower to gut wrenching extremes.

Therefore, with this in mind, and as I foreshadowed in last Friday’s update, I took advantage of the downside volatility on Tuesday of this week to increase the equity (i.e. stock) exposure of most clients by 2 to 4%. The rare exception to this was the small handful of clients with very pro-growth mandates who were already practically positioned 100% in equities. The logic hear is simple: if the outlook remains positive (it does: see above), then buy when assets are on sale. Or, to borrow the well-worn phrase coined by perhaps the most famous (and successful) investor of them all, Warren Buffet: be fearful when others are greedy; be greedy when others are fearful.

That’s it for this week. All the best,

Nick

Nick Scholte, CIM, FCSI

Senior Portfolio Manager

Scholte Wealth Management
RBC Dominion Securities Inc. │ Tel: 604.257.7569 │ Fax: 604.235.9950
3200-1055 West Georgia │ Vancouver, BC │ V6E 3P3
Toll Free: 1.844.665.9900 │Email: nick.scholte@rbc.com

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Any recommendations herein are for the exclusive use of clients of RBC Dominion Securities and Investment Advisor Nick Scholte. Any other direct or indirect recipient of this email should consult with his/her own licensed investment advisor prior to implementing any investment action he/she may be contemplating.