To my clients:

First, an announcement: I’ll be taking holiday from December 24 through January 3rd, and back in the office January 4th. This will be a stay at home holiday and decompression break, so I will be actively monitoring the markets in case circumstances warrant portfolio changes. But other than that, it will be rest and relaxation, so there will be no weekly updates the next two weeks. The next scheduled update will be January 7th unless conditions absolutely warrant commentary in the interim.

It was a down week for North American stock markets with the Canadian TSX finishing down 0.7%; the U.S. Dow Jones Index down 1.7%; and the U.S. S&P 500 down 1.9%.

Economically speaking, the dominant twin story lines of the past few weeks continue to compete for investors’ attention: Omicron and U.S. Federal Reserve Policy. Let’s begin with Omicron…

I’ll start by suggesting that Omicron might well prove to be a good news, bad news, good news story. Since first being discovered, anecdotal evidence has suggested that Omicron infections are less severe than prior variants. While still not definitive, this perspective continues to solidify. So that’s good news. Unfortunately, firmer evidence suggests Omicron is significantly more transmissible than prior variants and that vaccines are substantially less effective, such that many countries, jurisdictions and businesses are re-enacting the social distancing and safety protocols that I’m sure we all had hoped were behind us. That’s the bad news. But there is a rising good news possibility that the increased transmissibility of Omicron might “crowd out” more severe variants such as Delta and conceivably speed up and/or solidify our long hoped for “return to normal”.

Expanding upon this, RBC Global Asset Management’s Chief Economist, Eric Lascelles, in his most recent commentary ascribes the following probabilities to three Omicron dependent scenarios:

Worst-case (20% chance): significant lockdowns needed – subtract 2% from near-term growth

Base-case (48% chance): pandemic lingers – subtract less than 1% from near-term growth

Best-case (32% chance): add slightly to growth as mild Omicron crowds out Delta

What’s important to note from these expectations is that even the worst case scenario, which is given a small 1 in 5 chance of occurring, might deduct only 2% from economic growth, and is not enough to tip an economy otherwise expected to grow at 4% or more in 2022 into recession. As all clients know, unless there is a credible threat of recession, my and RBC’s perspective is that equities (i.e. stocks) should be given the benefit of the doubt in investment portfolios. The much less impactful “base case” and “best case” scenarios are collectively given a much greater 4 in 5 chance of occurring.

So, at this juncture, Omicron is a significant concern, and it is likely to impact all of our holiday plans in one way or another, but it is not likely to be a game changer when it comes to portfolio outlook.

Moving on, the other major economic topic is the U.S. Fed’s pivot to a more aggressive monetary tightening stance. As noted last week, the Fed anticipates winding up its asset purchase program (otherwise known as quantitative easing) many months sooner than previously guided. Once complete, the door is open to interest rate increases with some strategists suggesting these may come as soon as March 2022. Indeed, higher interest rates will impact stock price valuations and without a doubt this will be a modest headwind pushing against portfolio performance in the year ahead. However, one must remember that current rates are at historically low levels and the overall monetary environment remains, in economic lingo, “easy”. Returning to my and RBC’s core goal of giving equities the benefit of the doubt in client portfolios unless there is a credible threat of recession, Fed policy alone is unlikely to tip the economy into recession until monetary conditions become “tight”. But the monetary conditions continuum between “easy” and “tight” is rather large and we are a long, long way from monetary conditions being considered “tight”. Realistically, at the anticipated pace of rate increases, it wouldn’t be until 2024 that Fed policy might become a credible threat to derail the current economic expansion.

Of course, Omicron and Fed Policy are not independent of each other. Both are occurring simultaneously and the combined impact of both should be evaluated when considering probabilities of recession. On this front, I return to the three scenarios put forth by Eric Lascelles above, and note that the 4%+ growth rate forecast for 2022 is inclusive of anticipated Fed policy. At present, any of the three envisioned Omicron scenarios are not sufficient to threaten recession.

Very last, unrelated point: client portfolios were assessed for tax loss selling opportunities this week. Given portfolio growth, there were few such opportunities available. However, for the vast majority of clients AT&T was sold in taxable accounts to generate a year-end loss for tax purposes. The position was retained in non-taxable registered accounts. Newer clients welcomed aboard in the past 6 months may have had an additional security or two sold for the same purpose.

That’s it for this week. If you and your family celebrate Christmas, I wish you a very merry one! If not, I likewise wish you a very happy holidays! All the best, and see you in 2022!

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

Visit Our Website: www.nickscholte.ca

We accept new clients primarily by referral from our existing clients. If you have family or friends who would be a good fit for our specialized wealth management services, please let us know.

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.