To my clients:
It was a down week for North American stock markets with the Canadian TSX finishing down 2.5%; the U.S. Dow Jones Index finishing down 1.9%; and the U.S. S&P 500 finishing down 1.6%.
Not much has changed in recent weeks as many of the world’s financial markets continue to grapple with elevated inflation and a policy shift towards higher interest rates. As discussed last week, investors also remain on edge due to the Russia and Ukraine crisis, which seems to go from better to worse and back again by the day. The latter presents an ongoing risk to broader sentiment but, again, as I asserted last week, apart from longer lasting implications for the geopolitical landscape, the impact upon the investment outlook is likely to be fleeting if history is an accurate guide.
On the inflation and interest rate front, investors will have to remain patient. Some potential clarity may emerge by the middle of March when major central banks – particularly the U.S. Federal Reserve - deliver their next policy updates. More likely, it’s going to take until the spring, if not longer, for investors to get a sense of whether inflation is peaking and has the potential to moderate, or whether it will remain stubbornly high due to more sustainable forces (to reiterate, I and RBC fall in the former camp). Until then, market volatility is likely to continue.
The preceding paragraph being said, I remain of the opinion that the global economy is, in aggregate, returning to pre-pandemic norms. To these ends, inflation at 7.5%, while definitely at worrisome levels on a year-over-year basis, is nonetheless at a much more reasonable and historically representative 2.6% on a two-year annualized basis (i.e. averaging out the deflation of 2020 with the inflation of 2021 and into 2022). Further, overnight interest rates were at 1.75% at the end of 2019 as the world entered the pandemic, and it’s not surprising (to me at least) that rates are widely anticipated to return to those approximate levels over the next 12 to 24 months. And, of course, as pandemic restriction ease, supply chain challenges should ease, and this significant inflationary input should recede into the background (although I acknowledge there will be a secondary wave of inflation – hopefully lesser – driven by increased rents and wages) much as it was pre-pandemic.
Takeaway message? Recession is not in sight and, as such, equities should continue to be given the benefit of the doubt which has been the winning strategy in non-recessionary times throughout our collective lifetimes. Meanwhile, the global economy is resetting back to pre-pandemic norms and this is unsettling markets in the short-term. Add in the Russia/Ukraine crisis, and conditions become further roiled. Look through these unsettling times as best you are able.
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
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