To my clients:

It was a down week for North American stock markets with the Canadian TSX finishing down 2.6%; the U.S. Dow Jones Index finishing down 2.1%; and the U.S. S&P 500 finishing down 2.4%.

I can usually tell when clients’ patience with “uncooperative” markets is wearing thin. One such time was on Christmas Eve 2018, when I received 3 incoming calls from clients expressing concern over declines in the markets (having never received a market-related client call on Christmas Eve the prior 20 years of my career). Interestingly, that day marked the absolute low of that particular ~ 20% peak to trough decline in markets, and markets recovered very sharply thereafter. It’s sad, but largely true, that the threshold for portfolio “pain tolerance” by retail investors often coincides with market lows. It’s why investor pessimism (or optimism as the case may be) is often used as a reliable contrarian indicator for future market performance.

I bring this up because I’ve had about a half dozen such conversations with clients over the past week. Clearly client patience is being tested. But I’d advise heavily against giving in to the comforting urge to sell. Client’s will know I’m not against selling and de-risking portfolios if conditions warrant. I did so in January and February of 2020 ahead of the pandemic; and I also recommended the same in 2008 during the financial crisis (prior to my time as a discretionary Portfolio Manager). However, I did NOT do so in 2018. The commonality of the two former examples is that recession was imminent in both cases. Recession was not imminent in 2018. At this juncture it’s important to emphasize we at RBC continue to believe that recession is NOT imminent now either.

Interestingly, today saw a rather substantial jump in markets from the declines that came the first four days of the week. This jump came in spite of comments from Federal Reserve Chair Jerome Powell after the markets closed yesterday that fighting inflation will be “painful”. Such comments would normally assure a very negative reaction from the markets. It didn’t happen this time. While it’s too soon to say with confidence that we have seen the absolute low in markets, I am confident that, absent recession, we are close. Today’s market action - in spite of Powell’s comments – is suggestive of this.

For the remainder of this week’s update, I will cut and paste comments from Kelly Bogdanova, one of RBC’s lead portfolio strategists, published just yesterday in RBC Wealth Management’s Global Insight Weekly. She writes:

Despite the current (market) challenges, we believe the U.S. market has the potential to deliver worthwhile gains over the next 12 months:

- Our economists anticipate domestic inflation pressures will recede somewhat in the second half of the year, and historically, the market has rallied within 12 months after a peak in inflation;

- Recession risks are still no worse than moderate according to a range of our indicators;

- We think the Fed has some room to raise interest rates without breaking the economic expansion, and will assess the impact of its rate hikes along the way;

- Earnings trends are still generally good at a time when the S&P 500’s price-to-earnings valuation has become cheaper at 17.3x the 2022 consensus forecast; and

- Investor sentiment is quite bearish, and this is typically a contrary indicator for the market (Nick’s note: as I suggested in my earlier comments).

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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