To my clients:

First, an important message: despite my efforts to keep clients updated via these weekly updates, from time to time market dynamics warrant a personal check-in. I think now is such a time. All clients can expect a call from me next week. My general message won’t change from what is to follow below in this week’s update, but I think personally touching base to answer individual questions and concerns is a good idea.

It was a down week for North American stock markets with the Canadian TSX finishing down 6.6%; the U.S. Dow Jones Index down 4.8%; and the U.S. S&P 500 down 5.8%.

I’m going to keep my economic comments very short this week, and spend more time discussing the broader market outlook as relayed to me today in a conversation with our lead strategist here at Dominion Securities.

So, very briefly then to economic developments, the U.S. Federal Reserve raised rates by 0.75% for the single biggest increase in rates since 1994. This increase came after Fed Chair Jerome Powell all but assured markets at the Fed’s last meeting that the increase would be only 0.50%. What changed? Well, nothing really – and that was the problem. Headline inflation continues to come in higher than expected thereby forcing the Fed to raise rates more aggressively than it previously anticipated. The expectation is that a more aggressive pace of tightening will, at some point, slow the economy enough to begin making a dent in inflation.

Turning now to the thoughts of our national strategist, and as can be surmised by the title of this week’s update, “Keeping it Real”, we (RBC) certainly have reduced our return expectations for 2022. In fact, its highly likely that 2022 will turn out to be a negative year for portfolio returns. But guess what? On average, 1 in 4 years sees a negative market return. As long-term investors (which I’d categorize all of my clients to be), a negative annual return has happened before and will assuredly happen again. Of course the corollary is that, on average, 3 out of 4 years are positive and the cumulative benefits of the good years easily overwhelm the negative effects of the bad years such that, over time, portfolios with equity (i.e. stock) exposure will grow quite nicely. The rate of that growth will largely depend upon the amount of equity held as per the individual Investment Policy Statement of each client.

Digging deeper into the weeds, market sentiment is extremely negative at present. While those reading might reflexively believe this to be a bad thing, the opposite is generally true. Market sentiment – whether good or bad – is a classic contrarian indicator. What this historically means is that when sentiment is excessively negative or positive, markets most often will move in the opposite direction. While the timing of such moves is not certain, the widely accepted belief is that when sentiment skews excessively in one direction or the other, it means that the vast majority of the bad news (or the good as the case may be) has been priced into the market. It is for this reason that we believe we are close to a proverbial market bottom. Might markets push still lower? Yes, it’s possible. But again, we believe we are close to the bottom.

Now, that said, what do we perceive as the likely path forward? Well, I’ve already stated that we think 2022 is destined to be one of the negative years that frustratingly occur about 25% of the time. But we do expect choppy recovery from here. And I emphasize the word “choppy”. There are a lot of cross currents at play in the world: supply chain disruptions; low unemployment; war; healthy corporate balance sheets; high inflation; consumers with cash on hand; and lest we forget, covid concerns lingering in the background. These competing forces will contribute to the aforementioned choppiness. Of these forces, it is our belief that a peaking in headline inflation is the key to turn the tide toward market recovery. Here too, we believe that we are close to seeing this happen (as I mentioned last week, core inflation which strips out energy and food costs is already receding). Bottom line: from now, through year-end, we envision choppy recovery, but likely not enough to get back to even for 2022.

Finishing with our thoughts on recession probability, these have certainly increased, but still, in aggregate, remain low according to our recessionary scorecard. As previously noted, the least prescient (i.e. it has a history of generating “false positives”) of our 7 indicators shifted to amber recently. More importantly, the spread between the 1-year and 10-year bonds has narrowed and is moving in the direction of amber status, but is not there yet - and may not get there (but it needs to be watched because this indicator is much more prescient). The remaining 5 indicators remain firmly green. We struggle to see recession being anything other than a 2023 story at the earliest.

I look forward to discussing these matters further with clients next 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

Visit Our Website: www.nickscholte.ca

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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.