To my clients:

Happy New Year to all. First, an announcement with respect to annual reviews: Brenda will begin the process of booking annual review meetings next week. Our offices are fully open, and we are happy to welcome those clients who prefer to meet in person. We also understand some clients prefer the convenience of remote meetings, and here to we are happy to accommodate. When booking with Brenda, please let her know your preference, and we will schedule accordingly. Whether in person or virtual, I look forward to meeting with you all!

It was an up week for North American stock markets with the Canadian TSX rising 2.2%; the U.S. Dow Jones Index rising 1.5%; and the U.S. S&P 500 rising 1.5%.

Well, a very challenging 2022 is now in the rearview mirror. From a market perspective, I’m sure I’m not alone in wishing it good riddance. With interest rates rising as precipitously as they did, even bonds saw a sharp decline. Quite simply, outside of going to cash, or select niches of the stock market (like energy stocks), there was no place to hide.

But there are many reasons to believe 2023 might well be better. I’ll list these reasons in point form before concluding with a table distributed internally here at Dominion Securities just yesterday. So, here are some reasons for optimism:

- While year-over-year headline inflation sits at a very uncomfortable 7.1%, the annualized rate of inflation the past 5 months is just 2.4% (I wrote about this specific point in my last update of 2022). This 2.4% rate of inflation is very close to the U.S. Fed’s target of 2.0%, and is absolutely NOT the commonly accepted market narrative.

- Just this morning, wage price inflation also showed signs of easing, coming in at 0.3% month-over-month vs the 0.4% rate expected by economists. Further, the prior month’s reading of wage price inflation was revised DOWN. These readings fueled the strong uplift in markets today.

- The same report that showed wage inflation slowing also showed that employment remains strong, with job gains for the month of December coming in at 223,000, nicely ahead of expectations for 200,000 new jobs.

- However, ISM Manufacturing and ISM Services (the other key monthly economic metrics I always track) both fell into contraction territory. While this would ordinarily be worrisome, and indicative of a potential recession, I and most market participants have already conceded that a mild recession is likely. More important to the 2023 narrative is that these softening economic numbers, in conjunction with continued improvement in inflation readings, suggests that the Fed’s aggressive rate hiking path may need to be reconsidered (and I, for one, think the fed has already gone too far)..

While there are other quick hit points I could add to the above list, I think these are the key ones. At this point I’d like to pivot to the aforementioned table distributed here at Dominion Securities. The table lists a historical compendium of “bear markets” (i.e. market declines of greater than 20%) since 1961. If readers take a quick look down the “1 Year” column of “Forward Price Returns”, they may be comforted by what they see (not to mention the 3, 5 and 10 year columns as well). I need to emphasize that this is not a forecast, but it does provide a nice counterbalance to the prevailing gloom brought on by a dismal 2022.

***Disclaimer*** we are assuming October 12, 2022 as the “trough” for this bear market, which may or may not be accurate. We have marked that with a “?” in the table.

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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