Our hearts and prayers go out to all of those impacted by the devastating earthquake that took place in Turkey and Syria.

 

The solid start to the year for financial markets has been welcome given last year’s struggles. Global markets have benefited from a combination of subtle economic improvements. The positive results are a reminder of an important but often overlooked factor in investing: time. We explain more below.

 

At first glance, it may seem that little has changed over the past year. Inflation is still high, interest rates are still rising, and expectations remain for future economic growth to slow. Beneath the surface, however, there are improvements. The pace of inflation is slowing, and its trajectory over the next year may take it closer to the more normal levels we became accustomed to years ago. The scale of central bank interest rate hikes is diminishing, and policy makers are increasingly talking about “disinflation” rather than just “inflation”. Lastly, while expectations for slowing growth and an outright recession remain, the global economy has been resilient, and some estimates for future economic growth have recently moved higher. These trend shifts have been key drivers of the greater stability in equity and bond markets in recent months.

 

It is important to avoid focusing too much on the short-term, allowing current circumstances to drive emotions and decision making. Most broad bear markets in history have been followed by a bull market, and vice versa. Some of these transitions can take time to unfold, such as with the global financial crisis in 2008/2009. Others can occur more swiftly, such as in the wake of the pandemic.

 

Investing can be particularly rewarding when investors have time on their side. This is primarily because the investing experience over the long-run, particularly in equities, is dictated more by the earnings growth and dividends generated from the underlying businesses rather than the short-term occurrences that unfold from one year to the next. The longer-term pace of earnings growth has historically averaged in the mid to upper single digits for the broad equity market as a whole. The phenomenon of compounding produces exponential growth. The bottom-line: avoid getting caught thinking too short-term, and for those with time on their side, focus instead on the power of compounding returns over the long-run.

 

We would not be surprised if the trajectory of inflation, interest rates and growth shift yet again at some point this year, forcing investors to reevaluate expectations about the short-term. We remain attentive, because market swings, particularly outsized ones, often present opportunities for us to refine portfolios. Nevertheless, these short-term considerations will not alter our commitment to our clients’ financial plans which, for most, remain focused on the long-term.

 

If you have any questions, please do not hesitate to contact us.

 

Drew M. Pallett LL.B. CFP

Senior Portfolio Manager and Investment Advisor 

RBC Dominion Securities         

Email: drew.pallett@rbc.com

Website: www.pallett.ca