There is no shortage of negativity in mainstream media. At every turn it looks like a doomsday scenario. For years I have made it a point to assess objective data and rather than opinionated media headlines, as I have witness what kind of financial damage an investor can do if they allow emotions to take hold. Let’s have a look at the markets since the start of 2022 and I will share my thoughts.

YTD Snapshot of markets
S&P 500 YTD (-11.47 %)

Nasdaq YTD (-19.31 %)
Dow Jones YTD (-7.53 %)
S&P TSX YTD (-1.93 %)
VEA YTD (-12.28 %)
XBB YTD (-10.85 %)

(Datacollected on April 27^th 2022 at 2:40PM)

Markets price companies (stocks) as the present value of future cash flows, with all of the current information that is available in the moment. Markets react to uncertainty very quickly in the form of a correction or bear market, but over time equity prices rise with the earnings of the underlying companies. This has been true for over 100 years. Currently, there are a few variables that contribute to the market correction we have seen year-to-date. There is the war in Ukraine, inflation (caused by a multitude of factors), central banks and the Federal Reserve raising rates. Both the energy and materials sectors are seeing double-digit returns YTD which explains why the Canadian market is off to a better start. However, this does not change my position that we need to be diversified globally and in larger markets such as the US. The markets have recently been reacting more strongly to the question of inflation and rising rates specifically. Interest rates are the primary lever that central banks can use to heat up or cool down the economic machine. Keeping rates ultra-low is comfortable in the short-term but it can cause inflation to “get out of control”. If inflation were to remain high over a long period of time, there would be deferring severe consequences over the long-run. Hence, Central banks raise rates in order to keep inflation “under control”. Raising rates is a highly sensitive lever and it has to be done in a careful and methodical manner. Central banks strive for a balance between cooling down inflation all while allowing for economic growth to continue. Markets are reacting to these factors as I would expect them to… We are in a market correction.

Is this a good time to invest new money?

Old wisdom backed by objective historical data would indicate that the best time to invest is when you have the cash. If you happen to have the cash while the markets are correcting, then you get to buy at discounted prices and I would consider that a bonus.

What are your forecasts for the rest of the year?

Discussions about forecasts are somewhat futile because by definition, all of the information that will make up the story is already baked into today’s prices. Future price movements will be caused by future events that have not yet occurred and cannot yet be observed. As a professional investor, I am mostly interested in how the businesses we invest in are doing financially (demand for products & services, free cash flow, profitability, ability of the management team, positioning in industry) and less about market fluctuations. Having said that, when studying 100+ years of overall market data, we can say that equity markets delivered positive returns during approx. 75% of calendar years and a negative return during 25% of calendar years, on average. The S&P 500 delivered exceptionally strong returns in 2019, 2020 and 2021. This year is off to rocky start and I expect volatility to remain higher while interest rates are adjusting. The “truth” comes out when companies release their quarterly earnings. If earnings are stronger than expected, then markets will adjust upwards and if earnings are worse than expected then markets adjust downwards. The companies we buy (To name a few: Apple, Amazon, Google, RBC, TD, Coca-Cola, JP Morgan, etc…) show great financial strength and I am not concerned about their ability to survive and thrive in a rising rate environment. Could 2022 end being a negative return in the market? Sure it could and it would not be a big surprise, but remember when the consensus was that 2020 would be the worst year we see since 2008? The S&P 500 ended with a 15.76% return in 2020.

There is too much uncertainty so should I get out now and get back in when things are looking better?

I will allow you to come to your own conclusions if I may pose two questions:

1. When there is more uncertainty, are prices higher or lower?
2. When things are looking better, will prices be higher or lower?

There will always reasons to worry.

Is there anything we should be doing?

I wrote about the fact that we will experience higher inflation and rising rates a year ago or so. I have been recommending clients to consider taking a relative overweight position in equities if their risk-tolerance permits. I recommended this since we expect that bonds could fluctuate when interest rates rise and buying good businesses is the best way to fight inflation over time. Sure, equities can decline temporarily but good equities trend up over time as I mentioned earlier, but not in a straight line. One strategy that works very well is Rebalancing, which means that as asset values fluctuate, we trim what is relatively overweight and we buy what is relatively underweight. When good companies are discounted, we become even more interested in buying them. We rebalance our clients’ portfolios when they hit a certain threshold of being offside from target.

• Precautionary measures
• • Geographical diversification
  • Sector diversification
  • Buying businesses based on strong fundamentals
  • Selecting asset mix based with economic environment taken into account

• Reactive measures during volatility:
• • Rebalancing (buy low, sell high)
  • *Take a break from mainstream media!

I am closely monitoring the situation and I have my hands on the steering wheel. If you are a client of ours, you have a financial plan that has already been stress-tested against volatility and the portfolios we manage have contingencies in place. The only real risk is that an investor reacts emotionally and sells while markets are down… Don’t do that! My team and I are here as always and we take pleasure in answering any questions or concerns.

Tax Season

The 2021 deadline for personal income tax is April 30 2022. If you need slips, reports, or anything else, feel free to reach out to my team. We make it a point to be available to our clients and our clients’ accountants during tax season. Given the deadline is on Saturday, we recommend you get your tax return in by Friday. Let us know if we can make your life easier.

This commentary is based on information that is believed to be accurate at the time of writing, and is subject to change. All opinions and estimates contained in this report constitute RBC Dominion Securities Inc.'s judgment as of the date of this report, are subject to change without notice and are provided in good faith but without legal responsibility. Interest rates, market conditions and other investment factors are subject to change. Past performance may not be repeated. The information provided is intended only to illustrate certain historical returns and is not intended to reflect future values or returns.