THERE’S SOMETHING WE HAVE TO ACCEPT.

There’s no way to sugar-coat it, we are in the midst of an extended market sell-off.

In periods like this I’m reminded of a quote from famous investor Peter Lynch “In the stock market, the most important organ is the stomach. It’s not the brain”.

We know market pullbacks are expected, normal and necessary, however these periods are not easy.

Remember markets do not go up in a straight line. They take two steps forward and one step back. We do not earn returns on our money without accepting some risk, some fluctuations in the short term.

We know it can feel like these periods will never come to an end, but it will. The only way through with a high probability of success is to stick to the strategy.

You’ve recently been through this – 2018, 2020 and now 2022. And for many clients and advisors alike, twice as many times prior to 2018.

Here’s how we got here, what’s going on now, when will it end and finally, some perspective.

How we got here:

• March 2020, Covid hits and the world economy shuts down
• Central banks around the world cut interest rates to basically zero (negative rates in some places) and start sending money to those who need it (and some who didn’t). Think CERB.
• They did this to avoid an economic catastrophe which many experts viewed as necessary and ultimately a success
• Potential consequence of free money is higher inflation
• Think about it – many people improved their financial position during Covid and want to spend, however the factories making the products were not fully back online yet
• Therefore demand exceeds supply and prices increase (i.e. inflation)
• It was believed that inflation would be temporary and supply would eventually catch up, however in late 2021, Fed Chairman Powell indicated that elevated inflation may be with us for longer
• To avoid hyperinflation (prices getting out of control), you must raise interest rates which causes the cost of borrowing to go up and therefore keeps a lid on spending
• Powell’s comments suggested that in order to combat inflation, the Federal Reserve may begin pulling money out of the economy and raising rates at a faster pace
• This led to the first wave of selling in the high priced speculative technology stocks which typically gets hit first
  • WHY: higher interest rates means higher future costs for companies, which means the price you’re willing to pay today for the future earnings is now lower.

What’s going on now:

• It’s now early 2022 and we’re headed in the right direction as it relates to Covid, however inflation is soaring to levels not seen in 4 decades
• At this point, the general consensus from market experts is that inflation, although elevated, will moderate towards the end of the year as supply chain disruptions resolve
• Therefore, 3 interest rates increases were expected in 2022 to tame inflation
• What comes next – the war in Ukraine + China Covid shutdown
• Ukraine conflict puts pressure on energy and food markets (think of the price of gas) and China Covid shutdown means factories and ports remain closed
• Therefore inflation to remain elevated for longer
• As a result 3 interest rate increases is no longer sufficient to fight inflation, we are now expecting 8-10 hikes
• This change from 3-10 has caused much of the volatility and re-priced both stocks and bonds downward
• WHY: Again even higher rates means even higher future costs, therefore the price I’m willing to pay today for the future earnings of a company is even lower
• Most recently companies like Walmart and Target earnings missed expectations citing inflationary issues including higher wages, freight costs and supply chain issues

When markets will stabilize:

• When inflation is under control and interest rates normalize

Main takeaways:

• Inflation and the repricing of the Fed’s expected interest rate policy path is the main driver of markets
• Inflation will moderate
• There is nowhere to hide – stocks are down, bonds are down, cash underperforms inflation
• The 8-10 interest rate hikes are already priced into the market, therefore the majority of pain in fixed income is behind us
• Soon your high interest savings account, your GIC, your bond will actually earn you a return (short term pain for long term gain)
• Inflation and interest rates are normal mechanics of markets
• Interest rates have been accommodative for the better part of 10 years (at some point, rates must increase)
• 2019 – the opposite occurred, decreasing rates which boosted stocks and bonds

Perspective:

• 2019 to 2021 were fantastic years for investment returns
• Every bear market (drop of 20%+) has marked a tremendous buying opportunity
• There have been 15 bear markets since 1950 with an average downturn of 30%, lasting just under a year to reach the bottom. It takes a little more than one-and-a-half years to break even (i.e. this doesn’t last forever)
• Looking at the past 75 years, average bull market has lasted 8.6 years vs bear market which lasted an average of 1 year
• Average 1 year return after bear market = 54.3%
• Average 3 year return after a bear market = 88.6%
• Average 5 year return after a bear market = 132.3%

We all know it’s not about timing the market, but instead time in the market.

Our advice – stay away the from the day to day noise, zoom out and think of the big picture and connect with us if you have any questions or concerns.

Finally, we are hosting a virtual event with Drummond Brodeur, Portfolio Manager and Global Strategist at CI Global Asset Management on June 8^th at 3:00pm. If you’re interested in attending, let me know.

On behalf of Surround Wealth Advisors,

Adil Mohammed, CFP®, CIM®, FCSI®
Wealth Advisor
Assante Financial Management Ltd.