Thoughts On The Year Ahead

The primary theme of 2022 (in the financial world) was high and rising inflation, which led to rapidly increasing interest rates, and sizeable declines in the values of both stocks and bonds. The first half of the year was worse, with stocks and bonds declining month after month with little to no reprieve. Markets stabilized in the second half of the year, moving in more of a "sideways" range as some decent rallies emerged to offset further declines, amid hopes that inflation was peaking.

2023 has started off as nearly a mirror image of 2022: most stocks indexes are higher through the first two months of the year as inflation has started trending lower, and a possible recession is creating the potential for interest rates to start coming down later this year or early next year.

A positive start to the year doesn't mean we are out of the woods yet, as we haven't fully seen the effects of higher interest rates on the economy, and there are signs we are early into an economic slowdown.

The big question for 2023 seems to be: Will there be a recession, and if there is one, how bad will it be?

If the economy goes into a recession, it will quite likely help bring inflation numbers down (some components of inflation could even turn negative on a year-over-year basis), and could lead to rate cuts sooner than later. This could turn out to be a positive for the markets, as long as it is not too severe of a recession and profits don't decline too significantly. However, a more severe recession could trigger another move to lower lows in the markets, especially if job losses start to add up. This is where central banks need to be cautious with how much more and how quickly they raise interest rates, as they could turn a managed slowdown into a severe recession if they're too aggressive.

Caution is likely warranted for first half of the year as we see what upcoming data on inflation, corporate profits, and the labour market reveals about the state of the economy. Any resurgence in inflation data would likely lead to expectations of interest rates going higher than previously anticipated, which could put further downward pressure on markets. However, we could currently be seeing a good buying opportunity with markets still near a relatively low point and having established “support” levels over the past 6 months and the possible peak in interest rates within sight, as long as inflation keeps trending lower.

Unlike the first half of 2022, things no longer seem to be getting worse month after month. But, it’s just too early to know if things are actually starting to get better, or if we'll be dealing with a new set of worries if the economy goes into a recession. Aside from a recession, there are several other risks and factors that could affect the markets as the rest of the year plays out. Some of these are:

-The price of oil: China moving away from their “zero-COVID” pandemic policy and reopening their economy should add to oil demand and could push prices (and possibly inflation and interest rates) higher. This could be offset by lower oil demand in other parts of the world (North America and Europe), should a recession unfold there.

-War: as Russia’s invasion of Ukraine enters its second year, will some type of ceasefire or peaceful resolution be reached, or will the conflict escalate and possibly involve additional countries? Will we see a new conflict arise if China attempts to invade Taiwan?

While there are certainly factors to be concerned about, keep in mind stock markets usually react about 6 months ahead of the economy. So, if you're on the sidelines waiting for inflation and interest rates to start coming down, the economy to start accelerating again, or geopolitical risks to be resolved before investing, the markets could likely be much higher by the time any of those happen.

Unfortunately, I can't tell you whether the markets will be higher or lower by the end of the year. However, I can tell you to expect uncertainty in the world and for it to create volatility in the markets. This is nothing new. Don't panic if the markets go through another sell-off, as it can be an opportunity if you are prepared for it.

If there are any lessons investors learned in 2022 that should be remembered going forward (and potentially applied to their portfolios), it’s that traditional portfolios of stocks and bonds may not offer sufficient diversification, and alternative assets and investment strategies can help to minimize volatility and reduce downside risk. Yes, even the “Select Portfolios” that hold 10-12 (or more) different mutual funds within them aren’t as truly as diversified as they claim to be, if they’re just holding traditional stock and bond funds within them. While stocks and bonds both suffered large losses last year, there were several alternative asset classes and strategies that held up rather well, or even posted positive returns. If you are interested in learning more about alternative investments and if they would be a good addition to your portfolio, I would be happy to discuss some of these options with you (contact me at Dennis.Rubeniuk@Endeavourwealth.ca or 204-318-2663).

- Dennis Rubeniuk, Investment Advisor

Dennis Rubeniuk is an Investment Advisor at Endeavour Wealth Management with iA Private Wealth Inc, an award-winning office as recognized by the Carson Group. Together with his partners he provides comprehensive wealth management planning for business owners, professionals and individual families.

This information has been prepared by Dennis Rubeniuk who is an Investment Advisor for iA Private Wealth Inc. and does not necessarily reflect the opinion of iA Private Wealth. The information contained in this newsletter comes from sources we believe reliable, but we cannot guarantee its accuracy or reliability. The opinions expressed are based on an analysis and interpretation dating from the date of publication and are subject to change without notice. Furthermore, they do not constitute an offer or solicitation to buy or sell any of the securities mentioned. The information contained herein may not apply to all types of investors. The Investment Advisor can open accounts only in the provinces in which they are registered.

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