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Updated: Jan 28, 2022

Financial market trends and strategies for the year ahead and beyond.

Where We've Been

There is no denying the stock market, house prices, and some durable goods have been on an astonishing bull run since the bottom of the Great Recession in 2008.

The shock and government stimulus that followed the housing market crash accelerated the Baby Boomers' shift from consumption to retirement savings orientation. The pro-active stimulus by the Bank of Canada and the US Federal Reserve Banks had only just begun to unwind when the Covid-19 virus struck almost 13 years later.

Stock markets plummeted when money managers recognized the gravity of the pandemic, most indexes reached the bottom on March 20, 2020, down -30% from the peak a month earlier. But there is a proverb in financial circles, "Don't fight the Fed," which means when the US Federal Reserve Bank (or the Bank of Canada) decides to raise or lower interest rates, stock and bond prices will reliably move in the opposite direction.

This is what happened in late March 2020. Policymakers came forward with significant monetary and fiscal stimulus, lowering interest rates and sending out checks to avoid the global depression, which certainly would have followed. The relative magnitude of the fear policymakers needed to allay is evident from this chart of Household savings rates courtesy of Statistics Canada:

Most of us have come through the pandemic with minor bruising only thanks to policymakers. Houses and financial assets have enjoyed an extended boom. The Canadian Home Price Index is up 15% since March 2020. Nevertheless, household savings rates are still more than double the average of the last 15 years. Is this a good thing? Possibly. Possibly not. But it is certainly different!

Lessons Learned, Lessons Applied

If your crystal ball is cloudy, you are not alone. It's times like these that reinforce the value of the "No-Idea Approach to Investing." We could not reliably anticipate the pandemic, the timing of the mortgage market crash, the policy response to either, the continued tech stock and home price booms etc. in the past, present, or future! That is why and how we have arrived at the Rigden Financial Investment Philosophy, which I encourage you to read here. We have also developed a model portfolio that is designed to provide stability and growth under a variety of financial-economic conditions.

Financial Outlook 2022

Here are a few speculations on trends I expect this year for our mutual amusement:

  • Tech stock boom takes a breather - As you can see from the Model Portfolio table, our tech fund has grown more than 20% for five years running. This has been due, in part to the deliberately lowered interest rate environment and pandemic-related trends. I expect a year of low single digits or slightly negative returns soon. It could be this year, but it looked that way last year too!

  • "Rotation" out of tech stocks into "Defensive" or "Value" Stocks - As we emerge from the pandemic (June 2022?) I expect traditional industries will enjoy a resurgence. Rising rates will hurt them less than the growth (mostly tech) stocks because their profits are more observable and stock prices less dependent upon earnings growth.

  • Inflation rising toward the 5% range - will happen primarily because of the long-overdue rise in wage rates. Historically, employment costs have made up 65% of inflation. Emerging research is showing that it is Baby Boomer retirements causing the labour shortage and driving wage rates higher above other causes. The question is whether the more general inflation will subside in a year or two. That depends on whether this inflation is driven by "Irrational Exhuberance" or global supply chain shocks. The former will push inflation and interest rates higher, the latter not so much. Stay tuned.

  • Rising mortgage rates - The best indication of where mortgage rates are headed is usually where they are because the smart money (big sophisticated money managers) has already voted. Fixed rates, in particular, are determined by the international capital markets. But both fixed and variable mortgage rates are being held down temporarily by central bank policy the world over. I expect variable-rate mortgages to rise from the current 1.35% lowest to the mid 2% range and fixed rates above 3% by year-end, assuming the pandemic recedes. We shall see.

So What is a "No-Idea" Investor to do at the beginning of 2022?

  • Review your financial situation - to ensure your asset allocation percentages reflect an appropriate balance between your risk tolerance, needs and goals.

  • Rebalance your portfolio - It might make sense to plow some of the gains from cyclically high asset classes (tech stocks) into some of the cyclically lower (Global Dividend and Conservative balanced funds) if the asset allocation has become materially skewed. This may have some tax implications and slow long-term growth, but it will increase stability, theoretically. This is particularly helpful for those reliant on regular income from their holdings.

  • Nervous Variable Rate Mortgage Holders - Reflect on your ability to withstand several rate hikes. I think variable rates will continue to be financially superior from here, but I could be wrong and if you are nervous, it may be better to lock in a fixed mortgage rate now vs. hesitating until after rates have risen more. Let's discuss your options.

  • Committed Variable Rate Mortgage Holders - If you are comfortable riding out a few rate hikes per year over the next couple of years, then the only thing to do is make sure you have the deepest discount to prime. If your variable rate mortgage discount to the prime rate is not very deep, or if you have higher interest debts to consolidate, we should do the math to see how much you would save by refinancing to the current historically low variable rates. This is an apples-to-apples comparison in most cases, meaning the potential costs/benefits to make a change are clear. We have a spreadsheet that can be used to estimate the net gain or loss to making such a move net of penalties and closing costs.

  • Fixed-Rate Mortgage Holders - The interest rate differential penalties may remove the most apparent gains from doing a refinance. But if you are carrying higher interest debts and/or considering a shift to the variable side, we can do the math using the same spreadsheet mentioned above to estimate the potential gain or loss of refinancing based on certain assumptions.

  • Set-up Financial Containers to Match your Needs and goals - The most important step toward financial security after making a plan is implementing it! Once your financial plan is made, and the accounts are open, time is on your side. Let's talk!

  • Some Applications have become much more accessible - Mortgage Applications, RRSPs, TFSAs, RESPs, and RRIFs all have secure online application platforms now with electronic signatures. It's also possible to set up direct contributions to your investment accounts through your bank account. Ask me how.

Every Rigden Financial mortgage, investment, or insurance client is entitled to a free financial plan and regular reviews. All you need to do is ask. Click here to see my appointment calendar for a new plan or review. Let's get started!

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