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  • Roger Banks, RRC

Take market timing OUT of the equation.

I hope all is well as we head into the summer weather. Here is a market update from the Capital Markets Team at Manulife. I wanted to share this with you as I find they do a great job of bringing clarity and explaining sentiment and fundamentals in a very easy-to-understand manner. The key takeaway is to stay invested and take market timing out of the equation. Hold a balanced portfolio with strong dividend-paying companies... and that a real recession where unemployment skyrockets is an unlikely outcome for this year.





For your review:


According to retail brokers Charles Schwab and Interactive Brokers, U.S. retail investors' cash as a percentage of assets under management reached nearly 12% in the month of April. History has shown us that trying to time the markets does not work. Making a decision to go to cash in your investments is actually two decisions, not one. It also requires the decision to get back in the markets in order to get back on the path to your goal.

When we ask investors, “What’s holding you back from allocating into this correction?,” the answer we hear most often is that “We’re waiting for more clarity on the Federal Reserve, China’s zero covid policy response, and inflation.” … to which we respond, “Aren’t we all?!”

Last week’s United States Consumer Price Index will no doubt add to the paralysis. Although inflation has remained stubbornly persistent in the near term, our view hasn’t changed over the medium term. In our inflation model, when we input oil at $115/bbl, wage growth at 5% per annum, owner’s equivalent rent at 4.5%, and the US Dollar Index (DXY) at 95, our inflation model indicates that inflation will trend towards 4% as we end the year and fall below 3% next year. What also hasn’t changed is our expectation of a 50-basis-point increase by the U.S. Federal Reserve in each of the next two meetings. We still believe they won’t be as aggressive afterwards to see the effects of rate increases. While recession risks have increased since the start of the year, we believe a “real recession,” where unemployment skyrockets, remains unlikely in 2022.

Once we have complete clarity on these challenges, markets will have likely rallied, leaving investors behind. Think back to several weeks ago, while it was too early to call the rally a pivot in sentiment, it does highlight how quickly markets can move. The S&P 500 Index was up nearly 9% over a six-day period, as less hawkish commentary from a few U.S. Federal Reserve Governors, China reopening, and good earnings supported positive investor sentiment.

Investing is a probability-based decision,

and the odds are overwhelmingly in investor’s favour in bear markets.


As we’ve highlighted before, we believe:

  • market expectations of the Federal Reserve’s rate path are too aggressive in a slowing economy and they’ll need to soften their hawkish tone

  • although China’s closing of major cities will likely extend supply chain disruptions, the recent opening of Shanghai and Beijing, in addition to new stimulus, should be a positive for global growth in the second half of the year

  • inflation is likely plateauing—as evidenced by April’s Personal Consumption Expenditures Price Index inflation data, which grew at its slowest pace in a year and a half.

We believe these factors will be supportive of stronger equity and fixed-income markets for the second half of the year. And once investor sentiment shifts, the “cash on the sidelines” is likely to act as a tailwind. What do we like in this environment? Our top three investment ideas are:

  • high-quality dividend growers

  • U.S. mid-caps

  • dollar-cost averaging (DCA).

When we’re in the middle of a major selloff, it’s easy to forget one’s plan. But those investors who stick to the plan, despite getting a little roughed up, often benefit in the long term.


Below is a link to a great article about holding High-quality dividend growers:


https://www.manulifeim.com/retail/ca/en/viewpoints/capital-markets-strategy/dull-boring-repetitive-the-investment-case-for-high-quality-dividend-growers


Please reach out to us with your questions

We are here for you and always happy to help!


Best Regards,

roger

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