Christmas Eve is just a week away. A time of celebration, frantic last-minute wrapping and food preparations; but this time last year, things were not “normal", and we wondered whether the new socially distanced way of ringing in the holidays would disappear come the next season. A few weeks ago, many of us thought that would be the case. Larger and larger gatherings were taking place, family members were vaccinated, and it seemed as though “normal” was coming back from its hibernation. The Omicron variant has, for now, turned that view of normalcy around.

 

In the space of just a few weeks, the world has gone from ignorance of a new COVID-19 variant to a re-awakening. We are still devoid of substantive analysis on this variant or vaccine efficacy; however, the early examination of Omicron – that is spreads faster – has been born out by its proliferation around the world. This song has, of course, been played before and the government and corporate responses were to be expected. Canada has suggested people not engage in non-essential foreign travel. Regional governments are imposing limits on gatherings and a multitude of companies have now pushed back plans to bring individuals back to the workplace. We are not yet at the place we were at the start of last year, when businesses went back into restrictive mode (strict limits on customers in retail establishments or curbside pick-up), but that too could change in the coming weeks.

 

 

Ally and I have commented in the past several weeks that the two things that could create the conditions for a severe equity market setback (like 20% or more) would be a variant that leads to major economic restrictions or a faster pace of rate hikes by central banks. Neither seemed to carry a high degree of probability, but we were always more comfortable with the odds on the central banks. True, the Bank of England surprised everyone on Thursday by being the first developed central bank to raise its official rate target. And the Bank of Canada and Federal Reserve have signaled an intent to move rates higher over the course of at least the next two years. Yet, none of the revelations expressed by these banks suggest that a kneejerk substantial rate increase is imminent.

 

The virus, on the other hand, has the benefit of being totally unpredictable. A variant shows up that is more virulent, but does it lead to a sharp mortality rate? Is it severe enough to cause policies to tighten to a point where the economic recovery is halted? The truth is, we don’t know. What we do know is that we are in a better position today than a year ago. Going into the holiday season in 2020, none of us were vaccinated. Today, many of our clients and colleagues have received or are getting their third shot. Young Canadians are vaccinated and those 18+ can get a booster. None of this means we skate through another wave of this hideous virus unrattled; but it does mean we have a stronger base of insulation against severe effects.

 

 

Let’s play this back to portfolio decisions. I will comment on 2021 and the outlook for 2022 in next Tuesday’s conference call (details will be emailed out on Monday); but for a year that started with an insurrection in Washington and saw supply chain bottlenecks, soaring inflation and two variants – things don’t look too bad at the finish line. The S&P500 is up about 24% and the TSX has gained roughly 19%. Double-digit gains have also been seen across Europe and the only real disappointment has been in Asia – notably China and Hong Kong, but also Japan.

 

 

The government bond market in North America has suffered, but a net increase of about half a percent in the US 10yr bond yield is hardly a major move against the backdrop of strong economic growth, inflation rates that are more than double central bank targets and sharp gains in stocks (not to mention, the yield is below its peak of over 1.7% set back in the Spring). True, mortgage rates have ticked higher in the US, but closed to 2% under the levels we saw in late 2018. And, even if the Fed or Bank of Canada had a complete lapse of reason and hiked rates early in 2022, longer-term bond yields would likely remain relatively subdued. The reason is that the market would extrapolate aggressive monetary tightening into weaker economic demand.

 

In our increasingly high frequency world, it is easy to get caught up in the day to day and hour to hour gyrations in the news flow and market valuations. As hard as it might be these days, investors really do need to focus on the long-term. Yes, even if you just retired or converted your RRSP to a RRIF this year, there is still a long road ahead. And for our younger clients, well the 50yr chart of the S&P500 is instructive. Not blindly instructive mind you.

 

 

There were a lot of amazing things going on in the last 3-4 decades that helped make the chart look the way it does. And, sadly, some of those things won’t be there over the next 3-4 decades (like declining interest rates, 10% plus annual growth from China, etc.). Still, even in the decades leading up to the roaring 80s and 90s, equity markets stumbled, but then recovered. Some think COVID-19 has changed everything, that we are going back into a period of high inflation, soaring interest rates and a period of stagnation like the 1970s. Possibly, and that decade was a rollercoaster ride to be sure, with the S&P gaining roughly 10% over the ten years. Still, the market still went up. And, with higher interest rates, individuals were able to roll into better returning fixed income securities.

 

Bottom line, we have more to worry about this season than we thought we would have had to a year ago. The number one thing is that we have our health and healthy loved ones around us. Second, we have our wealth, whatever number of digits follow the dollar sign. Keeping and improving on both can happen, even with another holiday season spent in this pandemic, provided we stay educated, mindful and plan.