Everyone that we have met with in recent weeks has echoed exactly what we at the Pyle Group have been thinking. What happened to our wishes this time last year, that the 2021 holiday season would be more festive and less stressful? The re-emergence of market volatility this month and the arrival of a new Covid-19 variant has led to despair for many, especially those who had hoped to finally have a larger family gathering. Some feel the mental fatigue even more so than last year, especially as we are inundated with headlines of how fast Omicron is spreading and restrictive measures are being put back in place. It’s easy to become pessimistic on the outlook, which is why I thought I would spend our last newsletter of 2021 focusing on the positive side of things.

 

There are some interesting similarities between current developments and what was happening this time last year. On December 24, 2020, the US suspended travel from the UK without negative tests because of a new variant that had emerged in that country. Like Omicron it was seen to spread faster and had the potential to counter therapies available at the time. It did lead to the wave we saw going into 2021, but the curve was flattening out by March. Some believe this current surge will flatten out sooner, for a few reasons.

 

 

Let’s begin with the obvious – vaccinations. This time last year shots were not even available to the general population. Even by February, only 1% of Canadians had received two doses. As of this week, that number is 77% and over 80% of the eligible population have received at least two vaccinations. There are still huge gaps in vulnerable parts of the world, but we are moving in the right direction. Therapeutic coverage is also moving in the right direction and, on Wednesday, US regulators announced that they are giving emergency authorization for the use of Pfizer’s Covid-19 pill, called Paxlovid. In a clinical trial, the pill was shown to reduce hospitalizations for high-risk patients by 89%.

 

 

While the efficacy of vaccines has slipped with this new variant, the rollout of boosters is going to enhance immunity and that leads to one important difference between today and the holiday season of a year ago – the rate of change in deaths from the virus. Based on data, the daily increase in global deaths due to Covid-19 fell to 2,950 today, which is the lowest since May 2020. The 7-day average is down below 6,100 for the first time since October 2020. Continued expansion in global vaccinations and therapeutics should continue to push that average lower. That said, we know this won’t be the last variant, but if the severity of future mutations trends lower, then this has important implications for the economic and market outlook.

 

As I commented on our last conference call of the year (playback details can be found at the end of the commentary), economists are predicting that any reintroduction of social distancing measures and travel curbs won’t last long enough or be intensive enough to significantly affect economic activity over the near-term. The annual pace of growth is forecast to slow in 2022, but after the strong performance this year, we are still talking about solid numbers. For the US, economists expect GDP to growth by 3.9% and Canadian GDP growth is seen coming in at 4%. Note, the 2022 Bloomberg consensus forecast for Canadian GDP hasn’t changed much since the first quarter, when we saw it jump. That was the reaction by economists to a bending of the winter covid wave and introduction of vaccines.

 

 

Inflation should moderate over the course of next year, but the annual average won’t be that far off what we saw in 2021. For example, Canadian CPI inflation is predicted to actually come in higher at 3.5% for 2022 – a tenth higher than this year – while US inflation is expected to slip marginally to 4.4%. What that means is that nominal economic growth should remain buoyant next year and that supports revenues and potentially earnings.

 

This underscores why stocks have been able to bounce back twice this month after initial reactions to virus or inflation headlines. At the time of writing, North American stocks were up for a third straight session, with some of the major indices potentially moving to new record highs before year-end. For the S&P500, there has been strong resistance up in the 4700 area so a sustained break before the New Year would be bullish, especially if supported by more positive news on the covid front. The TSX is still about 3% off its record highs, set back in November; but should feed off any positive momentum in the US.

 

 

It’s important for investors to step back and recognize that, with all the challenges of 2021, North American equities still looked to finish with gains in the 20% neighbourhood. It will be hard to duplicate that in 2022, however, based on continued economic growth and a moderate tightening in monetary policy, we could see a 5-7% net gain in the TSX for the year (which would get us into a 22,100 to 22,500 range). Factoring in dividends could suggest a total return of 7-9%, which wouldn’t be too bad. The flipside is that I expect volatility to run higher next year as we transition from one set of dominant risks attached to the virus to another set relating to the direction of interest rates and the US mid-term elections.

 

At the end of the day, the task at hand is to stay diligent and safe and to enjoy our times with loved ones this season, either physically in a responsible setting or virtually. I think we also need to stay focused on the positives and to help those who are feeling the mental strain of recent developments. On behalf of the entire Pyle Group, I want to wish all of you the best of the season and a very Happy New Year. The Weekly Capital Strategy will return On January 7th.

 

Pyle Group conference call playback details:

Toll-free dial-in number (Canada/US): 1-800-408-3053

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