How did I do in my 2022 assessment in December 2021 “Here Comes 2022” ?
“We can thank governments and central banks for juicing both fiscal and monetary stimulus (foot to the floor on the economic gas pedal) for providing the impetus for most of this. The end result, however has produced asset inflation, price inflation and some hint of wage inflation (beginning to show up) that will create some wicked hangover for financial markets to deal with in 2022 and perhaps beyond.”
“Central banks will likely be raising interest rates (pushing the economic brake pedal) and borrowing costs will take a bite out of the consumer as debt servicing costs escalate. Meanwhile inflation (some argue that it is just a transitory phenomenon, while others see it affecting the psyche of the consumer / household, making it more troublesome) will be an ongoing issue…”
I am hoping that might have brought a little credibility to my perspective. Sorry if I cannot sugarcoat it the way so many advisors attempt to do. Sometimes, however, we need to understand that most advisors just want to paint a purely optimistic future to garner your confidence so that you can be sold on whatever it is that they want you to buy into.
At High Rock we will always endeavor to paint a realistic picture. Indeed this may in fact be one reason why the Globe and Mail’s ROB / Shook research picked High Rock as “Best In Province” in their annual “Canada’s Top Wealth Advisor” rankings. You all can render final judgement.
So what do we expect in 2023?
If you have not had a chance to read Paul’s latest blog Money Supply, Inflation and Rates Have Peaked , it may be a good place to start.
However, the resulting forces of high interest rates have not yet fully impacted the economy. In fact, in their desire to defeat inflationary forces currently in the vicinity of 7%, Central Banks may still have to push rates higher to quash the inflationary psyche that has begun to permeate its way into the consumer’s mind. Don’t forget that their targets for inflation are still 4-5% below the current levels.
There is only one way that this will be rectified and that is through a significant economic slowdown. Once again forgive me for not sugarcoating it, but that is also known as a recession.
The hardest hit will be the household who bought in 2020 or 2021 paying up for over-priced real estate (and in fact pushing prices higher) and borrowing at variable rates slightly above 1%. At the moment their debt servicing costs have tripled! If they were struggling to make payments before, now has to be pretty ugly. In recessions unemployment rates rise. What if these new home owners lose their jobs? How will they cover their debt servicing costs?
Certainly, at best, these consumers will be cutting back on spending. That can’t be good for company earnings, especially in the services sector or technology, travel, consumer durables. I won’t (because forecasting is usually for the optimistic advisor types) begin to predict where stock prices will go on lower earnings, but even with 2022’s price corrections there is still plenty of over-value to current equity markets. Which means everyone should be managing their expectations for the ability of their stock market holdings to give any significant growth in 2023.
Passive balanced portfolios will continue to struggle, although better bond prices should help offset stock market weakness.
Once again, as in 2022, having non-correlated assets (as High Rock does in its Tactical Model and Special Mandate portfolios) will be important to get more growth in a portfolio in order to continue to meet long term growth goals through this next economic period.
As with all recessions, once inflation has been brought back into control, Central Banks will start to ease up on the monetary policy brakes and the cycle will play itself out and a period of growth will return. However, this cycle may take longer than most investors want and / or have the patience for to run its course, so we must also manage our expectations on timing.
So to all who take the time to read my stuff, thank you. I hope that even though I tend to write less these days, the content is of some reasonable value. As always, please be aware (if you are not High Rock clients) that doing it yourself is an option, but if the current situation is giving you sleepless nights, we are always ready to offer some insight that may alleviate this situation. I would suggest that most, if not all High Rock clients have seen their downside well mitigated through 2022. If your portfolio goes down less, it is a great deal easier to play catch up when growth returns.
At High Rock we support the Pinball Clemons Foundation and in leu of cards and gifts at this time of year, donate to their cause: empowering youth through education by bringing them from the margins to the mainstream. If you are looking for a worthy cause to support, perhaps click on the above link and learn a little more about them or perhaps consider giving them some financial support.
Wishing you all the very best of the season and a happy, healthy and prosperous 2023!
