A Rough Start

The market has been weighed down by a host of worries this year. The U.S stock market is having its third worst start to the year in history. Year to date, the tech heavy NASDAQ is down <red>-27.36%<red>, the S&P500 is down <red>-17.44%<red>, while the Canadian TSX index is down <red>-6.67%<red> [1]. The bond markets fared no better, also posting one of their worst performances in history. The Bloomberg US Aggregate Bond index is down <red>-10.87%<red> year-to-date [1].

Reasons for the Decline

Inflation continues to be a top concern. The latest CPI inflation numbers stand at +8.3%, although below the +8.5% high posted in March, it is still uncomfortably high [2].

The Federal Reserve, along with other central banks, have taken drastic action to curb this high inflation. In addition to the 25bps hike in March, the Fed aggressively raised interest rates by 50bps in its latest move. This marks the biggest interest rate hike since May 2000. The Fed also announced measures to reduce its $9T balance sheet. It will start running off $30 billion of treasuries and $17.5 billion on mortgage-backed securities on June 1, and after three months, the cap will increase to $60 billion for treasuries and $35 billion for mortgages [3]. The Canadian central bank also announced a 50bps hike along with its own balance sheet runoff [4] (we talked about the impact such monetary tightening has on the equity and bond markets in our January newsletter).

Meanwhile, the war in Ukraine hovers over market sentiments. The duration and impact of the war remain uncertain. Nonetheless, we are witnessing hits to global economic growth. Russia, together with Ukraine, are major suppliers of oil & gas, metals, wheat, and corn. The prices of these commodities have risen dramatically since the war. The World Bank lowered its global growth forecasts for 2022 by nearly a full percentage point, from 4.1% to 3.2% due to the war [5]. The IMF also cut its global GDP projections for both 2022 and 2023 [5].

Moreover, investors fret over the lockdowns in China. The world’s second largest economy currently faces its worst downward pressure since the spring of 2020. Chinese trade has been affected as lockdowns continue. China’s exports rose +3.9% from a year earlier in April, declining from the +14.7% growth a month earlier [6]. These are of course putting additional strain on the global supply chain.

Reasons to be Optimistic

Despite these headline worries, there are reasons to remain upbeat. The U.S economy and its consumers are still resilient, with card spending buoyant and household finances solid. The household debt service ratio is well below the historic average [7].

The U.S labor market continues to be strong. The U.S unemployment rate is at a low of 3.6%, returning to pre-pandemic levels [8]. Most economists do not forecast a recession as their base case scenario [7]. Furthermore, despite slowing down, business fundamentals are sturdy. The latest earnings call show that U.S corporations grew earnings at a blended rate of +9.1% in Q1 2022 [9]. Moreover, as the central banks raise interest rates and supply chains normalize, inflationary pressures should subside over time. Although there are uncertainties, the Federal Reserve is confident it can bring inflation under control without putting the economy into a recession [10].

Furthermore, the situation in China is improving. The Chinese government has pledged support for its economy through various monetary and fiscal tools [11]. Covid cases in China are also turning a corner. Shanghai is slowly coming out of lockdown with case numbers dwindling daily. The authorities have declared half of Shanghai Covid free [12]. Moreover, China is working to resolve the audit dispute with the U.S, as well as ending the regulatory crackdowns that have hung over Chinese shares for the past year [13]. The U.S is also considering removing Chinese tariffs in a bid to reduce inflationary pressures [14]. These moves should help remove key headwinds from Chinese stocks.

Our Positioning

Overall, we have weathered the market drawdowns in good shape. It is worth noting that some corners of the market have seen much direr declines compared to the rest of the index. For instance, Bitcoin is down -50% from its highs. ARK Innovation ETF is down more than -70% from its all-time highs, and marijuana stock Canopy Growth Corp is down almost -90% from its peak [1]. We have avoided these speculative assets because their intrinsic values are highly uncertain.

Further, we like to remind our clients that our portfolios have a healthy mix of alternative assets that don’t correlate with the current stock and bond declines. These assets have held up well during the drawdown this year and have protected our portfolios. Also, as we’ve mentioned in the past, we believe most of our businesses can thrive in a high inflationary environment, such that they don’t require heavy capital investments and can pass on the price increases to consumers.

Moreover, we have invested in oil & gas companies such as Exxon that benefit from the current geopolitical climate. We note here that we did not buy into Exxon as oil prices started rallying, as most investors have done. Instead, we invested in Exxon in 2020 when oil price was at a cyclical low, and as a result we are now up over +100% on this investment. We also invested in good financial companies such as Bank of America during the depth of the pandemic in 2020. The banks will also do well in this environment of rising interest rates. These are good examples of how we pick stocks. We like to pick stocks with strong fundamentals that are trading at a wide discount to intrinsic value, and we like them even more when everyone else is shunning them, such as at cyclical lows when most people can’t see any hope. We buy all our stocks using a similar philosophy. Despite the market declines bringing the prices of some of our stock holdings down this year, we are optimistic that these businesses will be long term winners that reward the patient investor.

It is helpful to think of Benjamin Graham’s analogy of Mr. Market when you feel bothered by market declines. As Ben Graham pointed out, you can view the market (let’s call him Mr. Market) as your business partner. The catch is that he is manic/depressive. He comes knocking on your door every day, looking to do deals with you. Some days he is in a manic mood, and he offers to sell you his shares in the business at a very high price. Other days, he is depressive, and seeing nothing but trouble, he offers to sell you his shares for a fraction of their worth. The important thing is to not let this manic/depressive Mr. Market tell you what your businesses are worth. Rather, you should have a good idea of what your businesses are worth intrinsically.

You can ignore Mr. Market when his deals are not good (he’ll come back tomorrow). Even better, when he comes at you with great bargains, you can buy from him at a cheap price. As the market drops, we are getting increasingly excited and we’re looking for good long-term investments in businesses trading far below their intrinsic value.

It is also helpful to remember that just as trees don’t grow to the sky, bear markets don’t last forever either. Booms and busts in the market are as common as night and day. We caution investors against pulling money out of the market as it nears a bottom. As market timing is nearly impossible, we believe being patient and staying invested through all market environments are key in getting your fair share of returns. In fact, we do believe that as the market is so bearish right now, it doesn’t take much good news to turn things around.

New Additions to Our Team

We welcome the following new members to our team,

Kevin Haakensen, CIM, FMA, FCSI, CFA

Kevin joined us on April 1, 2022, as a new partner in the firm, working out of our Calgary office.

Kevin is a Portfolio Manager with Clear Sky Private Wealth and helps steer the estate and insurance planning division.

Kevin has been in the industry since 1997 and has a diverse experience in cutting edge tax and insurance structuring, venture stage company investment, personal and corporate planning and Portfolio Management with a focus on alternative asset strategies to diversify portfolios and tame market volatility. His penchant for problem solving and helping people succeed were two of the motivators that steered him towards this profession 25 years ago and are still what drives him today. He has been recognized by Wealth Professional magazine four times as a Top 50 advisor in Canada from 2017 to 2020 as well being named the Portfolio Discretionary Manager of the Year in 2020.

Kevin was raised on a farm and ranch in South Western Saskatchewan and outside of the office loves spending time exploring the great outdoors with his spouse and young daughter, many types of fitness, “chefing” a nice meal, and can be talked into the odd round of golf.

Lyle Harvey, BSc

Lyle joined us on October 1, 2021. Lyle assists Steve Ambeault with financial projections, bookkeeping and tax preparation from our Calgary office. Prior to joining Clear Sky Private Wealth, he worked as a staff accountant for an international accounting firm. Lyle holds a Bachelor of Science degree from McGill University.

Ria Sidhu, BBA

Ria joined us on March 7, 2022. Ria is an administrative assistant in the Edmonton office. Ria graduated from NAIT with a Bachelor of Business administration.

‍

[1] FactSet May 11, 2022, Price Return – End of Trading Day

[2] https://www.bls.gov/cpi/

[3] https://www.cnbc.com/2022/05/04/fed-raises-rates-by-half-a-percentage-point-the-biggest-hike-in-two-decades-to-fightinflation.html

[4] https://www.bankofcanada.ca/2022/04/fad-press-release-2022-04-13/

[5] https://www.cnbc.com/2022/04/21/from-food-to-inflation-the-russia-ukraine-war-has-a-global-impact.html

[6] https://financialpost.com/pmn/business-pmn/chinas-april-exports-grow-3-9-y-y-imports-unchanged

[7] https://www.bloomberg.com/news/articles/2022-04-26/u-s-firms-tout-consumer-strength-despite-growing-recession-talk

[8] https://www.bls.gov/news.release/pdf/empsit.pdf

[9] https://advantage.factset.com/hubfs/Website/Resources%20Section/Research%20Desk/Earnings%20Insight/EarningsInsight_050622.pdf

[10] https://www.investors.com/news/economy/federal-reserve-rate-hikes-expected-as-powell-talks-recession-risk-dow-jones-falls/

[11] https://www.reuters.com/business/china-cbank-pledges-step-up-policy-support-real-economy-2022-05-09/

[12] https://www.reuters.com/world/china/half-shanghai-achieves-zero-covid-city-presses-with-unsustainable-fight-2022-05-11

[13] https://www.ft.com/content/771ada55-2c1f-4145-a069-2c5b3f65aa0e

[14] https://www.cnbc.com/2022/05/10/inflation-biden-says-lowering-prices-is-his-top-economic-priority-.html

‍

‍