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November Newsletter: Climbing the Wall of Worry or just scaling a Chimney?  Thumbnail

November Newsletter: Climbing the Wall of Worry or just scaling a Chimney?

By Scott Blair

At time of writing, all North American equity markets are reaching all time highs. Very exciting and yet for some, worrying.  We seem to have been taught over time “What goes up, must come down”.  Our psyche seems to work that way.  We have seen a long upcycle in equities, five years or more.  The natural question is “how high can this go?”.  A tree doesn’t grow to the sky. The equity markets, particularly here in North America seem to defy that logic. The TINA trade (There Is No Alternative to equities), continues.

Let’s review the inputs:

  1. Globally, countries around the world have committed to massive infrastructure projects. 
  2. These projects all take commodities to build: copper, aluminum, iron, silver and so on.   As a result, it appears we are commencing a commodities super cycle. The price of all these commodities, including oil, continue to reach all time highs. Look at copper as likely the best example. 
  3. Interest rates continue at very low rates, promoting investment.
  4. Inflation is rising, which may or may not be transitional.
  5. Unemployment continues to decline as we recover. More people have jobs and are therefore willing to spend. 

As we know, at any given time there will be media headlines which are meant to sensationalize an event or events and therefore sell subscriptions. No one is going to read articles that continually start of with “Things will likely be OK.”

Let’s review the current laundry list of headlines which are intended to draw eyeballs.

  • Inflation is no longer just transitory but will persist in being higher for longer. 
    • The response from those we believe are wise on the subject is that inflation will likely persist for a bit longer but from it’s current 4.5% should return to a pre-pandemic 2% by Q3 or Q4 of 2022.
  • Supply chain blockages will persist and add to higher long-term inflation. 
    • Again, the more enlightened seem to agree that supply chains will normalize and demand will be reduced within a year or two. 
  • The price of oil is crippling now and will continue to get worse. 
    • The old expression here is “high oil prices solve high oil prices” or in other words as the prices go up, consumption and demand go down, inventories go back up and voila, lower oil prices. 
  • The stock market is at all time highs and can’t go higher.
    • True, markets are at highs but companies continue to report higher than expected earnings.  Earnings drive stock prices. Here is a simplified analogy to make the point. Let’s say there were two machines that spit out nickels and they were both worth $100.  If one of them started spitting out dimes would it be worth more? 

Our position is that despite the wall of worry, and given what we know, we believe that equity markets will be higher between now and year end (yes, maybe a Santa Claus rally) and into next year. Bonds, not so much, which is why we look for alternatives such as structured notes and bond funds using a wide variety of strategies.  So yes HO HO HO we believe in TINA.

 

Want to discuss the festive season ahead? Have questions about our market review? Give us a call.