As we enter the last quarter of 2022, investors are trying to find a peace of mind solution for their life savings.
Stocks and bonds for the most part landed in the red for the entire year.
Balanced investors who normally are sheltered from such high volatility, felt the squeeze as negative returns reached double digits in 2022.
We witnessed soaring food, gas and energy prices.
Europe is facing a crisis where the cost of electricity is now 10 times higher than their average level over the past decade.
You have supply chain shocks, Ukraine, Russia, China and the United States conflicts and chip shortages.
The job market is overheating. You would need to go back 50 years to find a 3.5% unemployment rate. (United States)
Inflation proved to be here longer than expected hence monetary tightening from the Federal Reserve and the Bank of Canada. This means servicing debt including your mortgage will cost you more.
Disposable income seems to be reducing at a rapid pace and since the stock market is a forward thinking indicator, current stock and bond prices might already have these bearish factors baked in the economy cake.
The Oversimplified Narrative
As central banks across the world attempt to use interest rates to reduce inflation, consumers who are highly leveraged, meaning they hold high levels of debt are discouraged from adding more debt to their personal balance sheets. Conversely, these consumers are now incentivized to pay down their debt rather than continue to consume or spend new dollars in the economy. If companies, suppliers, and merchants are unable to sell more goods and services, they may be left with unwanted inventories and therefore may offer significant discounts to unload their products. Lower prices for goods and services can result in lower net revenues or even margin compressions.
Lower revenues and tighter margins on goods and services has been a signal for investors to take money off the table or reduce their convictions. Even well managed companies with billions of dollars of cash on their balance sheets felt the negative impact.
What does this mean for investors?
If the economy can expand in a rising interest rate environment and employment remains strong, this could be viewed as an indicator that a rebound might be closer than we think. Other factors including conflicts, supply chain disruptions and chip shortages also need to be assessed however a buying momentum could be triggered anyway by market participants.
If consumers cannot handle higher interest rates and the job market reverses its current course, we could experience a longer period of ups and downs in the market. Although this scenario is not comforting, investors may want to consider decreasing their exposure to public markets and instead add private holdings to their asset mix.
Why?
Buying real assets during times of high inflation can be rewarding since costs are passed down to users. Infrastructure projects including 5G networks, real estate, tolls, or airports are just a few examples of real assets.
Real assets tend to have predictable and steady cash-flow streams supported by regulated or contractual revenues and attractive operating margins.
Long Term Investor Advantage
For investors with longer time horizons and strong savings capabilities might not realize the advantage they have in front of them.
Today, I see many well managed companies trade at significant discounts some as much as 70% lower than their 52-week high stock prices.
If you’re an investor with the capabilities to add to new funds to your portfolio when stocks and bonds are significant down, this is your advantage. Investing in Amazon for the last 25 years is a great example of this point.
Was Amazon’s 25 year holding period a smooth ride? Absolutely not.
If we go back to 1997, at one point, Amazon lost more than 90% of its value. But long-term investors still got rich.*
How rich? A $10,000 investment made in Amazon on August 25th, 1997, would be worth $19 million dollars today. *
What is this week’s takeaway?
Investors should pay close attention to the reaction of rising interest rates and employment numbers.
If the economy can expand during a rising interest rate environment, the markets could enter into a recovery cycle.
If rising interest rates reduces growth and higher inflation is with us for a longer period, incorporating private investments such as real assets may lower the overall risk factors associated to your portfolio.
For investors who have strong savings capabilities, adding more dried powder (new funds) to your portfolio can make real difference.
Begin by parking new funds into your investment account for future buy orders or you can start buying price dips with ad hoc purchases. In other words, average down on your existing holdings by adding more shares at sharp discounted prices.
Remember, whenever the recovery cycle begins, missed opportunities will probably hurt more than unrealized losses.
Let’s have a strong quarter and end the year on a positive note.
Talk soon,
Michael Zagari, FCSI, CIM, CIWM
Associate Portfolio Manager with Mandeville Private Client Inc.
Financial Security Advisor with Zagari + Simpson
Disclaimer:
*Source of data: Y-Charts on August 25th, 2022.
This publication contains the opinion of the writer. The information contained herein was obtained from sources believed to be reliable, but no representation or warranty, express or implied, is made by the writer, Mandeville or any other person as to its accuracy, completeness or correctness. The information is for informational purposes only and is not intended to constitute investment, financial, legal, tax or accounting advice. Many factors unknown to us may affect the applicability of any statement or comment made in this publication to your particular circumstances. Hence, you should not rely on the information in this publication for investment, financial, legal tax or accounting advice. You should consult your financial advisor or other professionals before acting on any information in this communication.
Insurances: Insurance products and services are offered by Mandeville Advisors licensed as life agents through Zagari, Simpson & Associates Inc. Your Mandeville Advisor will ensure you understand which company you are dealing with for the products and services offered to you.
IIROC and CIPF Membership: Mandeville Private Client Inc. is a member of the Investment Industry Regulatory Organization of Canada and a member of the Canadian Investor Protection Fund.
*On May 15th, 1997, the offering price for Amazon shares was $18 per share. Between May 15th, 1997, and September 28th, 2001, Amazon share price declined by 94.43%. If an investor made an investment in Amazon of $10,000 on May 15th, 1997, and held this investment until August 25 ,2022, the investor’s total return growth would be worth approximately $19 million dollars.
I do hold a beneficial long position in the shares of AZMN either through stock ownership, options, or other derivatives. I wrote this publication myself, and it expresses my own opinions. I am not receiving compensation for it. I have no business relationship with any company whose stock is mentioned in this article.
2022 / Q4 Commentary: The State of the Global Economy & Portfolio Tips
As we enter the last quarter of 2022, investors are trying to find a peace of mind solution for their life savings.
Stocks and bonds for the most part landed in the red for the entire year.
Balanced investors who normally are sheltered from such high volatility, felt the squeeze as negative returns reached double digits in 2022.
We witnessed soaring food, gas and energy prices.
Europe is facing a crisis where the cost of electricity is now 10 times higher than their average level over the past decade.
You have supply chain shocks, Ukraine, Russia, China and the United States conflicts and chip shortages.
The job market is overheating. You would need to go back 50 years to find a 3.5% unemployment rate. (United States)
Inflation proved to be here longer than expected hence monetary tightening from the Federal Reserve and the Bank of Canada. This means servicing debt including your mortgage will cost you more.
Disposable income seems to be reducing at a rapid pace and since the stock market is a forward thinking indicator, current stock and bond prices might already have these bearish factors baked in the economy cake.
The Oversimplified Narrative
As central banks across the world attempt to use interest rates to reduce inflation, consumers who are highly leveraged, meaning they hold high levels of debt are discouraged from adding more debt to their personal balance sheets. Conversely, these consumers are now incentivized to pay down their debt rather than continue to consume or spend new dollars in the economy. If companies, suppliers, and merchants are unable to sell more goods and services, they may be left with unwanted inventories and therefore may offer significant discounts to unload their products. Lower prices for goods and services can result in lower net revenues or even margin compressions.
Lower revenues and tighter margins on goods and services has been a signal for investors to take money off the table or reduce their convictions. Even well managed companies with billions of dollars of cash on their balance sheets felt the negative impact.
What does this mean for investors?
If the economy can expand in a rising interest rate environment and employment remains strong, this could be viewed as an indicator that a rebound might be closer than we think. Other factors including conflicts, supply chain disruptions and chip shortages also need to be assessed however a buying momentum could be triggered anyway by market participants.
If consumers cannot handle higher interest rates and the job market reverses its current course, we could experience a longer period of ups and downs in the market. Although this scenario is not comforting, investors may want to consider decreasing their exposure to public markets and instead add private holdings to their asset mix.
Why?
Buying real assets during times of high inflation can be rewarding since costs are passed down to users. Infrastructure projects including 5G networks, real estate, tolls, or airports are just a few examples of real assets.
Real assets tend to have predictable and steady cash-flow streams supported by regulated or contractual revenues and attractive operating margins.
Long Term Investor Advantage
For investors with longer time horizons and strong savings capabilities might not realize the advantage they have in front of them.
Today, I see many well managed companies trade at significant discounts some as much as 70% lower than their 52-week high stock prices.
If you’re an investor with the capabilities to add to new funds to your portfolio when stocks and bonds are significant down, this is your advantage. Investing in Amazon for the last 25 years is a great example of this point.
Was Amazon’s 25 year holding period a smooth ride? Absolutely not.
If we go back to 1997, at one point, Amazon lost more than 90% of its value. But long-term investors still got rich.*
How rich? A $10,000 investment made in Amazon on August 25th, 1997, would be worth $19 million dollars today. *
What is this week’s takeaway?
Investors should pay close attention to the reaction of rising interest rates and employment numbers.
If the economy can expand during a rising interest rate environment, the markets could enter into a recovery cycle.
If rising interest rates reduces growth and higher inflation is with us for a longer period, incorporating private investments such as real assets may lower the overall risk factors associated to your portfolio.
For investors who have strong savings capabilities, adding more dried powder (new funds) to your portfolio can make real difference.
Begin by parking new funds into your investment account for future buy orders or you can start buying price dips with ad hoc purchases. In other words, average down on your existing holdings by adding more shares at sharp discounted prices.
Remember, whenever the recovery cycle begins, missed opportunities will probably hurt more than unrealized losses.
Let’s have a strong quarter and end the year on a positive note.
Talk soon,
Michael Zagari, FCSI, CIM, CIWM
Associate Portfolio Manager with Mandeville Private Client Inc.
Financial Security Advisor with Zagari + Simpson
Disclaimer:
*Source of data: Y-Charts on August 25th, 2022.
This publication contains the opinion of the writer. The information contained herein was obtained from sources believed to be reliable, but no representation or warranty, express or implied, is made by the writer, Mandeville or any other person as to its accuracy, completeness or correctness. The information is for informational purposes only and is not intended to constitute investment, financial, legal, tax or accounting advice. Many factors unknown to us may affect the applicability of any statement or comment made in this publication to your particular circumstances. Hence, you should not rely on the information in this publication for investment, financial, legal tax or accounting advice. You should consult your financial advisor or other professionals before acting on any information in this communication.
Insurances: Insurance products and services are offered by Mandeville Advisors licensed as life agents through Zagari, Simpson & Associates Inc. Your Mandeville Advisor will ensure you understand which company you are dealing with for the products and services offered to you.
IIROC and CIPF Membership: Mandeville Private Client Inc. is a member of the Investment Industry Regulatory Organization of Canada and a member of the Canadian Investor Protection Fund.
*On May 15th, 1997, the offering price for Amazon shares was $18 per share. Between May 15th, 1997, and September 28th, 2001, Amazon share price declined by 94.43%. If an investor made an investment in Amazon of $10,000 on May 15th, 1997, and held this investment until August 25 ,2022, the investor’s total return growth would be worth approximately $19 million dollars.
I do hold a beneficial long position in the shares of AZMN either through stock ownership, options, or other derivatives. I wrote this publication myself, and it expresses my own opinions. I am not receiving compensation for it. I have no business relationship with any company whose stock is mentioned in this article.
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