Cut the Crap Investing founder Dale Roberts shares financial headlines and offers context for Canadian investors.
It was hard to mess things up in 2021
Happy New Year! And welcome to the first “Making sense of the markets” post for 2022.
Before we go any further, you must catch up (or look back, rather) as I made sense of 2021 in an epic post. As I wrote last week, it is an incredible opportunity I have to write a weekly commentary on the stock and bond markets. It provides a diary for the markets. I enjoyed looking back on all of the top headlines that shaped 2021, then putting together that 3,000-word journey through year two of the pandemic.
It was a year that delivered incredible returns for stocks. Even the much-maligned 60/40 balanced portfolio was up for the task, again. The reports of its death were greatly exaggerated.
An asset returns round-up for 2021
U.S. stocks led the way in 2021, and Canadian stocks were not far behind. Here’s a look at some major indices. Note: These returns do not include dividends.
- S&P 500: +26.9%
- MSCI Taiwan: +25.5%
- TSX Canada +21.7%
- MSCI Switzerland: +18.0%
- MSCI France: +16.9%
- MSCI Russia: +14.9%
- MSCI India: +14.0%
- MSCI United Kingdom: +13.1%
- MSCI Australia: +3.7%
- MSCI Germany: +3.2%
- MSCI Japan: -0.9%
- MSCI South Korea: -9.5%
- MSCI China: -22.5%
- MSCI Brazil: -24.3%
And by regional category.
- MSCI All-World Equity Index: +16.6%
- MSCI All-World ex-US Equity Index: +4.8%
- MSCI EAFE (non-US developed economies): +7.8%
- MSCI Europe: +13.4%
- MSCI Emerging Markets: -5.5%
By sector for U.S. markets. 2021 now has the distinction as the only year in which every sector delivered double-digit gains.
- Energy: +46.4%
- Real Estate: +41.7%
- Commodities +41.3%
- Financials: +32.5%
- Technology: +33.7%
- Consumer Discretionary: +27.6%
- S&P 500: +26.9%
- Materials: +25.2%
- Health Care: +24.2%
- Industrials: +19.5%
- Communication Services: +15.2%
- Consumer Staples: +14.3%
- Utilities: +14.2%
Bitcoin delivered a return of 62%.
In Canada, energy ruled, along with REITs and financials.
From the above you can see that it was hard to go wrong in 2021. A well-diversified, global 60/40 balanced portfolio delivered in the area of 11% in 2021. That’s very solid considering core bond funds were down for the year.
Here’s a look at the performance of the ETF model portfolios on my site. And stay tuned for performance reports for the Couch Potato Portfolios from MoneySense.
In 2021, this column introduced the Beat the TSX portfolio to readers. The simple stock portfolio idea had some of its biggest beats of the market, ever. Here’s the returns for the 10 holdings for 2021.
BTSX gains in 2021
- Pembina (PPL) 36.1%
- Enbridge (ENB) 30.0%
- TC Energy (TRP) 20.3%
- Bell (BCE) 27.9%
- Power Corp (POW) 49.9%
- Canadian Natural Resources (CNQ) 82.6%
- CIBC (CM) 41.5%
- Shaw (SJR.B) 78.4%
- Scotiabank (BNS) 38.0%
- Emera (EMA) 22.3%
Beat The TSX return for 2021 – 42.7%
There’s more context and framing of the BTSX success on dividendstrategy.ca.
What is the January effect?
There is a stock market saying that “as goes January, so goes the year.” It’s called the January effect. DataTrek offers some insights once again.
For U.S. stocks, the first five days of January. The first week of trading can also set the table for the year.
The first five days have delivered negative returns 37% of the time (down 2.4% on average), but still end the year higher 73% of those years, and delivered annual returns of 5.6% on average.
Markets are positive 63% of the time (up 1.8% on average), and higher in 77% of these years (up 13.0% on average).
The takeaway: The S&P is up the first five days of trading during most years, and it generates more than double the annual return of years versus when it was negative during the first week of trading.
Historically, for the month of January, markets have been up an average of 1.1%.
The markets have been negative 39% of the time (down 3.7% on average), but still end the year higher 63% of the time (up 2.2% on average).
Historically, U.S. stocks have been positive 61% of the time in January (up 4.1% on average), and higher in 84% of these years (up 15.5% on average).
The takeaway here: The S&P is usually positive during January (over 60% of the time) and generates a much better return during these years with positive returns in the first month of the year. The difference is remarkable with an average annual return of +15.5% in up years, versus +2.2% in the down years.
For the record, January started on the wrong foot for both 2008 and 2000. Those years ushered in crippling bear markets.
While the markets started off 2022 on a positive note, they were hit hard on Wednesday January 5, thanks to the more hawkish tone out of the Fed minutes in the U.S. Into Friday U.S. stocks were down near 1.5% for the week.
As I wrote last week, the risk of an aggressive rising rate environment is likely the greatest threat to stocks over the next few years. Investors were spooked by the rate-hike suggestions from those minutes.
The risks for 2022
Here is another great write-up—as per usual—from Charles Schwab: “The top global risks for 2022”.
The post begins reminding us that the greatest risks do not usually come out of left field. They are known risks that are hiding in plain sight. It’s rare to see an outlier, such as the pandemic that took hold in early 2020.
This year is likely to bring major shifts on many fronts, as we work our way out of the pandemic. Schwab identifies these top risks for 2022:
- Shortages turn into gluts (too much supply)
- Rate hikes slower than expected
- China goes from cracking down to propping up
- COVID waves may not resemble those of 2021
- Geopolitical surprises
It suggests that the risk of surprise is not always to the downside. For instance, they see rate hikes that are much slower than expected. That might be welcomed by investors.
And a surprise on the supply chain front, according to the post:
“Although many expect these delays to linger through the next year, history shows us that shortages often rapidly lead to gluts. Should a supply glut emerge in 2022, it may lead to a fall in inflation with excess inventory prompting price cuts and posing risks to industries that have thrived on the shortage-fueled pricing boost.”
Schwab sees inflation fears fading, though unstable and surging food prices can present geopolitical risks. There is also the threat of military conflict between China and Taiwan. Russian continues to pose the risk of invasion of Ukraine.
COVID is always the wildcard, and a new variant could prove to be more contagious and more dangerous than Omicron. That could usher in a period of economic decline and stagflation offers Schwab.
So far, it appears that Omicron may be a blessing in disguise. It is very transmissible, but less lethal compared to the Delta variant. It may usher in the end of the pandemic in the first few months of 2022. Omicron may have peaked or plateaued in many parts of the world. Caseloads have rolled over in South Africa. That said, many more variants will be on the way as we move from pandemic to the endemic stage, the risk of a rogue variant remains.
Given all of the risks outlined, this is not to say that we should invest while in a state of fear, but we should always be in a state of awareness and preparedness.
In closing, the post offers some very sensible perspective and advice:
“Whether or not these particular risks come to pass, a new year almost always brings surprises of one form or another. Having a well-balanced, diversified portfolio, whose risk profile is consistent with your goals, and being prepared with a plan in the event of an unexpected outcome are keys to successful investing.”
The forward PE ratio for stocks by sector
It is one of the most common themes and market realities. The U.S. stock market is expensive, near record levels. The Shiller PE ratio of today was only eclipsed by levels that preceded the dot-com crash in the early 2000s.
But that overvaluation has been mostly concentrated in a few sectors. The tech sector has led the way in “expensiveness.” However, the earnings growth in the tech stocks has helped moderate those elevated valuation levels.
In this tweet, Liz Sonders of Charles Schwab offers the forward PE ratios and recent earnings growth rates for sectors in the U.S. The forward PE uses analysts’ earnings projections for the following year:
One of the major themes I heard repeatedly in late 2021, and even now, is that in a rising rate environment, value stocks and quality will become more important. Those styles may offer pockets of outperformance in 2022 and beyond.
From Sonders’ valuation tweet, we can see that energy, financials, materials and healthcare lead the pack on the valuation front.
I have been concentrating on those sectors for the last few months, and I will continue to in 2022.
Also, Canadian stocks might still offer greater value, compared to the U.S. market.
As that tweet from Scott Barlow of the Globe & Mail says, Canadian stocks are no more expensive today compared to pre-COVID-19.
We might see the Canadian value stocks that you find in that BTSX portfolio continue to outperform. You find that big dividend/value slant offered in ETFs such as Vanguard’s VDY and iShares XEI. Those funds are still surging even this week as the U.S. market sputters.
Keep in mind, though: If you hold a simple (but wonderful) couch potato portfolio, or one of the asset allocation ETFs that you’ll find in the Best ETFs in Canada for 2021, you have ample sector diversification. The financial and resource-heavy Canadian market is a wonderful complement to the U.S. market. International markets deliver added diversification.
You can just keep on keepin’ on, adding money on a regular schedule.
Here’s wishing you a happy, healthy and wealthy 2022.
Dale Roberts is a proponent of low-fee investing and he blogs at cutthecrapinvesting.com. Find him on Twitter @67Dodge for market updates and commentary, every morning.
The post Making sense of the markets this week: January 9 appeared first on MoneySense.
