Understand the markets this week: January 9th


    No more investing Founder Dale Roberts shares financial headlines and provides context for Canadian investors.

    It was hard to mess things up in 2021

    Happy New Year! And welcome to the first «Understanding Markets» Contribution for 2022.

    Before we go any further, you need to catch up (or rather look back) as I understood in an epic post in 2021. 🙂. As I wrote last week, it is an incredible opportunity to write a weekly commentary on the stock and bond markets. It provides a diary for the markets. I enjoyed looking back at all of the headlines that marked the year 2021 and then putting together this 3,000 word journey through the second year of the pandemic.

    It’s been a year that has produced incredible returns on stocks. The much maligned 60/40 balanced portfolio was up to the task again. The reports of his death were grossly exaggerated.

    A summary of asset returns for 2021

    US stocks led the way in 2021, and Canadian stocks weren’t far behind. Here’s a look at some key indexes. 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 share index: + 16.6%
    • MSCI All-World ex-US stock index: + 4.8%
    • MSCI EAFE (non-US industrialized countries): + 7.8%
    • MSCI Europe: + 13.4%
    • MSCI Emerging Markets: -5.5%

    By sectors for US markets. 2021 will now be the only year in which all sectors achieved double-digit growth.

    • Energy: + 46.4%
    • Real estate: + 41.7%
    • Raw materials + 41.3%
    • Finance: + 32.5%
    • Technology: + 33.7%
    • Cyclical consumer goods: + 27.6%
    • S&P 500: + 26.9%
    • Materials: + 25.2%
    • Health care: + 24.2%
    • Industry: + 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 things were difficult to go wrong in 2021. A well diversified, global 60/40 mixed portfolio that was delivered in the 11% range in 2021. That’s very solid considering that core bond funds were down over the year.

    Here is a look at the performance of the ETF model portfolios on my website. And stay tuned for performance reports for 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 the biggest hits of all time. Here are the returns for the 10 holdings for 2021.

    BTSX wins in 2021

    • Pembina (PPL) 36.1%
    • Enbridge (ENB) 30.0%
    • TC energy (TRP) 20.3%
    • Bell (BCE) 27.9%
    • Energy company (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 TSX Yield for 2021 – 42.7%

    There is more context and framework for BTSX success on dividendstrategy.ca.

    What is the “January Effect”?

    There is an exchange that says, «Like January, so goes the year.» It is known as the “January Effect”. DataTrek once again offers some insights.

    For US stocks, the first five days of January. The first week of trading can also set the table for the year.

    The first five days produced negative returns 37% of the time (2.4% lower on average), but still ended the year higher 73% of those years, producing an average annual return of 5.6%.

    The markets are positive 63% of the time (an average of 1.8%) and 77% of these years are higher (increased by an average of 13.0%).

    The finding: In most years the S&P is in the plus in the first five trading days and generates more than double the annual return of the years compared to the negative values ​​in the first week of trading.

    Historically, the markets rose an average of 1.1% in January.

    Markets were down 39% of the time (3.7% less average) but still ended the year 63% of the time (up 2.2% average).

    Historically, US stocks were positive 61% of the time in January (up 4.1% average) and up 84% of those years (up 15.5% on average).

    The takeaway here: The S&P is usually positive in January (over 60% of the time) and generates a much better return 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 the upward years versus +2.2% in the downward years.

    For the record, January started off on the wrong foot in both 2008 and 2000. Those years led to crippling bear markets.

    While markets got off to a positive start in 2022, they were hit hard on Wednesday, January 5th, thanks to the more restrictive tone of the Fed’s protocol in the US through Friday, US stocks were down nearly 1.5% for the week .

    As I wrote last week, the risk of an aggressive rate hike environment is likely to be the biggest threat to stocks over the next several years. Investors were shocked by the rate hike proposals made in these minutes.

    The risks for 2022

    Here’s another great report – as always – from Charles Schwab: «Top Global Risks for 2022».

    The post begins to remind us that the greatest risks usually don’t come from the left field. They are known risks that are hidden in public. It’s rare to see an outlier like the pandemic that broke out in early 2020.

    This year is likely to see big changes on many fronts as we work our way out of the pandemic. Schwab identifies these top risks for 2022:

    1. Bottlenecks turn into floods (too much supply)
    2. Interest rate hikes slower than expected
    3. China is moving from crackdown to support
    4. COVID waves may not resemble those of 2021
    5. Geopolitical surprises

    It suggests that the risk of surprise is not always down. For example, you see rate hikes that happen much slower than expected. That could be welcomed by investors.

    And a surprise at the front of the supply chain, according to the post:

    “While many expect these delays to continue into the next year, history shows us that bottlenecks can often lead to floods quickly. Should a supply glut emerge in 2022, it could lead to a fall in inflation, with excess inventory leading to price reductions and posing risks to industries thriving from the price surge caused by scarcity. «

    Schwab sees fears of inflation receding, although unstable and rising food prices can pose geopolitical risks. There is also a threat of a military conflict between China and Taiwan. Russia remains at risk of invading Ukraine.

    COVID is always the wild card, and a new variant could prove more contagious and dangerous than Omicron. Schwab offers that this could usher in a phase of economic decline and stagflation.

    So far, it seems that Omicron could be a hidden blessing. It’s very transmissible, but less fatal when compared to the Delta variant. It could herald the end of the pandemic in the first few months of 2022. Omicron could have peaked or plateaued in many parts of the world. The number of cases has expanded in South Africa. However, there will be many more variants on the way from the pandemic to the endemic phase, the risk of a rogue variant remains.

    With all the risks outlined, this does not mean that we should invest in fear, but always in a state of awareness and readiness.

    Finally, the post offers some very useful perspectives and advice:

    “Whether these particular risks materialize or not, a New Year almost always brings surprises in one form or another. Having a balanced, diversified portfolio with a risk profile that aligns with your goals and being prepared with a plan in the event of an unexpected outcome are the keys to investing successfully. «

    The forward PE ratio for stocks by sector

    It is one of the most common issues and market realities. The US stock market is expensive, close to record levels. Today’s Shiller PE ratio has only been exceeded by levels that preceded the dot-com crash in the early 2000s.

    However, this overvaluation was mainly concentrated in a few sectors. The tech sector is ahead of the pack when it comes to “expensive”. However, earnings growth in technology stocks has helped mitigate these elevated valuation levels.

    In this tweet, Charles Schwab’s Liz Sonders offers the forward PE ratios and the most recent earnings growth rates for sectors in the United States. The forward PE uses the analysts’ earnings forecasts for the following year:

    One of the key topics I heard over and over in late 2021 is that in an environment of rising interest rates, value stocks and quality will grow in importance. These styles can outperform in 2022 and beyond.

    From Sonders’ review tweet, we can see that energy, finance, materials, and healthcare are leading the way on the review front.

    I have been focusing on these sectors for the past few months and will continue to do so in 2022.

    Also, Canadian stocks could still offer higher value compared to the US market.

    As this tweet from Scott Barlow of the Globe & Post Says Canadian stocks are no more expensive today than they were before COVID-19.

    We could see the Canadian value stocks found in this BTSX portfolio continue to outperform. ETFs like Vanguards VDY ​​and iShares XEI offer this great dividend / value propensity. Those funds are still rising this week as the US market stutters.

    Just remember, if you hold a simple (but wonderful) couch potato portfolio, or one of the asset allocation ETFs you can find in the best ETFs in Canada for 2021, you have adequate sector diversification. The finance and resource intensive Canadian market is a wonderful complement to the US market. International markets provide additional diversification.

    You can just go ahead and add money on a regular basis.

    We wish you a happy, healthy and prosperous 2022.

    Dale Roberts is a proponent of low fee investing and blogs below cutthecrapinvesting.com. Find him Twitter @ 67Dodge for market updates and comments, every morning.

    Understanding This Week’s Markets: January 9th first appeared on MoneySense.

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