Giving thanks

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  By Guest Blogger Doug Rowat

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It’s been a horrible year.

Russia created global chaos with its invasion of Ukraine in February. The Ukrainian people suffered (and continue to suffer) the horror of constant artillery and drone bombardments, and the country’s bracing for what’s likely to be a dark and bitterly cold winter. As the war continued (badly for Russia as it turned out), Vladimir Putin frequently threatened nuclear war.

Due in part to the effects of the war, consumers in most countries struggled with skyrocketing inflation and central banks, in response to the soaring inflation, aggressively raised interest rates causing simultaneous bear markets for both equities and bonds.

The UK fell into disarray after Prime Minister Boris Johnson was forced to resign due to innumerable scandals. But his replacement, Liz Truss, only added to the turmoil after her tax proposals and spending plans nearly collapsed the country’s bond market. She resigned after only seven weeks, setting the record for the shortest-serving prime minister.

Covid proved that it’s not quite done with us as the Omicron variant forced new waves of public health restrictions, and later in the year, China opted to combat its own Covid outbreaks with draconian lockdowns that caused massive social unrest.

And as if all of the above wasn’t bad enough, the one seeming constant in the world—Queen Elizabeth II—died.

So with so much bad news, there couldn’t possibly be anything positive that happened this year, right? Wrong. Below are eight reasons to give thanks this year and to be encouraged as we look ahead to 2023.

1. Former Theranos CEO Elizabeth Holmes was sentenced to more than 11 years in prison. The fraudster and brief billionaire who put people’s health at risk with her bogus blood-testing device was finally punished. As an added bonus, her former business and romantic partner Ramesh “Sunny” Balwani was also sentenced to nearly 13 years in prison.
2. Bitcoin collapsed more than 65% y-t-d against the US dollar. Why is this good news? Because we’ve consistently told you to avoid crypto. If you listened, you’re thankful. And it also appears that FTX founder Sam Bankman-Fried will shortly join Elizabeth Holmes and Sunny Balwani in prison. More good news.
3. US inflation finally began to turn the corner. After peaking at 9.1% y-o-y in June, US headline CPI began to ease, dropping to 8.5% in July, 8.3% in August, 8.2% in September, 7.7% in October and 7.1% in November. The battle with inflation isn’t won, of course, but five consecutive months of progress is an encouraging way to end the year.
4. The World Container Index plummeted. The headline CPI numbers are the most important inflation metric, but there are many other important indicators that suggest inflation has peaked, namely the World Container Index (WCI). The WCI essentially indicates what it costs to ship stuff around the world. Thankfully, the WCI has collapsed spectacularly, down 77% from a year ago with 42 consecutive weeks of declines. Sometimes a picture says a thousand words:

World Container Index – nearly back to normal

Click to enlarge. Source: MacroMicro

5. North American labour markets remained strong. Canadian and US unemployment rates currently sit at only 5.1% and 3.7%, respectively, versus 8.7% and 6.7% two years ago. Basically, both countries are at full employment. We may still have a recession in 2023, but if we do, it’s likely to be shallow and mild. It’s hard to have a severe recession when everyone who wants a job has one.

6. US corporations avoided an earnings recession. ‘Earnings recession’ was certainly on the minds of most investors when Russia invaded Ukraine in February; however, every US quarterly earnings season this year has shown positive earnings growth. Earnings leadership has transitioned, moving away from the information technology sector, for instance, and more towards the energy sector, but according to FactSet, the consensus expectation is for overall S&P 500 earnings growth this year of 5.8%. Not spectacular, but not a recession either. Further, companies are beating consensus estimates at a high rate. These upside earnings surprises were a key driver of the strong US equity-market rally in October and November.

7. Global diversification proved its importance. Balanced portfolios had a challenging year, particularly with US equity and bond indices at times declining by 20% or more. However, if you’d had a GLOBALLY balanced portfolio, you’re likely down far less. Y-t-d, on a percentage basis, the S&P/TSX Composite, for instance, is down less than half that of the S&P 500. Many other global benchmarks, such as the Nikkei 225 and FTSE 100, are down even less than the S&P/TSX Composite. Geographic diversification helped to compensate for problems with asset-class diversification. Diversification, and therefore downside protection, comes in many forms.

8. Finally, Donald Trump released NFT trading cards. The former president decided he would reward his supporters with digital pics of himself dressed up as, among other things, a cowboy, fighter pilot, astronaut and a fire-from-the-eyeballs super-hero. The NFTs, which cost US$99 each, were so cringe worthy that even rabid Trump supporter Steve Bannon expressed his disgust. Why are we thanking Trump for his NFTs? Because after everything that’s happened in 2022, we all needed a good laugh.

Doug Rowat, FCSI® is Portfolio Manager with Turner Investments and Senior Investment Advisor, Private Client Group, Raymond James Ltd.