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Volume 11, Edition 2 | January 17 - January 21, 2022

The Right Questions Investors Should Be Asking

Doug Walters, CFA
As we enter 2022 (and really any year for that matter) it is important that investors continue to ask the right questions. We have them for you.

Contributed by Doug Walters, Max Berkovich, David Lemire

This week, we hosted a webinar focusing on investors’ key questions for 2022. One of those questions is whether US stocks can continue to outperform after three years of 18%+ returns. The answer is undoubted “yes, they can,” but that does not mean they will. The first three weeks of disappointing performance have certainly made outperformance in 2022 an uphill battle.

You can find it here if you have not seen the webinar (Q1 2022 Investor Playbook and Firm Update). Perhaps the question investors are asking now is, “will US stocks continue to underperform after starting the year down over 8%?” Our message is the same regardless of the question. The future is unknowable, and investment decisions should not be made based on what you “think” might happen in the future. The right questions are:

  • Am I invested at an appropriate level of risk (regardless of what the market does)?
  • Is my portfolio well-diversified (not just diversified, but well-diversified)?
  • Am I benefiting from market volatility (through an intelligent rebalancing process)?

If you can answer “Yes” to these three questions in 2022 and every subsequent year, you will have set yourself up for long-term investing success. Any other questions are likely just noise.

Headlines This Week

US Stocks fell again this week, and that dynamic dominated headlines and overshadowed minor economic reports that came out this week. Not helping sentiment was an inauspicious start to the earnings season.

Stumbling at the Start

US equities have had a tough time getting off the starting line this year.

  • Growth stocks continue to be amongst the worst hit. As we have discussed before, growth stocks tend to be more sensitive to interest rate moves than other market segments. Above-average valuations combined with Fed tightening are proving to be an unpopular cocktail for investors.
  • Does that mean stocks will underperform throughout the tightening? There is no reason that has to be the case. Stocks are always discounting future expectations. As soon as expectations change, the direction of stocks will change.

A Netflix Chill

Earnings season is underway, and high-profile “FAANG” stock, Netflix (NFLX), released results that failed to entertain investors.

  • The Q4 results were satisfactory, but the outlook for new subscribers in Q1 was well below expectations (2.5M vs. expectations for 6.9M).
  • Exercise cult Peloton (PTON) has also struggled. The stock was down 24% Thursday and around 80% over the past 12 months.
  • These pandemic winners have seen their fortunes reverse and are a good reminder of the importance of diversification. The next leg up in stocks could have entirely different leadership. Reopening winners?
  • As an aside, the term “FAANG” no longer makes sense. With Facebook now called Meta and Google renamed Alphabet, a new acronym is needed. We favor the addition of Microsoft and the acronym MANAMA.

The Week Ahead

Central Bank Week

Much of next week’s focus will be on the American Federal Reserve meeting and the Bank of Canada’s conference.

  • The January Fed meeting next Wednesday is likely to set the stage for upcoming meetings in the next few months as the central bank has enacted its accelerated tapering program that is set to end in March.
  • The likely result will be that the first of three expected interest rate hikes will coincide with the end of tapering in March.
  • What has been of concern recently is that in the December meeting minutes, Fed officials discussed the possibility of not only raising rates but beginning to shrink the Fed’s balance sheet.
  • Hopefully, investors will gain more information on the bank’s plan moving forward.
  • Our neighbors to the north will also be holding their central bank meeting next Wednesday amidst expectations of an even more hawkish tone.
  • The market is largely expecting the Bank of Canada to raise their interest rates by 0.25%, even though they had reiterated that the first rate rise is unlikely to come before April.
  • Expectations of a rate hike have been growing as Canadian inflation recently hit a 30-year high of 4.8%, pressuring the central bank to step in earlier than expected.

Non-Stop Action

For those looking for economic data, next week will surely satisfy your appetite as every day will have something to look at.

  • Starting on Monday will be the Markit manufacturing and services purchasing managers indexes (PMIs) as well as the composite PMI, with a slight drop expected across the board.
  • Following up on Tuesday will be the housing price index for November and the consumer confidence number for January.
  • The headline data release will be the Q4 GDP estimate on Thursday, which is expected to come in at a strong annualized rate of 5.8%, up from 2.3% the previous quarter.
  • While growth likely slowed in December due to the spread of the Omicron variant, this growth rate would support the argument that the American economy is nearing full strength and does not need any additional stimulus.
  • Wrapping up the week on Friday will be the Fed’s preferred inflation metric, the core personal consumption expenditures numbers for December, which are expected to inch up again to 4.8% from 4.7% previously.

Full Speed Ahead

Earnings season is in full swing as a few of the mega-caps along with household names are set to report.

  • The first of the giants to report will be Microsoft (MSFT) next Tuesday, along with Johnson & Johnson (JNJ), and Verizon (VZ)
  • On Wednesday, Tesla (TSLA) will report after a whirlwind of a year with recent price drops after founder Elon Musk had to sell 10% of his stake in the company to pay a large tax bill.
  • The final trillion-dollar company to report next week will be Apple (AAPL) on Thursday, with investors keen to see if the company had a strong holiday season.
  • Additional names to look out for next week include IBM, Intel (INTC), AT&T (T), Boeing (BA), Visa (V), Mastercard (MA), and McDonald’s (MCD).

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