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Volume 11, Edition 35 | November 28 – December 2, 2022

What Investors Should be Thankful for in 2022

Doug Walters, CFA
In an unusual year, where equities and bonds fell with surprising correlation, we take a moment to reflect on all for which investors should be thankful.

Contributed by Doug Walters, Max Berkovich, David Lemire, Eh Ka Paw

Each year around Thanksgiving and the holidays, we like to publish our list of things for which investors should be thankful. We find this exercise particularly useful in a year like 2022, which has, at times, tested the nerves of investors. So here it goes!

  • Thank you, Q4 bounce!… the equity and bond returns this year would have been much worse off without you.
  • Thank you, Value… you were the best-performing equity factor and helped multifactor funds outperform.
  • Thank you, Gold… you provided some much-needed portfolio ballast in a year when fixed income struggled.
  • Thank you, COLA… for investors receiving Social Security, your recent increases will put some extra cash in their pocket.
  • Thank you, consumers… the Fed may be frustrated that you keep spending, but it’s great that the buoyant job market is keeping your confidence high!
  • Thank you, tax losses… we were able to harvest you this year, turning lemons into lemonade.
  • Thank you, volatility… you created attractive opportunities for some sophisticated portfolio rebalancing.
  • Thank you, zero trade commissions… you make loss harvesting and rebalancing all the more lucrative.
  • Thank you, NFT art… your collapse this year has opened the opportunity to put the fun back in fungible.
  • Thank you, SBF and FTX… for teaching the next generation of savers and investors the difference between speculating and investing. They’ll be better off for it!

Thank you, future… with asset prices down, we are optimistic that you will eventually bring us better returns!

But most of all

  • Thank you, clients of Strategic and readers of Insights… the continued trust and confidence you place in the Strategic team is much appreciated. We are thankful to have you as part of our community!

Headline of the Week (aka wishlist)

Stocks ended up modestly in a week full of economic newsflow (as well as the US progressing to the knockout round of the World Cup). The Fed Chairman telegraphed a smaller rate increase in December, and non-farm payrolls came in hotter than expected. But it is the fall in PCE inflation that we focus on today.

  • Historically this has been the Fed’s preferred measure of inflation as it is broader and more timely than CPI inflation.
  • PCE inflation fell year-on-year in October from 6.3% to 6.0%. Core inflation (ex-food and energy) fell from 5.2% to 5.0%.
  • Both of these measures are in line with consensus expectations. That in itself is a bit of a headline, given how unpredictable inflation readings have been recently.
  • Some moderation in inflation is good news for the Fed and will give them some confidence in slowing the rate of increase in December.
  • The challenge for the Fed is knowing when to fully take their foot off the economic brake, as the impact of their rate increases takes time to influence consumer behavior.

The Week Ahead

After a fast start to the month of December, with a market-moving appearance from the Chairman of the Federal Reserve and a hot Job sprint, next week will be subdued ahead of big headlines expected the following week.

Bank Action

Our Central Bank doesn’t meet until mid-month; however, the Bank of Canada and Royal Bank of Australia will have rate decisions to make this week.

  • Investors are expecting a small move, if any, from the central bank in Australia as the inflation rate down under unexpectedly cooled last month.
  • The Bank of Canada is also pegged to only hike by ¼ of a percent this time.

Data Still Driving

The Federal Reserve enters a quiet period ahead of its meeting, so investors will have to look at the incoming data without real-time comments from the Central Bankers.

  • The Institute of Supply Management’s Service Purchasing Managers Index (PMI) next week and the Producer Price Index (PPI) are the key data to watch.
  • PMI is expected to move higher to 55.6 from 54.5. Prices paid, though, are expected to keep moving higher.
  • PPI on Friday is expected to show a decline.
  • The core (excluding food and energy) is expected to decline to 6% on a year-over-year basis but still move slightly higher from the previous month.
  • A surprise in either direction will be market moving.

Elsewhere

OPEC+ has a “virtual” meeting to discuss output targets, the European Union and Japan will have another read on 3rd Quarter Gross Domestic Product (GDP), and China will report inflation numbers.

  • OPEC will probably skip cutting production as China-related weakness in oil prices should give the oil exporters a pass, especially since there is an embargo on some Russian oil scheduled to kick in next week.
  • The GDP prints from Europe and Japan are not expected to see revisions.
  • China’s Consumer Price Index is expected to expand by 1% from a year ago period, and the Producer Price Index is expected to decline by 1.5%.

Still Kickin’

2022 FIFA World Cup in Qatar moves to the round of 16!

  • USA will face the Netherlands on Saturday morning.

About Strategic

Founded in 1979, Strategic is a leading investment and wealth management firm managing and advising on client assets of over $2 billion.

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