I wanted to provide a few updates as it relates to the markets and Security Financial.
As a reminder, the stock market is a leading indicator. Namely what occurs in the stock market is a signal of what lies ahead for the economy. Therefore, when we see the stock market decline, Gold peaking two years ago, and a price drop in Copper, these are all signals the economy is heading to recession.
The 2022 market declines have occurred due to supersized rate hikes, high oil prices, peaking inflation, continued supply chain constraints, decelerating economic growth, lockdowns in China, geo-political issues such as Ukraine and Taiwan, and mixed earnings from major U.S. companies. To give perspective on these events, Canadian defined-benefit (DB) pension plans experienced a double-digit negative return during the first six months of 2022. The median Canadian DB pension plan contracted by 8.8% during the second quarter of 2022 and by 14.5% during the first six months, according to the Northern Trust Canada Universe, which tracks the performance of Canadian institutional DB plans that subscribe to Northern Trust performance measurement services.
According to a statement from the Canada Pension Plan Board, “Financial markets experienced the most challenging first six months of the year in the last half century, and the fund’s first fiscal quarter was not immune to such widespread decline,” Chief Executive Officer John Graham said in the statement. “The uncertain business and investment conditions we noted in the previous quarter continue, and we expect to see this turbulence persist throughout the fiscal year.”
What will it take for the markets to reverse course?
A clearer indication will be once we achieve a few months of declining inflation and oil prices. Economic fundamentals including consumer demand, wage growth, job vacancies and corporate earnings in general remain healthy. Most recently, the U.S. consumer price index was reported for July and it showed a deceleration to 8.5% from 9.1% in the previous month. The better than expected inflation readings were immediately met by a sharp decline in bond yields and surge in equity prices. U.S. and Canadian bond yields, which move in the opposite direction to bond prices, fell as equities rallied and on anticipation inflation is peaking and central bank hiking might become more gradual. In addition, the price of oil declined for the second month in a row, helping to ease inflationary pressures, although it’s still hovering just under US$100 a barrel and up about 30% so far in 2022.
Where are we now?
In reviewing our portfolios from June 30, 2022 to present, we are already experiencing a recovery as most analyst’s consensus point to June being the market bottom. The portfolios remain focused on companies that can generate consistent free cash flows, maintain strong balance sheets, and possess management teams that have a proven track record of allocating cash effectively. Portfolio managers believe these companies provide the best breadth of opportunity amid the uncertain macroeconomic backdrop. In addition, with rates continuing to rise, I continue to believe fixed income exposure can provide capital preservation and liquidity, help reduce overall portfolio volatility, and the potential to generate positive total returns comprised of capital gains and income. Bottom line, we may not be moving our mandates but rest assured our portfolio managers are repositioning the business’ they own to capitalize on the next growth cycle.
Security Financial is now registered in the province of Nova Scotia
I am pleased to announce Security Financial is officially registered with the Nova Scotia Securities Commission. Moving forward, I am now able to manage and service clients residing in the province. As part of our launch, we released the video link below promoting the firm in Nova Scotia. The announcement is posted on my LinkedIn profile as well:
https://youtu.be/AC10tKDmvHc