This week’s headlines were dominated by the U.S. Federal Reserve and their Chairman, Jerome Powell. U.S. inflation is more than running hot. The main weapon for a central bank (with the goal to cool demand and inflation) is to raise rates. On Wednesday, Powell announced that they will double the pace of bond purchase tapering, and that rate increases will being in 2022 and continue in 2023. That removes stimulus and many would call that – taking away the punch bowl. U.S. stocks were initially supportive and then had second thoughts as market-makers considered the rising rate environment and the surging Omicron variant. We’ll take a look at the Jerome Powell show and our U.S. dividend achievers and aristocrats. Are they ready for Jay?
We can see the spike early afternoon on Wednesday December 15. The markets thought the party would continue and then had second thoughts. Once again, forever the wildcard, the pandemic and Omicron might have been weighing on investor sentiment.
The prolific variant
The shape and slope of that chart may be ‘coming soon’ to Canada, the U.S. and many more developed nations. Of course the most important charts and events will focus on the level of sickness and death that might be caused by Omicron. There are signs that the variant is less dangerous; that would be a wonderful surprise. But we do not yet have the answers to those very important questions. All we know is that Omicron is likely to shape the path of the pandemic. Given its transmissibility, it may deliver us to the endemic stage must faster, compared to how Delta was getting on with it.
Here’s a good backgrounder on the transition from pandemic to endemic.
We do not know the level of damage that the variant will leave in its wake. The stock markets do not like this level of uncertainty. That may be having more effect on the markets compared to rate hikes.
The bond markets laughed at Powell
I covered The Fed announcement in my weekly column for MoneySense.
The bond markets almost completely ignored the tapering and rate hike plans. It’s almost as if the bond markets thought that Mr. Powell had his fingers crossed behind his back during his press conference. From that MoneySense post …
I checked in with Greg Foss, a former credit-focused hedge fund manager. I asked how he interpreted the tepid response from the bond markets. The bond markets reacted as if it was status quo, they barely noticed.
The bond market does not believe that hikes are possible …. nor do I.”
I listened to many portfolio managers who offered that – Jay Powell will gently raise rates until the markets tell him to stop.
The bond markets did not demand a higher yield, which would normally be the case if higher rates are on the way. In fact, when the U.S. stock markets weakened at the week’s end, long term treasuries rallied – they were the risk-off asset as folks ran from stocks. They were up over 1.1% on Friday. We continue to hold some treasuries.
Recently, I posted on the green commodities super cycle. Nations will have to invest over $5 trillion over the next several years for us to have any chance of reaching our net zero targets for 2030 and 2050. The amount of commodities that will be required will be astounding. I am building positions, creating my own commodities super cycle TFSA portfolio. I will make that a public portfolio. I’ve funded accounts at Wealthsimple Trade (for Canadian stocks and ETFs) and Questrade for some other Canadian and U.S. ETFs. Stay tuned.
It is sooooooo easy to open and fund those accounts.
Many are suggesting that the greenification process will also be inflationary. I covered that topic in that MoneySense weekly. I also looked at the REIT sector. Special thanks to Lee Goldman of CI Global for his insights. Lee manages the CI First Asset REIT ETF – RIT.
That actively managed ETF is Canada’s best-performing REIT.
What about those dividend achievers and aristocrats?
On Seeking Alpha, I recent posted on our perfect dividend growth record through the pandemic. We went 27 for 27 with our U.S. and Canadian stocks. And of course, more important than the dividend record is the total return performance.
Here’s the total returns for our market-beating U.S. stock portfolio. Quality came through on the dividend growth and total return fronts. It is a very simple approach, and takes almost no time to manage the portfolio. I also have three stock picks in the mix that have greatly contributed to the returns. Mostly thanks to Apple and BlackRock.
One can build the simple stock portfolio.
Most investors will take a hybrid approach, they will invest in a mix of stocks and ETFs. Cut The Crap Investing readers are quite familiar with Mark at My Own Advisor and Bob at Tawcan who employ that hybrid portfolio model.
If you like the idea of the dividend achievers and dividend aristocrats they are available in ETF form. The achievers and aristocrats have delivered much less volatility and drawdown in major stock market corrections. I find the approach advantageous in the retirement or semi-retirement stage. They mix well with the generous and growing Canadian dividends.
And of course we manage the retirement risks with bonds, cash, commodities, bitcoin and real estate.
Is a recession on the way?
Aggressive rate hikes can and usually do lead to a recession, or at least signal the arrival of an economic decline.
“Since 1955, there’ve been 13 hiking cycles, and the median time from the start of the hiking cycle to the next recession is just over three years, with the earliest gap at 11 months,’ Deutsche Bank’s Jim Reid writes.
I’m not suggesting that you react to the likelihood of a recession. Lower prices will be good for those in the accumulation stage. We do need a U.S. stock market reset.
For retirees or those in the retirement risk zone, it’s a friendly reminder that recessions are a normal and expected part of the economic cycles.
Be prepared, is all.
Any new monies reinvested in our U.S. stocks will go into the Walmart’s, CVS’s, Colgate-Palmolive’s. Time to increase our boring stock allotment.
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