May 2022 Update

Money is a tool. It's something that supports your life!

April brought on market drops and unease to investors. It seems as the weather outside improves, the market does the opposite! In fact, April's candlestick had the largest bear body since the COVID-19 crash. We could be seeing the trading range begin to establish over the coming months or even years. This month, Stephen takes us through his market commentary and discusses where we are in the portfolios. Ashley also shares her Millennial Minute article this month regarding new ways to get into the housing market. We hope you enjoy this month's offerings - and we hope you reach out to us with any questions!

Interesting Charts

1) Don't spit your coffee out when you look at the chart below. It's hilariously depressing.;

2) This tweet was a reply to the following statement: "19 Bear Markets past 140 years. Avg price decline of 37.3% & avg duration of 289 days." With that average, the bear market could end by October 19th. However, this bear market is coming after months and months and months of overvaluations --- it's anyone's guess now.

Twitter post: May 06, 2022

3) We've known and touched on the overinflated prices in the market. The PE is far too high for most valuations -- and it seems the market is trying to stabilize a trading range. Below's tweet with visual charts gives a clearer picture of the PE ratios.  

 

Twitter post: May 03, 2022
 

Technical Comments

https://www.brookstradingcourse.com/price-action-trading-blog/​

• The March monthly candlestick was a big bear bar closing near the low.
• The bears got the reversal lower from a lower high and closed near the low. April’s candlestick had the largest bear body since the Covid-19 crash. 
• The bears will need a bear follow-through bar in May to convince traders that a deeper sell-off may be underway.
• The bears see this as the second leg down from the January top. They want a measured move down to 3600 based on the height of the 9-month trading range height.
• The bulls hope that this is simply a sell vacuum test of the trading range low and want any breakout below the trading range low to fail and reverse back up.
• The S&P has been in a 9-month trading range.
• While the S&P may test below the 9-month trading range, breakouts from a trading range have a 50% chance of failing.
• The S&P tested the 20-month EMA on the last trading day of April.
• The bull trend on the monthly chart has been very strong to make a bear trend on the monthly chart unlikely. This selloff should be a minor reversal on the monthly chart, which means the selloff will probably not go much below 3800, if it gets that far.
• The S&P should enter a trading range for about a decade within the next few years. It is always better to bet on at least one more new high. The trading range will probably have at least a couple of 30 – 50% corrections, like the trading ranges in the 2000s and the 1970s.

What's Happening

Looking at the trend in the all-important U.S. ISM1, along with comparable international indices, it is becoming clearer that economic momentum (i.e. the acceleration or deceleration in the rate of growth of the economy) has peaked. Yes economic activity is still robust, but the best days of the post-COVID rebound are behind us. This index historically leads corporate earnings growth so we are becoming increasingly convinced we have seen peak EPS acceleration as well. Investors have to be far more selective in this environment to make money in the market.
 
Looking at the historical impact of the yield curve2 on the stock market — focusing on the difference between 2-year and 10-year U.S. Treasury rates, in the last number of months, the yield curve has been flattening, with long term rates generally rising as well.
Our analysis clearly shows that investors should pay heed to the shape of the yield curve since it vastly increases the probabilities of getting stocks right over a multi-year time frame. While it is true that the S&P and TSX have done better during cycles when the yield curve is steepening, some sectors have actually generated attractive returns even in a flattening environment, such as the current one.

The market does best when the yield curve is steeper (10-year over 0.6% above 2-year yields).

Top performing sectors when the yield curve is steep are predominantly cyclical. This was last year’s environment:

 
As we have noted often U.S. Stocks remain expensive right now given very worrisome inflation trends which are accelerating interest rate increases. Conversely, commodities are well supported, not only technically but also because of the Russian aggression and the still very low valuation and capital return potential for many companies in the Energy, Agriculture and Metals spaces.


So much for bonds helping out when stocks go down.  The following chart shows the returns from bonds.

 

 

The Portfolios

*Starting this month we will have monthly podcast discussing the markets and our Portolio*

In April, we dramatically reduced our Tech holdings selling AMAT,NVDA,SNAP, and TTD and started to move the proceeds into more commodity related positions.  We added to DBC a commodity ETF, REZ a real estate ETF, IYK the consumer staples ETF, and SLX a steel etf.
 
We have increaed our cash weightings in our account to around 30%
Once again, we have done a very good job of avoiding the down turn on the markets. As you can see the US markets are down double digits

 

Returns on our 60/40, 70/30, and 80/20 portfolios before fees: As of May 6th, 2022

 

Millennial Minute

Ashley is back with another insightful article from her Millennial perspective. With the housing market still hot and the prices continuing to rise, it's leaving many first time home buyers with the notion that they can never afford their big purchase. Luckily, trends repeat themselves, and old world thinking bleeds into new world lifestyles. You can read about the rise of "Co-ownership Housing" here.

 

Planning Topic

CRA Prescribed Interest Rate to rise to 2% effective July 1, 2022 – act now to optimize income-splitting benefits.
A popular tax strategy involves the use of a prescribed rate loan to split income amongst family members. The prescribed interest rates are set quarterly by the CRA based on a formula using the yield of Government of Canada 90-day Treasury Bills in the first month of the preceding quarter. This rate has been set at 1% since the 3^rd quarter of 2020. Considering the current rising interest rate environment, the prescribed interest rate for spousal/family loans is increasing from 1% to 2% effective July 1, 2022. However, if a prescribed rate loan is implemented by June 30, the current low 1% rate of interest can be locked in throughout the term of the loan, regardless of the rate increase in the 3^rd quarter (or thereafter), which will optimize the income-splitting benefits of this strategy.

As with any tax strategy, it is critical that the relevant transactions are completed within the necessary timeframes and are documented appropriately, since the strategy will fail if not properly documented or implemented. In this regard, your clients should be directed to their external tax advisor for assistance in their situation.