Market Concern

Happy Friday,

What a week and year! We are overly excited to continue to build everyone's wealth at a breakneck pace this year. I continue to hear from many of you on how happy you are. We are all hovering around +30% ytd- depending on your allocations and age in our all stock portfolio....We love it, Congratulations!!!

That said, as we continue to outperform all indexes handily this year I am also getting many whispers of concern about when it will be taken away and that the crash must be coming. While I cannot predict the future, I can add some commentary from those I highly respect and also add some candor as to what I see on the horizon.

On the markets:

From CFRA Research: A "Red Wave," consisting of Republican control of the executive and legislative branches has occurred only eight times since WWII. Under this scenario, the S&P 500 posted its highest average annual price increase for a Republican President at 12.9%, accompanied by a 75% frequency of advance. The best return under a Democratic President occurred just six times under a split-Congress scenario, during which the S&P 500 gained an average 16.6% in price and rose 83% of the time. As a result, what is the likelihood of a "three-peat," in which the S&P 500 rises by double-digits (DD) three years in a row? Of the 80 calendar years since 1945, the S&P 500 recorded three consecutive years of DD total returns nine times, and quadruple advances four times. When the S&P 500 did not set a third DD increase, the S&P 500 gained an average 5.6% after two consecutive years of DD gains, rising 86% of the time.

So, we have an 86% chance of staying positive next year! Never mind the chance for another double-digit gain. I like those odds.

And this from Evercore ISI (yes, I read a lot): Length, Height and Width of the Bull – Still an Infant: In a Century of Bull Markets the average gain is 152% over 50 months. This Bull is young at 25 months and gain of 65%. The A/D line is very healthy, bolstered by strength in Small Caps benefitting from a “soft landing” along with the history of post-2020 and 2016 Elections as well as last July’s outperformance burst boding very positively.

The Fed, 1995 and the Rates “Wall of Worry”: As exuberant as markets may seem this historic week, our most frequent question since the 9/18 50bp cut is “When will interest rates derail the stock market?”. The Wall of Worry is bigger than the spiking MOVE Index itself. The only time the Fed started a cut cycle and 2 year yields surged was 1995, the only “soft landing” and start of a glorious stock market epoch. Second, while 5% on the 10 year could be a headwind as it was earlier in this cycle, that is still in the distance; we’d look for UK Yields to move toward 5% as the “yellow flag”. Last, credit markets remain impressively, soft-landingly, buoyant.

I underlined and bolded the most important lines. At only 25 months old and only 65% up this bull is not mature yet! With the average being at 50 months and 152%. That is bullish, along with the credit markets.

As I have stated all year, you do not get recessions when unemployment is historically low, as is the case in the USA. When consumers are confident in their job situation they spend more on travel, services, and goods. This is more the case south of us than here in Canada. We all know we need changes here-that is fodder for another day.

It has been a very challenging two years with higher rates and inflation and it looks as though the consumer has stayed relatively resilient through that and now we have Central banks dropping rates in many countries. This bodes well for spending, stocks, and the economy. There will be some upcoming challenges to inflation tapering off as tax cuts and other incentives hit households when the Republicans begin to enact their agenda. That is many months away yet.

There are two things not being discussed:

1. Markets have been very strong so many pre-retirees are confident they can retire now. Many of you have called me to discuss retirement and income levels, this is obviously happening everywhere. This is also very bullish for the jobs markets staying resilient. More retirees=more vacancies.

This can result in both good and bad outcomes. The good outcome is unemployment stays low= bullish for economy and markets. The bad is that there could be demand for higher wages and more job-jumpers with attrition= bad for inflation and employers. Overall this is still much more bullish than bearish, imho.

2. With possibly many less illegal immigrants entering the USA and also many being detained/deported the lower-end job market could come under some deep pressure. This has the same possible outcome(s). It keeps unemployment low but also may cause higher inflation. IE: The guy landscaping a place in Texas for $10hr cash may disappear. It might be tough to find a replacement for under $30 on the books.

All that said, as always, we need to be cautiously optimistic on the markets but also not feel an impending doom lays over the horizon! Sadly, we must remember pullbacks are needed to keep markets normal. Boring days and consolidation are also our friend. I know we all want straight lines up, like the last few months, but that is unhealthy and creates more room for error and larger corrections.

Last, to our Veterans and active members out there-Monday is your day. We appreciate what you have done to keep us safe, and the many sacrifices you have endured to do so. Thank-you all so very, very much.

Cheers,

Steve

This information has been prepared by Steve Switzer who is a Portfolio Manager for iA Private Wealth Inc. and does not necessarily reflect the opinion of iA Private Wealth. The information contained in this newsletter comes from sources we believe reliable, but we cannot guarantee its accuracy or reliability. The opinions expressed are based on an analysis and interpretation dating from the date of publication and are subject to change without notice. Furthermore, they do not constitute an offer or solicitation to buy or sell any of the securities mentioned. The information contained herein may not apply to all types of investors. The Portfolio Manager can open accounts only in the provinces in which they are registered. iA Private Wealth Inc. is a member of the Canadian Investor Protection Fund and the Investment Industry Regulatory Organization of Canada. iA Private Wealth is a trademark and business name under which iA Private Wealth Inc. operates.