Portfolio Strategy

Mo Money, Mo Problems

Our view: It’s been a monster year for equities with most North American equity indices up ~27% year-to-date, leaving many investors with “Mo Money, Mo Problems”. Specifically, in conversation with clients, many are wondering how to position heading into year-end. We note that while the strong equity market performance in 2021 has been indicative of several unique variables (e.g., near-zero interest rates, extreme levels of accommodation – both monetary and fiscal, strong corporate and household fundamentals, etc.) we do not expect to see a repeat in 2022. With this in mind, we suggest two common options for clients with “Mo Problems” this year including: 1) taking profits/crystallizing gains; and/or, 2) taxloss selling.

It’s been a record year for equity markets, with major North American indices including the S&P/TSX and the S&P 500 index up ~27% year-to-date (YTD). This compares favourably to the 20-year annual average of ~10% and ~13% for the S&P/TSX and S&P 500 index, respectively since 1990. As we have highlighted ad nauseam in our past research notes, the extreme levels of accommodation from global policymakers over the past two years has been the key driver for performance of equity markets this year. These extreme levels of support have resulted in subdued levels of equity market volatility, strong market breadth with most sectors in the green and a majority of constituents listed on both indices trading in a positive territory for the year. Looking at this from the opposite side of the spectrum, the list of major losers or stocks down -20% or more is very narrow and includes only 13 names for the S&P/TSX index and 11 for the S&P 500 index.

Standin’ at the crossroads, tried to flag a ride. As we head into year-end and look to 2022, we caution investors from extrapolating the return and volatility profile of 2021 for next year. This is especially true as policy makers globally pull-back/taper very extreme levels of support from the economy. Governments and central banks globally have already begun normalizing policy which we expect will cause the global economic engine to decelerate from the above-average level of +5.9% YoY in 2021 towards the long-term trend growth of +3.6% YoY in 2023. We believe these factors will result in a more challenging environment for investors to navigate and expect to see a return to historical trends for both economic and corporate fundamentals.

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