2021 – A Dickens Of A Year
“It was the best of times, it was the worst of times, it was the age of wisdom, it was the age of foolishness, it was the epoch of belief, it was the epoch of incredulity, it was the season of light, it was the season of darkness, it was the spring of hope, it was the winter of despair.”
With this opening paragraph begins “A Tale of Two Cities,” one of the best-known novels by Charles Dickens, whose words still resonate with us today despite having been written in 1859. In the age of COVID-19, meme stocks, cryptocurrencies, escalating debt, and all-time high stock market valuations, how could they not?
A Brutal Virus
It has been almost two years since the World Health Organization declared COVID-19, the coronavirus, a public health emergency of international concern. Since then, worldwide cases have exceeded 265 million with more than 5.2 million deaths. Canada has not been spared its share of tragedies and woes.
In March 2020, the reality of COVID-19 triggered extreme measures of volatility, negatively impacting global investments. Looking back, for those investors with the funds, temperament, and nerves of steel, it was the best buying opportunity in a decade. Who could have foretold that less than twelve months later, stock market indices would hit new highs and investment prices in all asset classes would march higher?
Buoyant Financial Markets
The quick recovery was primarily due to global central banks, who responded immediately and with force by turning on the liquidity taps. Billions of dollars were pumped into economies, and relief was provided for both corporations and consumers. Central banks, the Bank of Canada included, have given reassurances that rates would not rise until economies were operating at full potential and labor markets had normalized. With the worst of the pandemic potentially over, interest rates have started to rise – along with concerns that pricing pressures are here for the longer term.
Inflation Makes A Comeback
Until the emergence of the most recent new variant, according to the Organization for Economic Co-operation and Development, the most significant risk to global economies was that inflation would rise further and last longer than initial expectations. As economies recovered from their pandemic malaise, consumer demand rebounded, pushing inflation to levels not experienced in decades. Shortages caused by supply chain issues exacerbated the situation, leading some to believe that heightened inflation was only transitory and would fade with the resolution of supply chain disruptions.
The United States reported October inflation at 6.2%, the highest rate since 1990. Similarly, the Consumer Price Index rose 4.7% from a year earlier in Canada, marking the highest annual rate since February 2003. Energy prices were 26% higher than a year earlier. Grocery shoppers have been negatively impacted, with food prices increasing 3.8% and some categories rising even higher (meat products rose 10% in October). There is no doubt that the consumer is feeling the impact of rising prices.
Interestingly, while no one knows what the future will bring, financial market expectations for inflation in the medium to long term have declined recently. 
A Challenging Time For Investors (Especially Forward-Looking Ones!)
How should investment portfolios be positioned in an inflationary environment? Within the public markets, equities have been relatively unfazed by speculation over rising rates as investors have few places to turn – bonds on an inflation-adjusted basis are yielding less than zero. However, continued equity performance requires that inflation not prove too unwieldy, and valuations generally are stretched by historical standards in the US and a few other global markets.
Within private markets, Prime Quadrant’s Head of Investments, Alex Da Costa, notes that Real Estate, specifically multi-family and industrial, could provide some protection in an inflationary environment. Alex also believes that diversifying strategies (“hedge funds”) could be one of the most resilient asset classes as many of these multi-strategy, arbitrage-oriented portfolios focus on “absolute return” (which generally means a return that is both above the yield on government bonds, and less influenced by economic and financial markets than traditional strategies).
Markets will continue to surprise us all – and there is no shortage of concerns. And while it is always a good time for those in wealth preservation mode to be focused on building and managing widely and thoughtfully diversified portfolios, now seems like a particularly opportune time to pursue this type of strategy.
Optimism In The Face Of, Well, Uncertainty
As 2021 comes to a close, there is cautious optimism that the worst of COVID-19 is behind us. Vaccine success has provided us with a glimmer of light at the end of the long, dark tunnel. However, ongoing outbreaks and the emergence of the Omicron variant are indications that the coronavirus may be with us for longer and a reminder that the future remains uncertain.
Throughout history, people have demonstrated resilience in the bleakest of situations and shown a remarkable ability to adapt to an ever-changing environment. Whatever the future has in store for us in 2022, may we find the strength to endure the largest of challenges and the ability to find joy in the smallest of blessings.
We wish you and your family good health and prosperity this holiday season.
 The “5-Year, 5-Year Forward Inflation Expectation Rate” is currently at about 2.1% - down from a peak of 2.4% a few weeks ago. This metric attempts to measure inflation expectations for the five-year period that begins in five years’ time.