Patience is a Virtue
I hope this latest monthly update finds you and yours safe and sound.
The proverb patience is a virtue means that it is a good quality to be able to tolerate something that takes a long time. Covid and investing require this virtue!
Covid has required most people to live with lockdowns, travel restrictions, and many unknowns for going on 14+ months. It continues to require patience.
Investing, like Covid, requires patience since there are times when things are not going up, there are unknowns, and other external factors that influence your results.
I think the chart below highlights why patience in investing is a good quality.
The chart shows that even if you invested in the S&P 500 at the worst possible time, in recent history, patience would have prevailed in earning you a good return. In fact, much patience would have been necessary.
Consequently those of you without time and patience on our side should consider not fully investing in the stock market without recognizing the patience (time) needed to achieve such results.
What's next?
The story for this year has been one of optimism surrounding the reopening of the global economy. Vaccinations are still rolling out, with more than 1.84 billion doses administered across 165 countries. In the U.S. 40% of the population is fully vaccinated. Further boosting hope in the States is another round of stimulus, with cheques sent to over 100 million people.
The expectation is for economic momentum to continue, driven by several factors: a rapid reopen of the U.S. and global economies due to increased vaccine availability; fiscal and monetary stimulus; pent-up consumer demand; and massive savings. On fiscal stimulus alone, at the end of December 2020, governments around the world had committed US$7.8 trillion in foregone revenues or fiscal spending programs, with an additional US$6 trillion in liquidity support. Historically, fiscal stimulus can take months to years to fully work its way through economies. I think we’ll continue to feel the positive effect of this stimulus through the remainder of this year and into 2022.
Inflation
Pent-up demand, coupled with limited supply, has put upward pressure on prices. The forecast is for higher inflation through 2021 with only some moderation in early 2022. Evidence of higher inflation is already making its way through the economic data as prices surge for raw materials. Lumber, one of the biggest costs in home building after land and labour, has never been more expensive and is more than twice the typical price for this time of year. Crude oil, a starting point for paint, drain pipe, roof shingles, and flooring, has shot up more than 80% since October. Copper, which carries water and electricity throughout homes, costs about a third more than it did in the fall. Given the low levels of business inventories combined with the backlog of orders and unusually strong demand, the direction for inflation is most likely higher, not lower.
What does inflation mean for the markets?
At this point no one is quite sure. Normally it would signal a negative for stock markets as Central banks would raise interest rates. This would increase borrowing costs, increase materials, and labour costs leading to a reduction in earnings growth putting downward pressure on stock prices. However Central banks have been clear they do not intend to raise rates soon. This may suggest inflation is temporary and inflation will cool as a more stable supply and demand equation return.
Whatever is next the virtue of patience will be required.
If you should have any questions or concerns do not hesitate to let me know.
Best regards,
Matthew Bishop
Financial Advisor
Source: National Bank – Index returns are for information purposes only and do not represent actual strategy or fund performance and do not reflect the impact of management fees, transaction costs or expenses and investors cannot invest directly in any index.