Petrov Market Commentary & 2023 Early Year Financial Checklist

Wishing you a very Happy New Year, filled with good health, love & prosperity!

Let’s start with a discussion about markets and the economy.

Next, don’t miss the important points by looking at some early-year financial housekeeping items below (RRSPs, TFSAs, etc.).

2022 Market Summary

• S&P 500 -19.44%
• Dow Jones -8.78%
• Nasdaq -33.10%
• S&P/TSX -8.7%
• Euro Stoxx 50 -4.4%
• VEA -15.35%
• MSCI World Index -15.66%
• MSCI EAFE Index -6.54%
• XBB -11.78%

(Data retrieved from FactSet)

Economic Snapshot

Petrov Commentary

Let’s get right to it - Last year was the worst full calendar year for the S&P 500 since the 2008 financial crisis. 2022 was also the worst calendar year in decades for a Balanced (60% equities, 40% fixed income) portfolio and the reason is not only did equities go through a bear market, so did bonds. Historically we see bonds serve as a psychological “cushion” against equity volatility but this was not the case in 2022. When interest rates go up, bond values go down. Real estate markets have also seen a significant drop in value last year. It was an all-out hangover from the party of ultra-low interest rates and printed money since 2020. This mostly affected Growth stocks, which may have been enjoying a few drinks too many recently. In 2021, valuations in some growth stocks have stretched and we have been seeing a “Reversion to the Mean” recently. Inflation was supposedly going to be “transitory” but as I expected, it has been persistent to say the least. The Federal Reserve and Central Banks have aggressively risen interest rates in an effort to reduce inflation. In my estimation (and clearly in the market’s estimation), that cannot happen without causing economic weakness. As I have stated previously, much of the inflation we see is due to lack of supply rather than too much demand. Increasing interest rates reduces demand, which could be a contributing factor to a recession. The markets adjusted prices downwards (-19.44% in the case of the S&P 500) to reflect this anticipation of a recession. I have made the claim that we were likely in a recession last year but I was wrong – I called it too early and the economy has been more resilient than I thought. For a deeper dive into what caused the 2022 bear market, read my last blog posts in the link below:

Petrov Wealth Management Group - Petrov Blog (rbcwealthmanagement.com)

A theme I have been observing is the so-called “Revenge of the Real Economy”. We have been enjoying low interest rates long before Covid and this has contributed to Growth Stocks outperforming for over a decade. These types of stocks typically trade at higher multiples, which means their earnings are projected far out into the future. This can cause them to be sensitive to interest rate increases and other factors that could affect those “frothy” valuations. Just when everyone started experiencing FOMO (Fear Of Missing Out) and investors wanted to jump on the Growth bandwagon, we observed a recent rotation from Growth to Value. Value stocks tend to be more mature companies that trade at lower multiples and are more defensive. Those boring stocks that nobody wanted have held up quite well in the recent bear market and I expect them to continue to be cornerstones in a high-quality portfolio. We cannot predict the exact timing of when Growth stocks will be in favor or when Value stocks will be in favor. This is why it is crucial to be diversified not only by geography and by sector but also by style. We maintain a “Core” position in the equity model portfolio which means we own both Growth and Value stocks for our clients.

As at December 31 2022, the S&P 500 is trading at a discount relative to the 5-year average by virtually every valuation metric (See table below). Most retail investors typically look at the price level at a given point in time but may omit to look at what you get for the price. When they experience a decline over a sustained period of time while the media is convincing us that the end of the world is near, they may be tempted to capitulate (throw in the towel). Successful investors have foregone the exciting, trendy investments in 2020 and 2021 and are being opportunistic during this time when everyone is afraid. Historically, we have always looked back at bear markets wishing we had purchased at lower valuations if we could have simply stomached the volatility and take a break from the media. What makes investing difficult is not necessarily the technicality (though this is important too), but rather the emotional fortitude that it requires.

S&P 500 :

(Source :Factset)

I remain a cautious optimist. If we own a diversified portfolio of high quality companies on the equity side and stay focused on reasonable valuation as opposed to just price, we will not only recover but prosper long-term. Over the long-run share prices go up as earnings go up. I should also mention that as bond values have declined, their yields are quite attractive. I believe inflation is stickier than the Federal Reserve, the Central Banks and the Media has suggested and it could take a couple of years to see it come back down to target. Having said that, I estimate that the majority of the interest rate hikes are behind us. 2021 was the economy of the trendy and exciting, 2022 was the hangover and 2023 should be the “revenge of the real economy”.

Tax-Harvesting Done

We went ahead with tax-harvesting for all of our clients’ non-registered accounts. Given the generalized market downturn in 2022, we crystalized capital losses and simply “swapped” the investments for 30 days in order to respect the CRA superficial loss rules. We then went and reverted back to our model portfolio positions. We were able to create a silver lining for our clients from a tax perspective. You can apply those capital losses to offset capital gains indefinitely in the future or 3 years back. Be strategic with the timing and consult with your accountant as well.

2023 TFSA Contribution Room *(Please contact Rina Kalsi at 514-630-7499 or rina.kalsi@rbc.com to make your contribution)

All Canadians who are over 18 years of age can contribute $6,500 to their TFSA for 2023. We would encourage you to verify if you also have any unused TFSA contribution room from the past and top it up. You can find out what your unused TFSA contribution room is through CRA Online.

Maximize your TFSA as early as possible to benefit from Tax-Free investing as long as possible. The earlier you make the contribution, the longer the investments can benefit from being sheltered in a tax-free environment and enhance growth.

2022 RRSP Deadline *(Please contact Rina Kalsi at 514-630-7499 or rina.kalsi@rbc.com to make your contribution).

We strongly encourage you to check this task off your checklist early before the RRSP season deadline. The deadline for contributing to your RRSP for the 2022 tax year is March 1 2023. Find out what your available room is and contact us to help you make the contribution.

If you have significant unused RRSP contribution room we can strategize on how to use it optimally. Don’t wait until the last minute! Get this task out of the way as early as possible…

We will send our clients a 2022 year-end portfolio update report

Clients will receive a consolidated 2022 year-end portfolio update report by email. By “consolidated” we are referring to a combined view all of the accounts in your household in one simple report showing you asset allocation, portfolio history, returns and market commentary.

Clients will also receive a separate set of documents by mail showing you figures separated by account and separated by currency. Clients have given us the feedback that those reports may be confusing which is why we also send you the consolidated view above. These reports are sent to you as a regulatory requirement.

To understand the status and progress of the portfolio overall, we recommend referring to the simpler consolidated report that will be sent by Rina, our associate.

Alexander Petrov obtains Portfolio Manager Title & Transition to Private Investment Management (PIM)

As mentioned in my previous newsletter, I have obtained the accreditation of Portfolio Manager after meeting strict qualification requirements for education, experience and assets under management,

We have already converted many of our clients to our discretionary model portfolios. The portfolios are well diversified and this transition allows us to make tactical moves quickly and efficiently.

Tax-Free First Home Savings Account (FHSA)

A new account is now available for first time home buyers to save $40,000 CAD on a tax free basis. Similar to An RRSP account, contributions would be tax-deductible and withdrawals will be non-taxable just like a TFSA account.

In addition to the lifetime contribution limit of $40,000 CAD, you can make a $8,000 annual contribution per year.

RBC Dominion Securities will be launching FHSA accounts sometime around next Spring and we will make sure to share more information.

 Wrapping up

While we don’t control the economy outside, we control our households economy by keeping our financial house in order!

We primarily take on new clients by referral.

Let us know if we can be of assistance to a loved one or a colleague.