Lexicon Financial Group Weekly Update

Monday, November 22, 2021


Looking Back

The big news of the last week was the passing in the United States of President Biden’s infrastructure bill, more commonly known as “Building Back Better”. This bill is certainly unprecedented, and finalizes a key part of the government’s economic agenda.

The bill itself has been controversial. Indeed, it promises to deliver over US$550 billion in new federal investments in American infrastructure over the next five years. Think roads, bridges, sewer a, broadband, airports, waterways nd energy systems. Many economic pundits proclaim that this investment is sorely needed, as the infrastructure to transport goods and services has been slowly eroding over decades. Indeed, it’s hard to imagine any developed economy operating effectively without public infrastructure. Imagine the US economy without interstate highways or Europe without high-quality rail systems.

Domestically in Canada, we’ve just seen some devastating flooding in British Columbia, which reinforces the need for strong infrastructure that is robust enough to deal with changing demographics and the impact of climate change. Imports and exports will be hampered because goods simply cannot make it to or from Vancouver’s port because roads and rail lines have been flooded.

Major markets were mixed last week. For the period between November 15 and November 18, the S&P/TSX was down -0.21%, while the US S&P500 index was up 0.46%, spurred largely by strength in the consumer discretionary sector, which was up 3.5% over the same period. (1)

 

Looking Ahead

From an economic standpoint, the US$1.2 trillion dollar bill is indeed important, but it is not without consequences. Government spending will lead to hiring and increased employment for citizens, which can have an inflationary effect on the economy. More people working equals more money in the marketplace, which can drive prices up. This is at a time when government is actively trying to fight inflation. It’s too early to clearly tell what this means for investors, but it re-introduced the trade off between the rate of inflation and the rate of unemployment. These are what policymakers will be watching in the coming months.

The historic solution to controlling inflation has been to increase interest rates, so many are seeing the passing of this bill as a signal that long-term rates will indeed start rising. Just how quickly they rise will depend on how markets react, but some are suggesting that interest rate increases are already starting to be “priced in”. That’s all well and good, unless you are someone holding a variable rate mortgage, or a business which needs capital down the road to expand your business.

Many investors have held onto traditional fixed income instruments like bonds to achieve some measure of diversification in their portfolios. Unfortunately, when interest rates rise the *current* price of their bond holdings might actually decline. The good news is that if those bonds are held to maturity, they will generate exactly their anticipated rate of return. As with everything, patience is a virtue. I often remind clients that diversifying a portfolio is a risk-management strategy and not a return-creation strategy. The fastest way to make the maximum return is to take maximum risk. It’s also the fastest way to lose money. It reminds me of the old adage: “It’s easy to make a small fortune if you start with a large one.”

In all seriousness, it is an important consideration when it comes to building portfolios. Clients with higher asset levels may be able to take on enhanced investment risks inside their portfolio, but whether they should or not is an open question.

 

Further Reading

  1. Markets & Investing – Raymond James

 

Further Listening

The Advantaged Investor Podcast - What’s going on in markets as we head towards 2022, inflation and asset allocation with Nadeem Kassam, Head of Investment Strategy, Raymond James Ltd. and Luiz Furlani, Associate Investment Strategist at Raymond James Ltd.

 

The opinions expressed are those of Craig Swistun and not necessarily those of Raymond James Investment Counsel which is a subsidiary of Raymond James Ltd. Statistics and factual data and other information presented are from sources believed to be reliable but their accuracy cannot be guaranteed. It is furnished on the basis and understanding that Raymond James is to be under no liability whatsoever in respect thereof. It is for information purposes only and is not to be construed as an offer or solicitation for the sale or purchase of securities. Raymond James advisors are not tax advisors and we recommend that clients seek independent advice from a professional advisor on tax-related matters.

  1. Data provided by Factset showing the price return of S&P500 and TSX for November 15 – November 18, 2021 in its respective local currency

 

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