With the exception of the short-lived spring 2020 pandemic downturn, stocks consistently moved high from 2009 through 2021. The S&P500 index was over 600% higher over this incredible 12-year run. With raging inflation (Wealth Killer #3), rising interest rates and Putin's war, the first 6 months of 2021 were a very different story as the S&P500 index was down 21%. With a concentration of high-quality dividend stocks and energy/materials stocks combined with little tech exposure, the major Canadian stock index performed relatively better but was still down 11.2% (S&P/TSX Composite Index).
Significantly higher interest rates also hammered bonds. Overall, Canadian bonds are down around 12% year to date (as measured by VAB) with US and global bonds suffering similar losses. Bonds are safer than stocks, but this downturn meant that the bond portion of balanced funds, like "all-in-one" ETFs, did not provide an effective offset against falling stock prices as reflected in the table below:
| Balanced ETFs | 1st Half 2022 | | | | | VEQT (100% stocks) | -17.00% | | VGRO (80% stocks) | -16.60% | | VBAL (60% stocks) | -15.30% | | VCNS (40% stocks) | -14.30% | | VCIP (20% stocks) | -12.80% |
If interest rates keep rising over the next several months, bond prices will continue to fall and medium- and longer-term bonds will be hit harder than shorter term bonds. The good news is that, at today's prices, investing in bonds (directly or through ETFs) and GICs will generate yields of 4% to 5%, more than double the level of a year or two ago.
In January 2021 and again early this year I discussed the merits of focusing on high quality, high dividend, "blue-chip" stock ETFs. As shown below, while down on the year, all these ETFs outperformed the overall market, particularly the Canadian ETFs.
| Dividend Stock ETFs | 1st Half 2022 | | | | | Canadian High Dividend Stock ETFs | | | VDY | -3.70% | | XEI | -1.70% | | ZDV | -5.30% | | | | | US High Dividend Stock ETFs | | | VGG | -15.60% | | ZDY | -11.50% | | | | | x-NA High Dividend Stock ETFs | | | VIDY | -14.80% | | ZDI | -14.30% |
How will the rest of 2022 market turn out? Your guess is as good as mine (or anyone else's) but I expect a bumpy road ahead. I do know that, as stock market investors, living through frequent bouts of uncomfortable short/medium term volatility is the price we must pay for the opportunity to earn good returns over the long term. And I believe stocks will ultimately move higher.
If you have any questions or comments, just email me at larry@larrybates.ca.
Enjoy the summer sun. All the best!
Larry Investment Advice for Affluent Canadians
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