Home Month and Year February 2022 Market Ups & Downs

Market Ups & Downs

Surprising pandemic positives


There’s unspoken and private consensus that investments are the ultimate equivalent of what business calls risk management. And the past two years or so have made for choppy, rough waters to navigate for brokerages, investment advisors, the financial sector and their clients.

Inflation, interest rates, directly and indirectly COVID-19 and other unpredictables are causing various speedbumps for the investing and investors.

Of course, on complex, high levels, the fallout from the pandemic impacts the markets. “Initially, the investment sector experienced a huge hit in March and April of 2020 as the uncertainty of the pandemic took hold,” explains Michael Wood, region head, TD Private Wealth Management, Prairies. “Nobody really knew what was going to happen. And, if there’s one thing the market as a whole doesn’t like, it’s uncertainty. Then, with the rapid development and distribution of vaccines, we’ve experienced a recovery and a move upward like no other.

“It’s true that each new variant tests our optimism in the market, but I think this will be tempered as we also continue to see developments with vaccines and booster shots.”

Ironically, the work-from-home trends triggered by the pandemic turned out to be a positive for some segments of investing. “What we’ve seen in the last couple of years is a newfound interest in investing, and finance more generally,” notes J. Ari Pandes, finance area chair and associate professor of Finance at the Haskayne School of Business of the University of Calgary. “Whether the reason is more people at home, working or not, unable to spend and consume, having more money to put into savings and growing those savings, there has been much more attention on investing.

“And it’s not necessarily about investment professionals and the wealthy. They have always been investing. It’s a new generation of regular, main street, retail investors,” he says. “This is good, as it democratizes finance and investing. But there must be caution. Many people are not financially literate, and it’s not at all a matter of intelligence or capacity. Some exposure and basic knowledge of the world of investing and finance is vital. After all, investing is risky.”

According to Wood, the pandemic has also been a positive when it comes to the perception of investing. “We’ve seen amazing growth in online trading activity through our discount brokerage channel, which has experienced three times the normal trading volume compared to pre-pandemic times. Certainly, the popularity of meme stocks and social networks has increased the awareness and interest in investing, but the pandemic also provided people with some work flexibility and spurred them to take an active interest in managing their portfolios.”

Private, personal, from-home investing continues to enjoy a boom. The respected and enthusiastic Christine Zalzal, senior vice-president and head of Qtrade Direct Investing and VirtualWealth explains that, “The impact of the pandemic on the online discount brokerage sector (also known as self-directed investing) hit record highs with double the new accounts, and broke all historic records in Canada in terms of new business and trading volumes.

“Typically, market volatility creates investment opportunities, driving consumers to seize some of these opportunities. In the case of self-directed investors, many have opened new accounts to get in on the action. We also saw a boom of self-directed investing among younger generations. As a result, the size of the market has steadily grown over the past two years.”

“After the initial nose dive in the markets, when the pandemic hit, there has been a remarkable bounce-back that just continues to go up,” Pandes says. “So the perception among many inexperienced investors is that markets will continue to go up and make them wealthy. This is where perception becomes important. I think there is a vast swath of people that have been making money because the markets keep moving up. There must be understanding that markets don’t always go up. It may seem logical and obvious but it is sometimes forgotten and rediscovered, often painfully through big losses.”

He points out that perceptions lead people to believe that any price can be justified if there are other investors willing to pay that price and urges the caution that financial assets are bounded by the realities of firm fundamentals. “Perceptions of value have to be backed up the reality, which implies the prices we pay for assets should reflect the cash flows it is expected to generate.”

When it comes to the investment sector and the market focus in this new year, inflation and interest rate trends are hot topics for investment professionals and investors alike. “The investment community is watching very closely,” Wood says. “Right now, the general consensus is that the inflationary environment is more tied to supply chain disruptions caused by the global shutdown in the early stages of the pandemic, rather than reflecting a broad overall increase in inflationary pressures.

“Ideally, these supply issues should work their way out over time and this will help moderate inflation. Interest rates are still at historical lows, so we do expect upward pressure on rates as the economy starts growing again and we move towards pre-pandemic employment levels.”

Pandes underscores that interest rates and inflation are key isues for investors and investing. “There’s a lot of debate about inflation being transitory or something longer term, that central banks have to deal with. Certainly, interest rates are at all-time lows, but the question is how soon and how quickly will that ratchet up? Markets are forward looking, so they are alreadypricing in expected inflation and expected interest rate changes.

“The sectors that have been doing well in this environment – like energy, materials, commodities, financials, real estate – tend to be inflation beneficiaries or inflation-agnostic plays. Bonds, on the other hand, get hard it with inflation as the interest rate return is eroded due to the purchasing power of money going down. As inflation fears continue, I suspect we will see inflation protection plays to continue.”

Some investment fundamentals are basic and solid. “It may sound like a cliché and boring but the importance of diversification is now more enhanced than ever, due to all the uncertainty and volatility. Markets are beginning to adapt to the expectation of higher interest rates, downward revisions to economic growth expectations due to supply chain disruptions and greater inflationary pressures and the unpredictability of another, new virus,” he points out. “It may be wise to go back to the basics, which is a boring but importantly diversified portfolio that is in the best position to shelter investors from the unpredictables.”

Qtrade’s Zalzal suggests, “When crafting an investment strategy, the key factor for self-directed investors is to take advantage of all the education, resources and portfolio tools available to them. When managing your own investments, it’s key to keep learning in order to make informed decisions.”

Most experienced advisors agree that, when it comes to investing, Calgary has been somewhat unique. “Calgarians and Albertans have historically invested more in the energy sector than other investors across Canada. We’re more familiar with the industry, it’s in our backyard, and it has traditionally performed quite well,” Wood points out. “Recent developments about the long-term transition to clean energy and lack of new investment in oil and gas projects and companies has created uncertainty and may be a reminder to regularly revisit portfolios to ensure it is balanced to weather any downturn.”