January 2022 Update

Looking back at the year that just closed, December was a little bit rocky in the markets, following in the footsteps of November. But overall, investors who weathered the volatility were again well rewarded. The S&P 500 index of US stocks finished the month up 4.5% while the S&P/TSX Composite index of Canadian stocks finished up 3.1%. 2021 was another very good year for most riskier assets, as the S&P 500 added 28.7% while the TSX jumped 25.1% and other developed markets were also decently strong. However, it wasn’t an almost straight line up as it was in the second half of 2020, and this year threw a couple of new curveballs at investors. Quality bonds, typically the other main building block of investment portfolios, fell during the year. The Canadian fixed income market fell by 2.5% for the year, while US bonds dropped 1.5%. They will likely continue to disappoint. Barring any sudden economic collapse, central banks will likely raise interest rates this year, which will make bond prices fall again. With inflation here running at levels not seen since the 1980s while fixed income yields next to nothing, portfolios that are loaded with investment-grade bonds will likely fall further behind in meeting investors’ needs. At the same time, bonds can still provide some stability in a recession which would hammer stocks. So, what does the economy look like going into 2022? One of my favourite ways of getting an overview of the economic situation comes straight from the Organisation for Economic Co-Operation and Development (OECD). This intergovernmental organisation publishes a wealth of reports and data, some of which are available freely on their website. The most important one I follow is the Composite Leading Indicators, which summarizes the level of economic activity for various countries. For the economies that I follow the most (the U.S., Canada, Japan, the U.K., Germany, and France), the data as of the end of November shows a moderate slowdown but nothing that I believe should lead to a recession in the short term. With stock markets not showing signs of falling significantly, my preference is to stay invested in riskier assets, especially stocks. For the month of January, I have a weighting of 75% in stocks, while the rest is in riskier bonds, especially high yield bonds and emerging markets bonds. I included sample portfolios with suggested ETFs available for either Canadian or U.S. investors.

Sample portfolio for a Canadian investor

Asset class	ETF	Weight
Canadian stocks	VCN	7.50%
US stocks	VUN	37.50%
Foreign stocks	VIU	30.00%
US corporate bonds	ZSU	3.125%
Canadian corporate bonds	XSH	3.125%
Global high yield bonds	MHYB	12.50%
Emerging market bonds	ZEF	6.25%
Canadian mortgage-backed bonds	ZMBS	0%
Canadian government bonds	CLF	0%
Global government bonds	XGGB	0%

Sample portfolio for a US investor

Asset class	ETF	Weight
US stocks	SCHX	37.50%
Non-US stocks	SCHF	37.50%
US corporate bonds	SPIB	3.125%
Non-US corporate bonds	PICB	3.125%
US high yield bonds	SPHY	6.25%
Non-US high yield bonds	IHY	6.25%
Emerging markets bonds	VWOB	6.25%
US mortgage-backed bonds	MBB	0%
US government bonds	VGSH	0%
Non-US government bonds	BWZ	o%