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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%