A case for optimism

Nicole Rothe - Oct 27, 2021

A pessimist sees the difficulty in every opportunity; an optimist sees the opportunity in every difficulty.

– Winston Churchill

One of the best examples of eternal optimism is author J.K. Rowling’s success story. Her original Harry Potter novel was rejected 12 times before it was published. Despite these setbacks, Rowling never stopped believing in her idea. She was ultimately rewarded for her perseverance, and more often than not, investors are rewarded for their optimism.

Most major global equity markets continued their strong rally from 2020 through the first 9 months of 2021. The Canadian equity market, represented by the S&P/TSX Index, led the way closely followed by the U.S and Europe respectively. Emerging markets, however, have struggled YTD partially due to slower re-opening, high covid case numbers and manufacturing shortages.

There are certain factors, including the COVID-19 Delta variant that may be making investors cautious. But there may be even more reasons for optimism:

Monetary policy. The U.S. Federal Reserve has defended their very accommodative monetary policy while pointing out reasons to be confident in the economic recovery. Although it’s likely that the Fed will begin to taper or reduce the amount of bonds it buys in the coming months, it’s likely to be a gradual withdrawal from pandemic-era stimulus measures. 

Peak doesn’t mean weak. Equity markets seem to be reacting more to day-to-day headline news than long-term fundamentals. News of peak of market returns from last year’s bottom suggest the best is behind us. While that may be the case, any rolling over of market data merely suggests that the growth rate is slower, rather than negative.

Markets are less expensive than earlier this year. We’ve seen a strong earnings recovery globally, which has been the primary driver of returns. Despite global markets being at or near all-time highs, share prices relative to their profits have moderated. Today, investors are paying less for each dollar of profits than they were at the beginning of the year.

A case for optimism

Strong returns can continue. While we saw the market pull back in September, during the past 30 years, investors’ returns have been positive nearly 75% of the time on a one-year rolling basis. We expect that year-over-year earnings growth for the U.S should be attractive well into 2022.

Almost every success story involves some bumps along the way. When it comes to investing, the best results may come to those who keep an optimistic outlook while taking an analytical approach to their portfolio. 

As always, if you have any questions about the markets or your investments, I'm here to talk.

Regards,

Nicole Rothe BSc, CFP®, EPC

Financial Planner, Manulife Securities Investment Services Inc. | Rothe Wealth Management