The Great “Disconnect” (TWTW – Jan 3-7, 2022)

The Great Disconnect – is the one we’re recently witnessing in the market.

OMICRON rages, politicians scramble with what at times seem like half-baked, respectively incoherent, and/or inconsistent measures leaving us wondering what they are thinking … but in Quebec and Ontario’s case, with measure that aren’t doing much to help the economy heal further. The unvaxxed respectively anti-vaxx are vilified, and two years into this whole “pandemic” business, I think it is fair to say everyone has had enough.

In terms of the disconnect – well, the market, generally speaking, has been since the initial worries over OMICRON, from which it rebounded swiftly, seemingly  ignoring the OMICRON strain as far as anything but a short term nuisance. That, in a way, if the market has it right, is a good (dare I say great!) thing: it is telling us that we’re coming out of this shortly (presumably in a matter of a couple of months …). That, of course is the good news, the economy is strong (despite a weaker than expected Payroll report Friday); profitability will continue to prop up valuations, and the reopening will benefit all, with all manners of pent up demand supporting strong demand and sales. Oh, and at that, of course we will also be healing all of the supply chain issues that have come to light in the past 20 or so months, and as that happens, inflation will retreat, leaving interest rates to hopefully only represent a modest challenge to continued market gains.

That, of course, is the positive side of the equation.

The perhaps not so positive is that underneath the strong headline indices gains enjoyed in 2021, many many stocks have had rather painful corrections of late, including – in Canada – for instance, Shopify, which for some time had been the country’s largest company, now # 3 after (RY and TD), having correcting about 1/3 from its early November highs.

What happens when the country’s largest company takes such a “haircut”? well, with financials, energy and materials continuing on strong, not much at the headline index level. In fact for December, despite a tough month for Shopify, the index (Large Cap 60 XIU) rose 3.4%; while the broader Composite (XIC) gained 3.05%. Not bad for a month during which markets were concerned about the US FED’s “pivot” (from transitory to … heck we might have to raise rates sooner than we thought …). That said, with Shopify dropping some 10.27% month-over-month for the final month of 2021, the decline resulted in significant relative underperformance versus other ways of accessing Canadian exposure – such as Fundamental Indexing (CRQ), which rose 5.46% last month, respectively value (XCV), which gained 5.41% in December. The former (CRQ) is benefiting from low to non-existent Tech exposure, + strong exposure to Financials, as well as Energy. The latter (XDV) is mostly benefiting from huge Financials weighting. Will this continue to translate into strength for CRQ and XDV vs XIU/XIC? We’re about to find out …

Looking at December (month-over month), respectively YTD performance through the iShares line-up, here are the top and bottom 10 performers:

December 2021:

Of note:

  • A defensive “tilt” overall to the performance numbers for December? strength in Quality; Staples; Healthcare; and Dividends
  • Poor (ok – lousy) performance for Technology in December (XIT – 3.56% for the month). Canadian Hedged Nasdaq performance, to contrast, was up 1.1% (nothing to write home about here either …) for December
  • China – not exactly closing the year on a positive note …

for the year 2021:

Of note:

  • Energy dominating the performance table for 2021, on account of demand returning to pre-pandemic levels, all the while producers are exercising discipline, and focusing not on production growth, but cash flow generation, with dividends rising sharply in some instance (SU doubled theirs back to pre-pandemic levels), and more anticipated as Oil prices remain strong, and demand (absent renewed economic shutdown) should continue to be supportive …
  • Fundamental indexing (as an alternative to market cap weighting) outperforming the broader composite significantly for the year: +9.68% (vs XIC). Certainly notable in my books … (but likely overlooked by most)
  • Biggest disappointment last year for investors? Likely fixed income, aside from China, Emerging markets, Gold and Silver. Opportunity (ies) for some catching up / relative performance pick up in 2022?

Factors performance for 2021:

Of note:

  • Value has trounced Growth in Canada in 2021 (XCV vs XCG), producing close to double the returns of Growth for the year
  • ESG – whether “Aware” or “Advanced” (I am not even quite sure yet what the difference is …) looks to have done a good job of sticking close to the Composite in terms of performance. IF, when investors look at the ESG scores, the scoring shows a material difference between these ESG ETFs vs the Composite, then of course, investors are validated in their desire to align their aspirations with their $. Otherwise … well, they may have to revisit their thesis. (BTW I had a quick glance, and two things stand out: 1) fees for ESG have come down significantly relative to the “early” days and are close to or the same as those of the main reference index 2) for Canada, for instance, where presumably the “Carbon” side of the equation is a key consideration, I see a material difference in terms of intensity for the Aware vs Bench. In that sense, if your worry is you will lag if oil continues to lead … well, that need not necessarily be a concern holding you back …
  • Multi-Factors – it may feel good to diversify across factors … BUT the relative returns experience may leave many unimpressed (I know I briefly used one, and have abandoned ship a while back …)

Sector performance for 2021:

Of note:

  • As indicated above, performance last month seems to have exhibited some degree of defensive appreciation (Healthcare; Staples; Utilities).
  • For the year, Materials and Golds bring up the rear (Materials suffering from a sizeable Golds content)

And as for the first week of the new year? Well, here is the breakdown of performance across the Thematic, respectively Sector ETFs shown below.

Key takeaway? Thematic being hit really hard, with pretty much everything going on sale quickly .. while on the Sector front, Energy; Materials and Financials kick off the new year on strength, with weakness continuing (that Shopify again … -16.9% w/o/w … ouch ) in the Tech arena. Leadership shift anyone? I think it is pretty clear that this has been going on for some time by now …