Making sense of the markets this week: December 5
The effects of Omicron on the economy, the big banks and their dividends, investing in Metaverse ETFs, and what’s in store for 2022.
The effects of Omicron on the economy, the big banks and their dividends, investing in Metaverse ETFs, and what’s in store for 2022.
Each week, Cut the Crap Investing founder Dale Roberts shares financial headlines and offers context for Canadian investors.
The new COVID variant, now given the handle of Omicron, hit the newswires just as I had submitted last week’s (most excellent) post. The news spread quickly around the globe, and it caught the attention of the markets.
Last week, I wrote about the risk of investing in energy stocks, including the wildcard known as the pandemic. Always the elephant in the room, additional outbreaks from the virus can lead to more lockdowns, restrictions and less economic activity. In any lockdown, we travel less, stay closer to home and consume much less fuel.
Stock markets took a hit, and the price of oil dropped by about 15% after the Omicron news last Friday. And of course, the new variant of great concern poses a risk to the local and global economy. This threat goes well beyond the energy sector.
Source: Seeking Alpha
The markets adopted the mentality of “shoot now and ask questions later.” The stock markets around the world were reacting to an unknown. What do we know about Omicron? Not much.
And the markets keep reacting in whipsaw fashion, as the experts try to answer the many questions. This Atlantic post sums it up quite nicely:
“It’s a lot of news to process, and it comes without a lot of baseline knowledge about the virus itself. Scientists around the world are still scrambling to gather intel on three essential metrics: how quickly the variant spreads; if it’s capable of causing more serious disease; and whether it might be able to circumvent the immune protection left behind by past SARS-CoV-2 infections or COVID-19 vaccines, or evade immune-focused treatments such as monoclonal antibodies.”
We do not have answers to any of those three main questions, and it will likely be many weeks before we have those answers. I have a hunch that won’t stop the markets from reacting to each hopeful or cautioning headline.
On the other hand, the Omicron variant may pose no threat, or it might be the status quo on the pandemic front. Or, this prolific variant (it has more mutations than other previous variants) might pose a real threat. If it can evade vaccines, we might be somewhat starting over. At the other end of the spike protein spectrum, Omicron may be the best thing that has happened during this pandemic.
If Omicron is more transmissible compared to Delta, which is the current and prevailing variant, and if Omicron causes much less death and sickness, we will move closer to the other side of the pandemic. Omicron will muscle out Delta; and theoretically, a less-dangerous variant will spread around the globe. That is wishful thinking, but it is a possibility.
We don’t know how this will play out. The question is: Are you ready for any of these scenarios?
I often write that any scare is a polite warning for investors. It should not take such an event like this for you to check your investor pulse but take the opportunity now to assess your portfolio, your goals (financial plan) and your risk tolerance level.
In another strike of blogger post irony, last week I was creating a follow-up post to: “How to prepare your portfolio for the coronavirus outbreak.” I wrote that before the pandemic became a pandemic on February 1, 2020, just as cases were starting to spread around the globe. I did follow up with another post that looked at the performance of that “pandemic portfolio.”
Both posts might be timely today. And if you do need to protect your portfolio assets, you might look to the advanced couch potato portfolios that are designed to be ready for any economic development.
Be ready for volatility. Make sure you have a rock-solid investment plan you can execute through the noise and scares. This will not be the last variant of concern.
This is the new not-so-normal reality of this decade.
During the pandemic, Canadian financials (that includes the banks, insurance companies and diversified financial companies) were instructed by the Office of the Superintendent of Financial Institutions (OSFI), their regulator, to suspend dividend increases, share buybacks and stock compensation for executives during the pandemic.
Those restrictions were lifted in early November. And, yours truly was on the announcement call with OSFI and first to report the good news on Twitter:
Canadian dividend investors have been seen salivating ever since, looking to receive those big juicy dividend increases. Investors were not disappointed.
Scotiabank (BNS) led off the festivities on Tuesday November 30th. While there were expectations of a dividend increase of 5% to 6%, Scotiabank offered up 11.1%.
On Wednesday (hump day), Royal Bank of Canada (RBC) stepped up to the plate. They also served up an 11.1% dividend increase. But, keep in mind, historically RBC increases its dividend twice a year. It might match that increase again with announcements in February 2022. Of course, the next dividend increase could go either way—and end up being less or more generous than this round. Future dividend increases will likely be affected by economic and pandemic conditions.
Also on Wednesday, National Bank (NA) did not disappoint and set a new standard. National increased its dividend by 22.5%.
On Thursday, Toronto Dominion Bank (TD) came through big time with a 13% increase. That is not yet reflected on dividendhistory.org.
Canadian Imperial Bank of Commerce (CM) offered up a 10% raise.
And, on Friday, the Bank of Montreal (BMO) said “hold my beer.” It increased its dividend by 25%! What a week it was.
The Canadian banks also announced generous share buybacks. That is another route that can return value to shareholders. When a company can reduce the share count, that increases your ownership of the company. It can also boost earnings per share.
Many Canadian investors love their big banks and their big dividends. That’s fine—there is a wonderfully positive feedback loop created by dividend growth investing. But keep in mind that in the end, it is the total returns that will largely decide your retirement fate. As I like to write in mangled English, “more money is more better.”
Don’t forget global diversification. Also, take tax efficiency into consideration. In certain situations, capital gains can be more efficient (selling shares to make homemade dividends) compared to dividends that can benefit from the Canadian dividend tax credit.
That said, historically Canadian banks have delivered very generous (market beating) total returns and dividend income.
As I reported in late October, Facebook changed its name to Meta Platforms Inc. The name change was suggested to be in part, perhaps, rebranding to help repair recent reputational harm of the Facebook brand. And if we give Mark Zuckerberg the benefit of the doubt, the name change reflects a change to focus on the metaverse in the coming decades.
And, what is the metaverse?
It is the successor to the mobile internet. A new virtual world where we play and interact. CNBC reports:
“The new name reflects the company’s growing ambitions beyond social media. Facebook, now known as Meta, has adopted the new moniker, based on the sci-fi term metaverse, to describe its vision for working and playing in a virtual world.”
The potential for the metaverse certainly seems out of this world.
Grayscale believes the metaverse could become a trillion-dollar industry. And the gaming portfion could grow from US$180 billion in 2020 to US$450 billion in 2025.
Two Canadian ETF providers were quick to move into the metaverse:
Evolve ETFs has launched an actively-managed metaverse ETF, ticker MESH.
Evolve describes the metaverse as:
“…an immersive 3D next-generation version of the internet, rendered by virtual or augmented reality technology. In its simplest terms, the metaverse is a digital space where many of us will socialize, work and play.”
Evolve president and chief executive Raj Lala gives additional context in the Financial Post:
“The metaverse is a virtual space where users can log into and interact with one another and experience events such as NFT galleries and concerts.”
Here’s the page listing the 25 holdings. MESH has a management fee of 0.60%.
It all sounds completely surreal, but perhaps we should not be surprised. We can now work and attend meetings from home—and, thanks to FaceTime, feel close to family far away. Why not shop and socialize from home in an alternative universe?
A metaverse ETF from Horizons ETF follows the Solactive global metaverse index.
From this link you’ll find an overview of the key segments of the metaverse.
Steve Hawkins, CEO of Horizons ETFs, is quoted here, from the launch press release:
“The metaverse is the next frontier of the human experience and technological innovation. We believe that the metaverse will become an extremely important realm for social and economic interaction over the next decade.”
Here’s a youtube video from the Financial Post that explains and it offers a glimpse of the metaverse.
Here’s the link to MTAV. The management fee is 0.55%.
These are very early days. But again, we find another future-based thematic play that appears to offer incredible long-term potential. I would not be surprised to see the metaverse ETFs show up in the thematic section of MoneySense ETF Finder Tool.
In the U.S., Meta Platforms Inc. (formerly Facebook) still trades under the old Facebook ticker (FB). Meta said it will wait until the first quarter of 2022 to change FB to a meta-themed ticker. There was some confusion in the U.S. as many investors started to pile into an ETF with the ticker (META). The Roundhill Ball Metaverse ETF has seen its assets under management soar 548% since Facebook changed its name to Meta Platforms.
As Warren Buffett, the CEO of Berkshire Hathaway, reminds us that risk is not knowing what you’re doing. (Yikes!)
Meta Platforms Inc. started trading with its new meta ticker in Canada. The ticker in Canada is MVRS – CN. That is on the Neo Exchange.
In Canada, we did not make a wrong turn with our first foray into the investment metaverses.
Readers will know I always have time for the super-smart gals and guys. And Charles Schwab and Liz Sonders are both must-follows on Twitter for market-related charts and commentary.
Here’s a wonderful roundup of where we are, how we got here and where things might turn in 2022.
Schwab suggests inflation could certainly be tamed in 2022 thanks to supply chain relief and what they call the “boomerang effect.” Companies have been double buying and that could lead to a supply glut.
On the threat of stagflation, Schwab writes:
“There are rampant fears of stagflation akin to the 1970s/1980s, but the good news for now is that unemployment is not on the rise. As shown below, the toxic mix of high inflation and a surge in the unemployment rate brought the economy to its knees starting in the 1970s. The combined rate—known as the Misery Index—climbed above 20% at the height of the 1970s’ crisis, more than double the current rate.”
But here’s a more ominous threat: In the U.S. and Canada, household net worth has moved to record levels, thanks to asset inflation, real estate and stock markets. This is also from Schwab’s post:
“The weight of the stock market in terms of the economy, as well as its influence on confidence, cannot be overstated. The next significant drop in asset prices could deliver an outsized hit to economic growth, as was the case in 2001. That year’s recession was a direct result of the bursting of the tech stock bubble in 2000.”
In 2021, we are feeling the wealth effect. If we get a bursting of asset bubbles, that could have a massive effect on consumer confidence and economic growth.
If you read that Schwab post, you’ll see how stocks react to various rate hike cycles. Markets don’t mind a couple or hikes. They also don’t mind if the Fed goes slow and easy on the rate hikes. A chart in that post shows that the U.S. markets were not a fan historically of an aggressive and continuous rate hike cycle.
For 2022, Schwab is quite cautious. Only healthcare is listed as an outperform sector. All said, this U.S. stock market run continues to confound the experts.
“I don’t manage portfolios, but I have much sympathy with what two investing legends have recently said. Leon Cooperman has been very vocal about being ‘a fully invested bear’; and Julian Robertson believes that ‘trying to sell short in this market is like being run over by a train that’s going to derail a mile down the road.’ ”
I don’t mind sharing my greatest investment mistake. I was run over by the train at the tailend of the bull market run in the late 1990s. Anyone paying close attention at the time knew the stock run made no sense. Markets were historically expensive (similar to today), but euphoria kept driving markets higher. I had come into a decent lump sum of money. I thought I would do a momentum trade to make a quick 20%. The profits would essentially pay off our remaining mortgage. I caught the top of the market. The markets imploded. I had to wait a looooooooong time for some of those stocks and funds to make a buck.
I knew it was a gamble and was not investing. And, I lost. I went back to investing.
Today, it’s likely not the time to get greedy or fearful. As Sonders suggests: Successful investing in a disciplined process over time.
Be well-diversified and rebalance on schedule.
Dale Roberts is a proponent of low-fee investing and he blogs at cutthecrapinvesting.com. Find him on Twitter @67Dodge for market updates and commentary, every morning.
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