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Counsel Views – Episode 14: Stu Morrow

Mid-year market review and outlook

Counsel Views, hosted by Stu Morrow, Chief Investment Strategist, RBC PH&N Investment Counsel, is an audio series aimed at bringing insights to clients from thought leaders and experts across Canada’s leading wealth management firm.

Episode guests: Stu Morrow: Chief Investment Strategist, RBC PH&N Investment Counsel

In this special mid-year episode, Counsel Views’ own Stu Morrow, Chief Investment Strategist, RBC PH&N Investment Counsel, takes questions from guest host Leslie Baker, Senior Manager, Strategic Communications, RBC Wealth Management, on the state of global markets and the economy, and his outlook for the remainder of 2021 and beyond.

Following the unprecedented year that was 2020, 2021 has so far offered investors strong equity returns and reason for cautious optimism regarding the pandemic. Leveraging his recently published “Mid-Year Market Review and Outlook”, Stu provides his insights and analysis of what has driven markets to date, what developments will underpin market and economic developments in the months ahead, and provides his always insightful investment guidance to investors for today and the future.

View transcript

Voice over:
This episode is hosted by Leslie Baker, Senior Manager, Strategic Communications, RBC Wealth Management Canada.

In this episode, Leslie interviews RBC PH&N Investment Counsel Chief Investment Strategist Stu Morrow regarding his recently released special edition mid-year market review and outlook, which is available on the RBC PH&N Investment Counsel website, or through your Investment Counsellor.

Good day to our listeners, and thank you for joining us on this special edition of Counsel Views.

Stu, thanks for inviting me on Counsel Views again, and for the opportunity to engage you at the halfway mark of the year on the state of financial markets, the economy and your outlook for the remainder of 2021 and beyond.

Great to have you on the podcast, Leslie, and thanks for joining me today.

So 2021, Stu, has certainly been an interesting one, and that’s certainly saying something, given it follows on the heels of one of the most significant and world-shaping years of this millennium, 2020.

You recently released a thorough and really insightful special edition, Stu, for the mid-year market review and outlook that I would encourage our clients to read. But we also wanted to provide an opportunity for clients to hear directly from you on this important topic. So, without further delay, let’s get started.

The bounce back of the global economy from the depths of the COVID-19 crisis has been remarkable. In the early days of the COVD-19 market sell off, most investors were very concerned about a deep and sustained bear market. Instead, we ended up with the shortest bear market in history, and a phenomenal recovery.

What in your opinion has led us to where we are today in the market?

Yeah, it's a good question. And we cover this off in the report, but I think there are a few things.

So first, it's global monetary policy. The response by the central banks – including the Federal Reserve, Bank of Canada, Bank of England, Bank of Japan, and many other central banks, did provide more than ample liquidity to credit markets, and some equity markets as well, was able to facilitate market demands for cash and liquidity needs. This created a real dampening effect which ensured a less destructive market correction, and arguably probably helped lessen the duration of the downturn.

And second to that is the fiscal policy response – governments around the world provided stimulus in the form of direct and indirect support for individuals and businesses that were shut down during the pandemic, or otherwise who’d have been negatively impacted by this deliberate global recession, which was in an effort to reduce mobility in order to deal with the pandemic until a vaccine was produced

Then you sort of look at the response from the global health care and pharmaceutical sectors as well. The development of a vaccine for the coronavirus in record time certainly contributed to the recovery in the economy, the markets and investor confidence. By November 2020 the announcement of a successful Pfizer phase III trial, which more or less confirmed what markets had anticipated around this time mid-last year: that the rollout of a vaccine wasn’t too far away, and this would help to ensure a return to normalcy in less time than most had originally thought when we first started in March 2020.

So, in the mid-year review and outlook article, we highlight on a regional basis how the recovery has come along, and what the rest of the year might bring in terms of economic growth. The United States and Canada, for instance, we show in several measures of economic activity that both countries have seen activity levels recovered or even surpassed pre-pandemic levels at this point. Like for instance travel and hospitality sectors, they’ve recovered from the worst levels during the pandemic, and continue to recover as vaccination rates in both countries do continue to slowly grind higher.

Great, and from a markets perspective, how far we come from the bottom of the market reached at the tail end of March 2020?

Yeah, so we go into this within the mid-year review and outlook article, we dive into the specifics of the market recovery across the asset classes, regionally, and we also touch on how the various commodities and currencies have recovered as well.

But in brief, U.S. equity markets they have seen impressive earnings growth from the depths of last year, strong earnings momentum that’s really carried through to the most recent second quarter earnings results in July this year. Expectations for growth will naturally come down, of course, I think that’s just math, as you comp the periods, it’s difficult to keep the growth trajectory going, but with vaccination rates continuing to move higher, of course, there’s still a sense of demand to keep up over the coming year, furthering earnings growth.

In Canada, the S&P/TSX composite, it’s up 16% or so year-to-date, and 56% from the beginning of April 2020 to June 30, 2021, on the back of really improved corporate earnings and the outlook from management teams compared to consensus expectations.

The Canadian equity market, as we know, is exposure to financial services and commodities, and that resulted in relatively strong performance in a global economic recovery.

International markets have performed well year-to-date, and from the depths of the market recovery, Europe’s in a somewhat more favorable position than parts of Asia, given the surges in cases we’ve seen in India and Southeast Asia just more recently.

And on the bond side, I said that while the negative returns to bonds overall sort of year-to-date 2021 period in developed markets, we talk about that in the report, but I’d continue to stress that for most investors, that short-term return doesn’t fully capture the important role that bonds played in some portfolios during the period of market dislocation.

Bonds still remain a ballast in the portfolios, we believe, and they’ve maintained relative value to stocks; they’ve continued to pay interest for income-oriented investors who are looking for yield; they’ve dampened portfolio volatility, perhaps keeping some investors actually invested and avoiding doing the wrong things at the wrong time; and, perhaps some bonds investors were able to reduce bond holdings and buy some stocks on the cheap during the depth of the crisis. So, a very useful source of funds in the portfolio to help rebalance as stocks sold off.

Right and, I mean, it really does illustrate, Stu, that there always reasons to worry out there, there's always that “wall of worry” that we so often refer to in the investment press, and we're talking about these kinds of things. And I think you also include a fantastic chart in your report that's called “There are always reasons not to invest”. I think it just illustrates the point of really taking that long-term perspective and maintaining it.

But there are some risks that you think investors need to pay attention to as we enter the second half of 2021, and perhaps into 2022 as well. Would you share those with listeners?

Sure. And we go into more details within the report on three specific risks that I think investors should be aware of, but not necessarily considered to be afraid of.

So first would be Inflation: the debate in the market today is, is it temporary, or is it more sustained inflation? Inflation is the top of mind for most investors, and we are all trying to decipher is this a signal, or just more noise?

I don’t think we can deny that short-term inflation levels are elevated, but this can be explained partially by the imbalance of supply and demand for many goods and services, as we’ve come out of the depths of the pandemic.

As we went into this deliberate shut-down and recession, many primary goods and secondary industries, like shipping companies and other modes of transportation for goods, also went into shutdown. Employees were furloughed, laid off, or terminated permanently.

As the economy opened up rather quickly again, there really wasn’t any ability to turn on the global machine, so to speak, so as workers needed to return to work, some workers had to move on to other jobs, some workers couldn’t come back in the same way given distancing/health concerns, etc. All of this led to the inability for those producing the goods to meet rapid and sudden shift up in the demand curve.

So, we seen temporary price increases, which of course is a natural phenomenon, demand outweighing supply. Commodity prices, consumer goods, input components, various industrial process that lean on these products all have seen price increases. But we’ve already started to see some of these commodities’ prices come back down again to pre-pandemic levels.

So, important in the debate about temporary or permanent inflation, of course, is this component of wages, wage component growth to inflation measures is important.

Overall wage growth has actually declined during the pandemic when you control for the sector impact, like hospitality and tourism. And we detail that in the article.

Overall, our previous work around inflation that tried to explain to our clients why inflation isn’t a medium to long-term risk to portfolios still holds true today.

Deflationary forces like technology, aging global demographics, are expected to keep inflation pressures in check.

The second risk – what happens to markets when monetary policy is no longer accommodative?

We believe that the Federal Reserve in the U.S. – sort of the main component of what we are talking about is monetary policy impact in the markets – will stay the course and continue to support its view that inflation is transitory, and that any removal of monetary policy will be gradual, well communicated in advance to markets.

So we don’t expect a similar market reaction to the removal of monetary policy by the US central bank as we saw in 2013, which has gone down in history and known as a “taper tantrum” – we talk about that in the report.

The third and final risk that we talk about is the Delta variant, or another coronavirus variant, will play havoc with the global growth outlook.

I think we just start to say that the continuation of global case counts and mortality rates is disturbing even if the rate of change has improved quite steadily year to date.

We are hopeful that the inequality with respect to vaccine distribution does play out in a relatively short order so fewer lives will be lost. I think that’s important to say upfront.

We are seeing emerging market infection rates rising again, and in developed markets where vaccine rates are relatively higher, case counts and fatalities seem to be skewed to the unvaccinated populations tied to the Delta variant, which does spread more easily and according to reports, even amongst younger populations.

We are closely monitoring developments and we’re going to watch for any additional signs for breakthrough cases on the rise, and take aim from there.

So, great detailed insights, Stu, in terms of what some of the things, some of the challenges, we may be facing over the coming months, and are facing presently.

Any final reminder for investors at this stage on how to be prepared for any market environment?

For sure. I think it’s important to always tie back these larger macro discussions to specific portfolio management techniques and sound investing principles. They get you through any market environment.

So, in our mid-year review and outlook article we provide a series of charts in the last part of the article that I think every investor should keep sort of posted on the walls or virtually somewhere on their phones or desktops as a reminder.

We show you, as you talked about before, there are charts in there that talk about there are always going to be reasons to sell stocks and move to cash to hypothetically avoid losses, but despite the continued, we call it, the wall of worry in the market, and seemingly end of days at times, you know the market continues to move on and slowly grind higher. Compound returns in your portfolio, they’re mostly a result of leaving your portfolio invested during the worst of times, even adding to positions to rebalance your portfolio to your own risk tolerance is a great strategy.

We also show you that over any reasonable timeframe that returns to equity investors are positive, and that volatility isn’t necessarily a risk to be concerned with.

At RBC PH&N IC we always stress that trying to time the market is a useless exercise really, that can actually cost you money in the long run – both in terms of transaction costs, taxes and lost opportunities for these sudden and violent swings in markets, both to the upside and downside, as we’ve certainly seen in the last year-and-a-half.

So we would say, staying invested, staying the course, remaining diversified at all times and anticipating frequent and sometimes large drawdowns are tried and true investment principles for any market environment.

Well, as always Stu, thank you for your insights and your perspective, and really, you know, laying it out so clearly, addressing both the issues of today and in the near term, but also maintaining that long-term perspective that truly adds value over time.

A pleasure joining you on Counsel Views today, Stu, and enjoy the rest of your summer and 2021.

Thanks very much, Leslie. You too. Talk soon.


The Canadian S&P/TSX Composite comprises the majority of market capitalization for Canadian-based, Toronto Stock Exchange listed companies. It is a benchmark used to measure the price performance of the broad, Canadian, senior equity market. It was formerly known as the TSE 300 Composite Index.

This recording was made on August 3, 2021.

Past performance is not indicative of future results.

This recording has been prepared for use by RBC Phillips, Hager & North Investment Counsel Inc. (RBC PH&N IC). The information in this recording is based on data that we believe is accurate, but we do not represent that it is accurate or complete and it should not be relied upon as such. All opinions and estimates contained in this recording constitute RBC PH&N IC judgment as of the date of this report, are subject to change without notice and are provided in good faith but without legal responsibility.

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