Letter from the President:

Every week, I have the great pleasure of meeting our clients, mostly through Zoom these days although a few have ventured into our office and sat with masks on across our big boardroom table. At meetings we cover basic things like TFSA and RRSP contributions. We cover portfolio risk and we often do planning, but often a client asked something like: Where is this market going? It’s a tough question and if I knew I would be a billionaire. (I’m not.) What I can tell you, is the market is trying to process two key factors, Covid and inflation.

Covid first. It seems that every time we start to think it’s over, we get another wave. We are in the fourth wave now and while we Canadians were pretty smug about how well we were doing earlier (remember how we used to clap for nurses and doctors at 7pm every day?), we’re not out of the woods just yet. The Delta variant is bad enough (over 90% of current cases1), but two new variants are getting some press. Mu (named for the Greek letter) is a World Health Organization “Variant of Interest” and C.1.2 (identified in South Africa) is not yet a VOI but is being closely watched2.

Also of some concern is a recent Pfizer/BioNTech research report which found that the efficacy of the double vaccine wanes over time, dropping from 88% to 47% effectiveness after six months3. The U.S. Food and Drug Administration has authorized the use of a Pfizer/BioNTech booster for persons of high-risk. While scientists have called for more data, the argument is building for boosters for all (not a bad thing for Pfizer shareholders).

On the positive, most are now vaccinated (75.96 % in Canada4 and 65.1% in the US5 as of October 5) and AstraZeneca, the drugmaker that developed one of the first COVID-19 vaccines, has asked the U.S. Food and Drug Administration to authorize the use of its antibody shot, a potential major step in the global fight to combat Covid6.

Notwithstanding some ups and downs in the world’s battle with Covid, the general view is this too will pass.
Inflation is probably the bigger issue for markets as it has a direct impact on interest rates, valuations, consumer spending, corporate profitability, and central bank stimulus. Some inflation is good. The Bank of Canada and the US Federal Reserve Bank like 2%7,8. Too little inflation or deflation is bad, and too much inflation can be a problem as interest rates must rise to compensate investors, potentially killing the economy. The debate now is whether the inflation we have now is “transitory” or is part of a trend to an inflationary world.

Gareth Langdon, our “newish” investment analyst (he started in June) and member of our Investment Oversight Committee, takes a look at inflation and the market this quarter in his commentary below.


300 Billion:

During the third quarter of 2021 we saw a little bit of everything happen in the world from a federal election in Canada to one of China’s largest real estate developers, Evergrande, teeter on the verge of bankruptcy. Looking back in the rear-view mirror we now know that the election really turned out to be a nonevent. The Evergrande story out of China on the other hand has been much more interesting (unless you’re one of those weird political junkies). The traction of the Evergrande story led to some short-term market volatility as investors worried about the possible fallout of one of China’s largest developers and the implication this could have globally with such a globalized market. Their debt has ballooned to more than $300 billion, a crazy number to wrap your head around.9 The Evergrande story is far from over, but for now, it looks like it will not be a catalyst for an extreme sell off that some Bears have been calling for. The Evergrande situation is a good reminder that there are vulnerabilities than can be hard to anticipate. It shows the importance of having a diversified portfolio while not being too concentrated in any one industry, region, or asset class.


At the end of September, we saw the U.S. 10 Year Treasury yield pushed higher to touch 1.5% which was a level that had not been hit since June. However, its crucial to remember that despite the initial uptake in current rates, they are well below historical averages.10 UBS had this to say about the current situation:

“The gradual shift in central bank policy reflects optimism over economic growth, rather than worries over inflation. Rather than ending the equity rally, we expect the rise in yields to favour cyclical sectors such as financials and energy, over growth sectors such as technology” 11

Speaking of inflation, as mentioned in our last quarterly letter, we were watching very closely on inflation figures to see what sort of numbers would come through the summer months. Well, we have the answer: The Consumer Price Index in Canada accelerated to 4.1% in August which is the fastest pace since 2003 and the fifth consecutive month of inflation readings above the Bank of Canada’s 3% cap.12 As expected, the Bank of Canada left rates unchanged and did not change their current bond purchase program on their meeting that took place on September 8th. All eyes will be on the next interest rate announcement and monetary policy report on October 27th followed by the final Announcement of 2021 on December 8th…get your popcorn ready!


In August, the annual Jackson Hole Economic Symposium took place with Fed Chair Jerome Powell giving his much-anticipated speech which markets took as a positive sign. He reiterated the central banks accommodative stance of keeping interest rates low, although he did mention the bank would slow down their asset purchase program soon. More recently, Powell has also been busy warning about the growing concern of the U.S. Treasury needing to raise the debt ceiling given they expect to run out of cash in a matter of weeks. Luckily, the U.S. senate has voted to temporarily raise the nation’s debt ceiling until December. In December I’m sure the same process will occur, and financial news will warn about the catastrophic consequences if the ceiling isn’t raised, only for it to be raised yet again. Rinse and repeat.


One recent acronym that I have been thinking about lately with interest rates so low is “TINA” (There Is No Alternative). That’s great, but what does that mean? Well, it, refers to the current situation where bonds offer such low yields, investors don’t really have options in their search for yield, and so keep plowing into equities to try and grow their net worth13. The “There Is No Alternative” to equities argument can be made even stronger when looking at the Equity Risk Premium (ERP) in the below chart. The ERP values stocks based on the prevailing 10-year Treasury rate. The ERP gauges whether investors are compensated for the greater risk in equities versus “risk-free” government bonds. The ERP has been well above its long-term average for the past 10 years. This suggests stocks are undervalued for the relative risk/reward they offer according to BlackRock’s Chief Investment Officer for U.S Fundamental Equities, Tony DeSpirito 14.

The big risk however to the TINA argument simply put is, you guessed it, our good friend inflation. If we do see secular inflation drag out, central banks will be forced to raise rates which will raise bond yields.

Our skillset at ZLC is not being able to accurately anticipate or predict inflation, but rather create portfolios that can respond well to it based on asset allocation. and This is what we continue to do despite the everchanging headlines on inflation and central bank rhetoric.

Blowout Earnings: 

While many of us took the opportunity during the summer months to take some well-earned R & R, we might have missed the stellar earnings period that came and went. The below graph produced by BlackRock showcases the Year-to-Date sources of return for the S&P 500 index which is almost entirely explained from earnings.

Despite the remarkable earnings we have recently seen, they will eventually peak if they haven’t already. In our last client letter we highlighted the substantial amount of savings in the economy, and clearly some of those savings have been put to use during the summer months as equity markets pushed higher on the back of these strong earnings results. We will be keeping a close eye to see how the next few earnings reports go and what that can tell us about the pace of growth in the economy and which industries continue to be robust.

The rebound from the lows of March 2020 really have been outstanding and the recent earnings are truly unprecedented (I apologize for using this overly used phrase, but it is true when it comes to companies beating expectations). Investors who panicked during the pandemic and got out of the market without redeploying their assets have missed out on great year thus far.

What’s Next? 

Despite an overall strong year of market returns, U.S equities during the month of September experienced their biggest monthly selloff since March 2020 over concerns of slowing economic growth, elevated inflation, and issues coming out of China. However, after such an incredible market run since the March 2020 lows, pullbacks are expected. Market volatility is the norm, not the exception.

As noted above, U.S. Treasury Yields have recently picked up after Fed Chair Jerome Powell indicated to the Senate that the central bank has “all but met” the test to tapering bond buying. Everyone knew it was only a matter of time until the central bank would reduce stimulus, however it might happen faster than some market participants anticipated. On a more positive note, the recent U.S. Durable goods orders that were released at the end of September leaped 1.8% with business investment also increasing for the sixth month in a row. Businesses appear to be preparing for a busy holiday season and seem to expect consumers to continue spending, regardless of what happens in the financial markets. We will have to wait and see what consumers have in store when we get the relevant data in the New Year.

With global equities having touched new highs during Q3 2021 and coming back down with some economic data points pointing towards optimism, and others less so, the team here at ZLC Wealth will continue to focus on what we do best, keep the big picture in mind. It can be easy at times to get distracted with granular details especially as sentiment shifts from week to week.

On a final note, unfortunately, due to the ongoing situation with COVID here in the province, we will not be able to host our Annual Client Update this year, but we look forward to the opportunity to connect in person in 2022.

-Gareth Langdon


1. https://health-infobase.canada.ca/covid-19/epidemiological-summary-covid-19-cases.html

2. who.int/en/activities/tracking-SARS-CoV-2-variants

3. reuters.com/business/healthcare-pharmaceuticals/pfizerbiontech-covid-19-vaccine-effectiveness-drops-after-6-months-study-2021-10-04/

4. https://health-infobase.canada.ca/covid-19/vaccination-coverage/

5. https://covid.cdc.gov/covid-data-tracker/#vaccinations_vacc-total-admin-rate-total

6. https://www.reuters.com/world/us/astrazeneca-files-us-approval-drug-prevent-covid-19-2021-10-05/

7. https://www.bankofcanada.ca/core-functions/monetary-policy/inflation/#:~:text=publications%20and%20explainers.-,Measures%20of%20Inflation,consumer%20price%20index%20(CPI).

8. federalreserve.gov/monetarypolicy/files/FOMC_LongerRunGoals.PDF

9. https://www.bloomberg.com/news/articles/2021-09-27/evergrande-pain-spreads-to-wealthy-investors-as-more-interest-payments-missed?srnd=premium-   canada&sref=IAvzeH47

 10. https://www.bloomberg.com/news/articles/2021-09-26/asia-stocks-to-open-steady-as-treasury-yields-rise-markets-wrap?srnd=premium-canada&sref=IAvzeH47


12. https://www.bloomberg.com/news/articles/2021-09-15/inflation-jumps-to-4-1-in-canada-jolting-trudeau-election-bid?srnd=premium-canada&sref=IAvzeH47

13 https://www.bloomberg.com/opinion/articles/2021-08-20/fund-managers-in-thrall-to-tina-can-t-quit-stocks?sref=IAvzeH47

14 https://www.blackrock.com/us/individual/literature/investment-commentary/taking-stock-quarterly-outlook-en-us.pdf   

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