For this week’s missive, we have recorded a brief update on the current market situation. I will summarize below, but the video, which is ~17-minutes, provides some thoughts on the recent market selloff and the likely glide path from here. I am going to apologize that I am in the latter stages of getting over Covid, so my voice is a bit horse throughout the video (also was not my best hair day).
Market Update
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Summary
The selloff year to date has impacted all markets to varying degrees:
While the Canadian market has held in better, this has primarily been because of energy with the average non-energy stock losing closer to 8%.
While it is convenient to blame the situation in Ukraine for all of this weakness, the initial cause was upcoming rate hikes from the Bank of Canada and the U.S. Federal Reserve. As we have pointed out, the market often experiences heightened volatility ahead of rate hikes, but absent a U.S. recession (which still remains a low risk at present), losses are generally short-lived.
As we have pointed out before, periods of market weakness are not unusual (although after a year such as 2021 in which we did not have any big selloffs, we often forget this). In fact, more than half of all years will see a 10%+ selloff:
We would note that in years where there is significant global conflict (as noted above), these selloffs are quite common, but we would also add that while these losses are significant, the average return for these years is ~-1%, so heightened volatility does not necessarily mean that the year will end up badly.
Inflation presents an ongoing challenge and is going to be the main driver of BoC and Fed rate hikes in the coming months:
However, while inflation remains elevated, it is important to note that the “bones” of the economy remain strong with manufacturing, employment and consumer sentiment all on the right path. Against this backdrop, the S&P/TSX is now trading below its long-term average. Interestingly, the main driver of this discounted valuation has not been falling stock prices, but rather rising earnings:
Final Thoughts
