Weekly Comment- March 10, 2022

March 10, 2022 | Nick Foglietta


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Systemic Stress

 

A quick recap.

  • Serious amounts of volatility this past week.
  • Stock markets bounced at MEDIUM term support.
  • Oil and Gold became overbought, corrected and bounce again.
  • Bond yields went back up into the middle of their ranges.
  • Investors mostly sat back and watched.

These types of markets favour “traders” over “investors.” The stock market in Canada is still nicely above trend and dividend paying company shares have held up very well. Therefore, CDN investors are fine holding for now.

To keep these comments easy to understand and quick to read we will take a look at a few interesting/important visual aids.

  1. European systemic stress:

                                      

Clearly Europe, due to physical proximity, has been more detrimentally impacted by what is going on in Russia. The chart above shows a deep decline in the European bank stock index (blue) alongside the building systemic stress. (Black line).

To offer some frame of reference to the chart, remember back to March 2020 when the COVID pandemic was unfolding upon the face of the planet. See how the two lines correlated at that time on the chart.

Now look at the present setup. Quite similar indeed. Caution is warranted. Banking stress can spread quickly in the world today.

 

  1. Growth/Earnings in US:

Corporate earnings numbers have come off boil in the US. I will be watching corporate buybacks of shares closely here. For the majority of 2018-2020 corporate buybacks were making lackluster earnings appear solid by reducing the outstanding float of shares.

 

 

The backdrop of higher inflation and short term interest rates makes buybacks less attractive. Therefore, a large support for mega and large cap stocks is removed.

The US economic leading indicator has also dipped back to the zero line. In other words, growth has gone to zero.

 

 

As I keep stressing, the US Fed is attempting to raise interest rates into an inflation charged, economic slowdown.

 

  1. Inflation

It has now been 9 straight months of significantly higher inflation than the central banks have said they would be comfortable with. Remember back when the US Fed said they were “data dependent?” That simply has not been the case and the central banks are frozen like deer in the headlights.

A few comments back we chatted about “inflation expectations” being more important than the actual inflation rate when looking forward. Expectations are what impact people’s behavior and shape their decisions of today.

Below is a chart of the University of Michigan inflation expectations survey results.

 

 

It will be interesting to see if the spike this time results in the same recessionary outcome we have seen in the past?

So now let’s look at a very late economic cycle statistic to see if we can see more evidence of a coming slowdown.

In this case we will choose the jobs (labour) market.

 

 

Not a definitive roll over, but getting more convincing.

Remember again, the Bank of Canada and the US Fed are attempting to raise interest rates at the time of significant signs of slowdown.

 

Summary

Portfolios positioned for late economic cycle outcomes have performed pretty well. This is a good time to have lower exposures to growth-type investments and stay committed to commodity based names and utilities.

For the first time in a long time I am starting to buy mid-dated government bonds. The next 3 months are likely to be a tough set of economic comparable statistics in both Canada and the US.

Please make sure to preserve some buying power in your portfolio to take advantage of future opportunities that are likely to arise.

Feel free to ask questions.