To my clients:
Reminder: I will be “away” next week as I spend some Spring Break time with my family. That said, I will be connected and will be monitoring markets as well as checking in periodically to my desktop. However, please contact Brenda at brenda.goertzen@rbc.com or 778-328-7797 for any pressing needs. There will be no update next week.
It was an up week for North American stock markets with the Canadian TSX finishing up 1.7%; the U.S. Dow Jones Index finishing up5.5% ; and the U.S. S&P 500 finishing up 6.2%.
As the data above reveal, it was a very strong recovery week in the markets - in fact, the strongest in nearly a year and a half (November 2020). However, it is fair to wonder why? The Russia/Ukraine conflict continues in depressing fashion; inflation persists; the U.S. Federal Reserve kicked off its rate hiking campaign and forecast a more aggressive path to rate increases than most anticipated; and a new variant of covid is capturing greater attention. So why would markets rally so nicely in a week when headlines seemed decidedly negative? Let me offer my thoughts…
Well, a drop in oil prices from recent highs of roughly $130/barrel to around ~$100/barrel (as I type) has certainly helped sentiment. But, the surge in markets can’t be tied to this alone since oil prices actually dropped into the mid-$90/barrel range earlier this week before settling in today at a little over $100. Yet, as the price moved back up from the mid-$90/barrel range, markets continued to rally.
More likely, I suspect some of the market rally owes to the fact that the U.S. Federal Reserve did not raise interest rates by 0.5%, but instead limited the increase to the 0.25% that Chairman Jerome Powell previously said would occur. It’s a strange phenomenon, but my anecdotal observation from years of watching markets closely is that markets often respond in unexpected (read: positive) fashion when an anticipated negative event actually occurs. I suspect this phenomenon has to do with markets pricing in a near worst-case scenario and then responding with relief when events play out in a less pernicious way. Relatedly, markets are also said to “hate uncertainty” and the clarity provided by the Fed’s rate hike campaign actually beginning helps sentiment. Whatever the reason, in a call with a client the first week of this month, I was asked when I thought market conditions might improve in earnest. I responded that my best guess would be when the Fed begins its rate hike campaign mid-month. I emphasize that this was a guess (part educated and part lucky), but I would also emphasize that the guess was made within the context that I and RBC continue to see a recovery in markets going into the back half of 2022. In our view, recession continues to be a low probability event.
But let’s not be disingenuous – while recession is still a low probability event, and all seven of RBC’s indicators continue to flash green, perhaps the most important indicator – the yield curve - is bordering upon flashing yellow. It’s not there yet, but it’s close. In itself, even if the yield curve did invert, it wouldn’t be a game changer to our outlook, but it would be a significant development. We will continue to watch closely (one of the reasons I will be checking in while away next week).
Lastly, a sub-variant of Omicron known as BA.2 is leading to an increase in European covid cases. I won’t dwell on this because this variant appears not to lead to more severe outcomes than the reasonably mild main Omicron variant, and I further believe that countries and populations have minimal appetite to revisit restrictive societal measures to combat the sub-variant. But, of course, this too should be watched.
That’s it for this week. Next update (no fooling) on April 1st. All the best,
Nick
Nick Scholte, CIM, FCSI
Senior Portfolio Manager
Scholte Wealth Management
RBC Dominion Securities Inc. │ Tel: 604.257.7569 │ Fax: 604.235.9950
3200-1055 West Georgia │ Vancouver, BC │ V6E 3P3
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