Newsletter Q2 2022

Market Update

The first half of 2022 was one of the toughest across all asset classes in recent memory, and while markets are showing some signs of light at the end of the tunnel, it is still too early to cue the rebound just yet. While the worst of the correction may have run its course, asset prices are expected to remain highly volatile as central bankers try to limit the negative impact of inflation and not cause a recession in the process. 

We recognize that it is especially important to maintain regular communication with clients during these periods of volatility and give you the information you need to navigate through the market cycle.  We hope you have found value in some of our recent email communications but always welcome the opportunity to connect directly by phone or in person for a more in-depth portfolio review and update. In fact, it is often during conversations with clients that we get asked some of the best questions and in many cases these questions are too good to be limited to just one discussion. It is on that basis that we posed some of these questions to our trusted network of economists and portfolio managers, many of whom manage investment portfolios for our clients. Here’s what they had to say: 

Is the global economy headed for a recession? 

“If you look at nothing else but employment figures in the United States and other countries like Canada or in Europe, the economy seems healthy. After all, a high percentage of people are working, which in the past usually means strong demand for goods and services. But that’s not really the case right now. In fact, a global slowdown seems inevitable and certain economies including the U.S. may be closer to recession than some might think. In fact, if growth ends up being negative in the second quarter, the world’s largest economy might already be in recession – technically speaking – given the contraction in growth during the first quarter.” – Kevin McCready – CEO & CIO at AGF Investments 

How low does the inflation rate need to get before the Fed stops raising rates? 

“In the past, 2% was the target, but that’s not the case anymore. If the rate ended up somewhere in the range of 2.5%, the Fed would probably be thrilled. But that’s an end goal. In the meantime, the hope is to see the inflation rate drop below 4% in the next six to nine months and if the rate fell closer to 3%, the Fed would surely consider that a victory and would be more inclined to pause on raising rates further.” – David Stonehouse – Senior Vice President at AGF Investments 

Given this uncertainty about inflation, what are your expectations for financial markets in the near term? 

“For me, the bottom line is that the stock market now looks like it may be approaching fair value, though it could always fall farther. Declining inflation expectations may help contain the amount the Fed has to increase rates from here. Those dynamics could give investors a better handle on what to expect – and could help lower the risk of the market suffering an earnings decline on top of a valuation haircut.” – Jurrien Timmer – Director of Global Macro at Fidelity Investments 

“It’s very difficult to predict the direction of markets in the best of times, let alone when there is so much uncertainty regarding inflation and interest rates. Equity markets may end up performing better than they did during the first six months, but volatility is likely to remain elevated for the next several months. The CBOE Volatility Index (VIX) has been trading in a heightened range since the beginning of the pandemic, but that shouldn’t be expected to change much going forward. At least not to the downside. It’s possible that the S&P 500 Index and other major indices that are down significantly end the year higher from where we are now. If it does, and the Index ends the year only down 6% or 7%, most investors should see that as a win.” – Rune Sollihaug – Vice President and Head of Risk & Portfolio Analysis – AGF Investments  

What is the biggest risk to an investor’s long-term returns right now?  

“I believe the biggest risk to [an investor’s] long-term returns is probably themselves. What’s maybe even more surprising is that the risk isn’t that they are doing too little, it’s that they are probably doing too much.  

The average investor makes too many decisions and the result of all this decision-making is lower returns. While the idea of expending energy to end up with less might not be an intuitive idea, it’s widely observed in investing. Activity is typically linked to emotions like fear and greed. One day an investor may feel the fear of missing out on the next hot trend, and by the next day they could fear a market downturn. The markets have a way of making investors manic and myopic – two traits that almost assure unpleasing long-term results in investing.” – Sydney Van Vierzen – Partner & Portfolio Manager at EdgePoint Wealth Management 

Maintaining Perspective 

As we have written about in the past, perspective plays an important role in assessing past performance and forecasting future results and therefore it is important that we do this analysis through the proper lens. When performance is viewed on a daily or weekly basis, declines can feel painful and deep. However, when we measure performance on an annual basis, we see little trace of these time periods.  

The two charts below show the S&P 500 Index over the last 10 years. The first chart shows the value of the index measured on a weekly basis, while the second shows the value measured on an annual basis. Which of these charts exhibits a greater degree of volatility over that 10-year period? The answer of course is that the level of volatility over this timeframe was exactly the same. The only difference is our perspective as we measure over a reasonable period of time.