21 January, 2022

Weekly Update - Volatility pushing stocks down as rate increases loom

North American stocks were caught in a downdraft last week as investors weighed ongoing inflation headlines, weakening consumer sentiment and the pending cycle of higher interest rates, which is hitting technology stocks particularly hard.

 

After being up more than 1% on Thursday, markets took a hard turn as the volatility that’s gripped North American stocks this year tightened its hold with a late-session drop that impacted virtually every corner of the market and sent the tech-heavy Nasdaq 100 Index into correction territory, down 10% from its recent highs.

 

Markets are bracing for rate liftoff by central banks, which could kick off as early as this week with the Bank of Canada set to announce its key policy rate on Wednesday. Economists surveyed by Bloomberg expect U.S. policy makers to raise interest rates in March for the first time in more than three years after tremendous support for the economy through the pandemic.

 

The best case is that higher rates don’t produce a sharp economic slowdown but are still potent enough to cool inflation significantly. Consumer prices rose at the fastest pace in 30 years last month.

 

But the potential for policy error has escalated along with inflation.

 

Central bank officials led by Bank of Canada Governor Tiff Macklem and U.S. Federal Reserve Chair Jerome Powell will worry that if they move too quickly, they will destabilize their economies, particularly here in Canada where we have one of the most expensive real-estate markets in the world. But they also know that if they balk, they could lose control of consumer prices and squander credibility that’s taken three decades to build.

 

Others believe central banks are already behind the curve with limited options. Amid signs price pressures have broadened, a gradual approach may fail to slow inflation -- forcing even more aggressive tightening down the line.

 

As markets continue to react and adjust to changing conditions, a continued focus on your long-term goals remains the best course of action. Investing through a well-diversified portfolio has historically provided the best experience through a combination of goals-based returns and reduced volatility over time.

 

  • Short-Term View: Investors bracing for rate increases dumped stocks last week, particularly the stay-at-home tech stocks that were favourites during the pandemic.
  • Longer-Term Thinking: Markets are cyclical over shorter periods. Growth in equities over time is in alignment with long-term historical trends. Maintaining a balanced and diversified portfolio is key to your long-term investment success.
  • Logic Over Emotion: Perspective is key. Focus on long-term goals and timeframes.

Our Experts Say...

 

“Our portfolio is more conservatively positioned than it was earlier in [2021], through the reduction of strongly performing holdings that have approached their target prices, trimming of the Energy exposure, and adding selectively to a limited number of holdings with stable business characteristics.”

 

Peter Chin, Portfolio Manager, Lincluden

Investment Management

Canadian Dividend Investment Specialist

 

 

 

Over the past 10+ years, markets are positive. Perspective is key. Markets do react to short-term increases in volatility – see the grey lines below – but the long-term trend is upward in the blue and red lines.

 

 

Source: Morningstar Direct. Growth of $10,000 shown. Total returns from January 1, 2010 to January 6, 2022 in local currency.