28 January, 2022

Weekly Update - Volatility Amid Rising Rate Expectations

Markets have shown renewed volatility this week as investors come to grips with central bank policy that has telegraphed an increase to interest rates in the coming months. Both the S&P/TSX and the S&P 500 have swung from significant intra-day declines to relief rallies but have ultimately moved lower on increasingly cautious sentiment. Historically high market valuations and uncertainty surrounding inflation-related consumer impacts are also contributors.  European markets have largely reflected the cautious-negative bias, shifting lower for the fourth straight week.

 

The Bank of Canada surprised markets this week by leaving its key lending rate unchanged at 0.25% despite high levels of inflation and evidence that the economy is running at near capacity. A rate move is all but certain in March. 



The U.S. Federal Reserve also held rates unchanged following a policy meeting this week, a positioning that was expected by investors. The Fed re-affirmed plans to reduce its bond purchase program as a first step to reducing stimulus, leaving the door open to a widely expected policy rate increase in March. 

 

Economic results continue to improve.  U.S. gross domestic product increased by 6.9% in Q4, coming in ahead of consensus expectations. Unemployment rates have been trending lower, and initial jobless claims fell this week reflecting tighter labour market conditions. However, consumer sentiment is softening, with a late January reading that is the lowest in 10 years reflecting higher prices, pandemic fatigue, and geopolitical tension.

 

U.S. corporate earnings season is in full swing. Q4 results have been largely positive, but there have been some notable misses knocking investor confidence, including household names like Goldman Sachs, Netflix, Intel, and McDonald’s. Corporate earnings growth is expected to be solid to finish 2021 but gear down significantly in 2022.

 

In line with the anticipation of rising rates and a potential slowing of economic growth, bond yields have been moving higher recently.  Interest rate sensitive tech stocks have been feeling the pressure of higher rates, pushing the tech-heavy NASDAQ index down almost 15% from its November high.

Oil prices continued to rise this week as global consumption trends appear to be holding firm, despite the impact of the Omicron variant. Geopolitical tensions in Ukraine and the Middle East have added pressure to prices.  Oil has increased approximately 15% so far in 2022.  Rising energy stocks have provided some relief from the market’s downward pull, particularly in Canada.   

 

Equity returns heading into 2022 are anticipated to be positive, but volatility is expected based on changing short-term conditions. However, research has shown that investment portfolios show less variability in returns over longer holding periods, and investors are encouraged to remain focused on longer term goals.

 

  • Short-Term View: Investors bracing for rate increases dumped stocks last week, particularly the stay-at-home tech stocks that were favorites 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...

 

“Given the strength of the Canadian market over the past year, we have had many stocks reach target prices and have recycled those funds into existing holdings as well as new opportunities. As always, we remain focused on the valuation opportunities in the market to both protect capital and deliver capital appreciation over the long term.”

 

James Black, Portfolio Manager

Beutel, Goodman & Company

Canadian Value, North American Value 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 $100,000 shown. Total returns from Jan. 1, 2010 to Jan. 27, 2022 in local currency. 

Volatility is illustrated by the rolling 5-day minimum and maximum percentage change for each of the indices shown.