18 March, 2022 Financial Planning Investment Services Portfolio Management Wealth Management

Weekly Update - Markets rally on rate hike certainty and TSX sets new record

The rally in miners and energy stocks this year has propelled Canada’s stock market to a new record as investors piled into producers of crude oil and gold amid rising geopolitical tensions. The S&P/TSX Composite Index gained 1.4% Thursday to close at an all-time high, its first since Nov. 12 with traders on the hunt for havens as the ongoing war in Ukraine fueled market jitters.

 

Shares of energy and materials companies have been strong this year, making them the two best-performing groups in Canada as markets reel from Russia’s war in Ukraine, a tight oil market, economic growth uncertainty and a rising interest-rate environment.

 

With oil and gas firms and miners making up almost a third of the benchmark, Canadian stocks have outperformed their U.S. counterparts -- the S&P/TSX Composite has gained 2.6% this year, while the S&P 500 Index declined -7%. Bank stocks, which contribute about 33% to the index, have also advanced this year as the Bank of Canada and the U.S. Federal Reserve (Fed) raised interest rates and signaled that more hikes are to come.

 

U.S. stocks have outperformed Canada every year since 2011 except one (2016), leading to a very wide long-term performance gap. But this could be the year things turn around for the TSX. With growth stocks getting hammered this year, investors have been able to diversify their portfolio by adding Canada’s “tech-lite” $3 trillion stock market.

 

Equity markets notched their biggest three-day rally since November 2020 during the week as investors were heartened by statements from Fed chair Jerome Powell, who said the “economy is very strong and well positioned to handle tighter monetary policy.” He also noted that the probability of a recession is “not particularly elevated.”

 

With inflation running hot, central bankers have a difficult task in front of them – needing to cool demand without crushing the economic recovery from the pandemic-induced downturn. Following the Bank of Canada’s move two weeks ago, the Fed started its own rate-hike cycle on Wednesday and signalled seven more increases to come.

 

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: Canadian stocks reached new record highs while U.S., European and Chinese stocks all rallied this week as the U.S. Federal Reserve kicked off its cycle of interest rate increases. 
  • Longer-Term Thinking: Sticking to your long-term plan through periods of volatility is central to investment success.
  • Logic Over Emotion: Perspective is key. Focus on long-term goals and timeframes.

Our Experts Say...

 

“In more normal times, central banks might look through higher inflation resulting from a shock such as this, but with inflation already high in most places, and some policymakers clearly concerned about inflation expectations becoming unanchored, we doubt that central banks will substantially scale back their plans to tighten.”

 

Corrado Tiralongo,

Chief Investment Officer

IPC Portfolio Services

 

 

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. 13, 2012 to Mar. 17, 2022 in local currency. Volatility is illustrated by the rolling 5-day minimum and maximum percentage change for each of the indices shown.