13 May, 2022

Weekly Update - World Equities continue to slide after US Consumer Price Index flashes signs of persistent inflation

Weekly Market Update

World equities declined on Thursday to an 18-month-low, with markets dogged by fears high inflation would persist and force central banks to keep tightening monetary policy.

 

The S&P/TSX composite index ended down or 0.7%, its lowest closing level since May 2021. It was the sixth straight decline for the index, its longest losing streak since August last year

 

In the United States, stocks ended a whipsaw session slightly lower on Thursday, as investors juggled fears of nagging inflation with signs it could be peaking. The S&P 500 came within striking distance of confirming a bear market since swooning from its all-time high reached in January.

 

US stock futures rose on Friday after a mixed overnight session, but the major averages were still headed for big weekly losses as rising interest rates, persistent inflation and a weakening global economic outlook continued to weigh on the markets.

 

The stock market has been sliding for months, starting with unprofitable high-growth technology stocks late last year and spreading to companies with healthy cash flows in recent weeks. The selloff has wiped much of the rapid gains stocks enjoyed off their pandemic lows in March 2020, as surging inflation prompted the Federal Reserve to tighten monetary settings.

 

The US consumer price index rose 0.3% last month, the smallest gain since August. This is in contrast to the 1.2% month-to-month surge in the CPI in March, the largest advance since September 2005. On an annual basis, CPI climbed 8.3%, higher than the 8.1% estimate but below 8.5% the prior month. The data signaled inflation may have peaked but was unlikely to quickly cool and derail the Fed's current plans to tighten monetary policy.

 

As markets continue to react and adjust to the highly-volatile environment, a continued focus on long-term capital preservation and selective risk exposures remains prudent. 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: Inflation continues remain persistent with US CPI a recording modest increase. Looking ahead to Wednesday, Canada is set to release its Consumer Price Index’s data. Canadian investors will be looking towards that figure for signs of relief that inflation has cooled. Value-oriented equities continue outperform their growth counterparts and have been stable in the volatile environment.

  • 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...

 

“Valuations gaps of this size seem unsustainable to us. We suspect that they are more likely to be corrected ultimately by a shift in relative equity prices, leading to an outperformance of US value.”

 

Corrado Tiralongo, Chief Investment Officer

Counsel 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 May 12, 2022 in local currency. Volatility is illustrated by the rolling 5-day minimum and maximum percentage change for each of the indices shown.