Our Recommendation: Stay the Course

Our Recommendation: Stay the Course

At the close of business on Friday, global equities declined for the third straight week to start 2022 with the tech-heavy Nasdaq Composite Index falling more than 10% from its November high. The yield on the US 10-year Treasury note rose to a two-year high before settling at 1.78%, and the price of a barrel of West Texas Intermediate crude oil hit a seven-year high and finished at $85.08. Volatility, as measured by the Cboe Volatility Index (VIX), surged to 25.7 from 20.3 on the week.


With the volatility we have seen in the first three weeks of January, it’s important to note that we are in the early stages of Q4 earnings season. The market is rewarding or punishing individual companies based on their announcements. It’s not just about Q4 results, but also their forward guidance. Supply chain issues and elevated input costs are creating uncertainty for some companies over the next few quarters, and this is adding to some of the price pressure.

Geopolitical risk is also factored into the market unrest, as renewed tensions between Russia and Ukraine, among others, top headlines. Geopolitics is always simmering in the background, but when there are flare-ups, we often see short-term market reaction. However, recent history shows that these are usually disruptive rather than destructive to the markets.

For the long-term investor, it’s important to remain focused on the fundamentals. Nothing has changed from our views. We must take a step back during these pit stops and ask ourselves what are the risks of a recession over the coming year? The answer is extremely low. Since most bear markets coincide with recessions, we don’t expect this near-term market volatility to cause a significant decline from these levels. When markets correct as they are now and we are not in a recession, the returns are quite strong one year later. We know in conversations with your fund managers that they once again have been provided a buying opportunity and have been active buyers in the last two weeks.

Inflation is a constant theme in everything that we’re dealing with as investors. In order for inflation to continue at this pace, we will see bottlenecks get worse, energy prices double again and the price of goods rise dramatically. With the expected interest rate increases this year, we expect inflation will decline by the fall to around the 3% level and we think that will allow our central banks to take their foot off the gas pedal by the fall.



This coming Wednesday, we expect an announcement from our central bank and we could see the first rate hike.



Earnings news
With about 13% of the constituents of the S&P 500 Index having reported for Q4 2021, blended earnings per share shows that earnings growth is running at 22.8% while sales rose about 13% compared with the same quarter a year ago.



UK inflation at 30-year high
Inflation in Britain rose faster than expected to a near 30-year high in December, which could place pressure on the Bank of England to raise interest rates. The annual rate of consumer price inflation increased to 5.4% from November’s 5.1%, the highest level since March 1992. Financial markets now price in a more-than-90% chance that the BOE will raise its main interest rate to 0.5% on February 3rd.



China reacts to slowing growth
China’s central bank cut its benchmark lending rates again on Thursday. They have also announced huge infrastructure spending to boost their economy. Emerging markets are a bright spot with positive performance year to date.

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