At the close of business last Friday, global equities were sharply lower on the week after central banks worldwide aggressively tightened monetary policy, amplifying recession fears. After breaching 3.80% briefly Friday morning, the yield on the US 10-year Treasury note rose to 3.74% from 3.45% a week ago, the highest level since 2011. The price of a barrel of West Texas Intermediate crude oil slipped below $80 on global growth concerns, to $78.90 from $85.50 a week ago. Volatility, as measured by the Cboe Volatility Index (VIX), rose to 29 from 27.5 last Friday.
Bearish sentiment, as measured by AAII, crossed above 60% this past week. The last time investors were this bearish was March 5th, 2009. The Federal Reserve in the US has hiked rates 75bps in June and September while the stock market was down -20% on a YTD basis. Raising rates when equities were down this much has never happened before in history. Meanwhile, ten-year bonds have experienced their worst annual price decline ever. The typical 60/40 balanced fund has now had its worst performance since 1937. Major global markets are down between 25-35% this year. We are currently living under immense and unrelenting Central Bank tightening pressure. One year ago, Central Banks talked about the transitory impacts of inflation and now they appear to be locked in a long 1970s struggle. On the inflation front, one positive indicator, our country’s inflation rate in June, was 8.1%. July 7.6% and August 7%. The estimate for August was 7.3% so inflation is easing a little faster than expected. Some commodities prices are also coming down.
Fundamentals and long-term secular outlooks for stocks no longer matter as markets are trading on fear of Central Banks. The relative price-to-sales ratios of growth stocks are today at one of the lowest levels of the last two decades. We believe we are headed into a future world of below-trend economic growth. Secular growth will be scarce and companies with it will be sought out and rewarded. We are incredibly enthusiastic about the opportunities over the next five years. Experience has taught me that these types of markets are the time to be investing aggressively to make your money for the next five years. As Warren Buffett has often said, “When investors are fearful, be greedy.” We have seen these scenarios play out before and everything we know tells us this is once again a generational opportunity for any investors with a time horizon of at least one year.
CANADIAN ECONOMIC NEWS
Canadian CPI declined to 7% year over year, below the 7.3% consensus forecast. Core inflation fell to 5.7% from an upwardly revised 6%. Interestingly, even the big unions in Canada are now asking our central bank to back off on future rate hikes, demonstrating that if Canada falls into a recession, it will be the workers who end up paying the price. We will watch closely to find out where inflation sits at the end of September. We expect it to continue to fall throughout the last quarter and into 2023.
US ECONOMIC NEWS
Markets expected a hawkish message from the US Federal Reserve last Wednesday but got more than they bargained for, as Chair Jerome Powell said that the path of interest rate hikes the Fed has planned will be enough to restore price stability. Powell reiterated that the longer inflation remains elevated, the greater the risk of it becoming entrenched. He also underlined the importance of not cutting rates prematurely. We think reducing inflation will take a sustained period of below-trend growth and will probably require some softening in labour markets.
EUROPEAN ECONOMIC NEWS
The Bank of England raised rates last week by 50 basis points, the Swiss National Bank by (0.75) and Norway’s Norges Bank (0.5%). Switzerland’s hike took its policy rate into positive territory.
JAPAN, CHINA and EMERGING MARKETS ECONOMIC NEWS
The central banks of Taiwan raised rates (0.125%), the Philippines (0.5%), and South Africa (0.75%).
The Bank of Japan is now the lone global holdout in maintaining a negative interest rate policy. The BOJ left its ultra-loose policy unchanged on Thursday, setting off a rise in the US dollar to its highest level versus the yen since 1998, which prompted Japanese authorities to intervene in the currency market for the first time this year.
“Whatever your life is at this moment, our team can come up with a plan.” Wise words from our very own Mike Tsuboi, spoken in his full-length bio interview on our YouTube channel.
What’s symbolic about the sentiment is how well it relates to this character element of our brand foundation: We do what we say we’re going to do.
After all, it’s what happens in Meeting One of our Total Package Planning™ process, where we ensure we clearly understand your current situation and future concerns by completing an analysis of your financial situation.
Stay tuned for next week, where we dive into what Meeting Two offers…