Alfred Lam, MBA, CFA | Multi-Asset Management | CI Global Asset Management
July 21 2022
The S&P 500 Index dipped to 3667 the day after the Fed hiked 75 basis points on June 15. It has since rallied back to 3999. (+9%) During this time, we had inflation risen to 9.1%, some disappointing earnings and lower future earnings guidance. It appears the markets are prepared for bad news and we are finally over with the period “good and bad news are both bad news”.
We are seeing signs inflation is cooling, gasoline prices in particular, down over 10% month-over-month. Employers have turned cautious and putting some pressure on wages and the job market. Unfortunately, it is necessary to have weaker economy to bring inflation down. I would not rule out “soft landing” completely even though I am never a fan of central bankers. Canada overnight rate is already 75 basis points above the last terminal rate and yet we have more debt. The ability to pay higher interest without implications is obviously lower. We are seeing property markets to feel the pain first. As such I suspect we are very close to the end of the hike cycle and BOC will use the next 50 or 75 basis points room very, very cautiously. If the overnight rate eventually peak at 3.25%, 10 year yield should be around 2.5% (because the average is always lower than the peak). It can happen in six months, this implies a cap gain of 6% for 10 yr bond, plus the coupon. This will provide income investors some relief.
Equity is everyone’s guess in the near term. It is an asset class investors supposed to only care the long term performance of a company, but recently investors only care about the next quarter as they are scared the central banks will “ruin the party” even though central banks have a track record of “promoting the party”. Equity markets have reacted well to bad news recently but it can change. We also have some geopolitical issues, England and Italy will have new leaders this Fall, Biden’s trip to Middle East received little respect and Putin’s trip to Iran was the opposite. All of the above suggest to me the war in Ukraine will be longer. Investors will continue to pay attention to noise and opportunities are opening as a result. The mega trend for technology advancement is not changing. Steve and I had a call with Nick at Munro this morning and we got reassurance the portfolio is invested accordingly. He went that far to say he has a hard time to see some of the tech companies like Microsoft to have lower earnings in 2023 even if we have a recession. Short term is anyone’s guess, long term (probably doesn’t have to be 10 years, even at 3 years mark) we are confident with corporate earnings and their prices.
What should you “hold” in today’s environment? Your emotions.