Market View

Quarter 3, 2022

2022 Third Quarter Market Summary

The volatile third quarter of 2022 was affected by a variety of factors outlined below:

Higher interest rates caused lower markets in Q3:  Investor sentiment bobbed and weaved during the third quarter.  In July and August, the equity market strengthened because the expected earnings “misses” never occurred.  In addition, there was a perception among investors that the rate of inflation would lessen and there was an end in sight for interest rate increases.  PMC thought it was too soon to be sanguine about the capital markets and so was not enticed to add new securities.   

Then September came around.  The U.S. Federal Reserve made it clear that interest rates will continue to rise until employment pressures decrease.  This, once again, stoked concerns of negative earnings revisions given a slowing of the general economy.  Accordingly, the interest rate hikes hurt stocks, bonds and preferred shares.  They all ended the quarter lower.   

Energy is the best performer:  Although energy is the year’s standout, it too slipped in the third quarter.  Energy is still the best performing sector, up 15.6% year-to-date (“YTD”), followed by consumer staples at 0.4%.  Every other sector is in negative territory.  We continue to like the energy sector as multiple years of under-investment will put that commodity in short supply in global recoveries relative to demand.  To that point, President Biden’s strategy to draw crude oil reserves from the Strategic Petroleum Reserve to lower prices at the pump means that the Reserve will have to be replenished down the road.  This will impact demand for oil for some time to come. 

Commodities indicating lower inflation?:  Interestingly, most commodities (metals, lumber, oil, corn, wheat) turned in a negative quarter.  This could suggest waning inflation moving forward.  YTD both healthcare and technology are down an astonishing 57% with both sectors suffering from declining investor risk tolerances.  Even the stable utility sector succumbed to the ever-increasing sell pressure of the market.  In true bear market fashion, there are few ‘safe’ places of refuge.  Solid high dividend paying names suffered as the rates of return for alternatives, like money market and bonds, became more attractive.   

2022 Stock Market returns:  Year to date (YTD) as of September 30, 2022, the Toronto Stock Exchange is still, relatively speaking, a global outperformer down ‘just’ 13% versus: 

EAFE (Europe, Australasia, & Far East) S&P 500 Nasdaq S&P/TSX 
-17% -24% -32% -13% 

Looking ahead, Federal Reserve will continue to raise interest rates to fight inflation:  The U.S. Federal Reserve has made it clear that it is going to continue to raise interest rates until it can engineer a softer labour market.  Statistics suggest there are currently almost 2 job openings in the US for every unemployed person, creating labour price pressure.  In an ideal world, the Fed would like the jobs available to weaken rather than see a rise in actual unemployment.  Indeed, a fine line to walk. The speed at which inflation and higher interest rates have impacted the economy has given way to speculation of a looming financial and or economic accident/crisis.  In Canada, the exponential increase in housing prices since Covid is a concern given higher interest rates (higher re-finance rates), and a slowing economy. 

Timing the bottom? 

Time the bottom or stay the course:  Impossible to time the bottom!  No one knows the answer to how long a recession will be.  There are just too many moving parts: inflation, interest rates, supply chain issues, high energy prices, government reactions, major conflicts around the world, and so on.  However, we do know this: Recessions are shorter than equity market upswings.  Typically, recessions hang on for 2 years or less.  Due to lags in statistical information, markets weaken before a recession is formally acknowledged and recover well before the end of the recession is declared. Assuming you have longer than a 2-year time horizon then our view is to stay the course.  

Strategas Research Chart 2022: “The Perils of Market Timing” shows it is better to be fully invested over time.  Returns fall if they do not include the best 5, 10, 20, 40 or 50 DAYS invested in the market.

PMC’s view:  2021 was an exceptionally strong year, the S&P/TSX went up 25%, which is not indicative of future returns.  So far, 2022 is an extremely poor year in the capital markets and again not indicative of future long-term returns.  Despite all asset classes, global equities, bonds and preferred shares being weak, we are doing substantially better than the markets.  Defensive positioning has helped to cushion the downturns.  It has been quite some time, but higher bond yields are making this area a more interesting topic in our investment discussions. Until we see forward earnings guidance out of companies, we will remain suspect of equity market bounces much as we were in July and August.  We will remain patient especially given the upward interest rate direction.  Stay the course. 

PMC in the News:

Anish Chopra’s article, Investing and Inflation:  Not mutually exclusive, was first published on the AICPA’s Journal of Accountancy’s website on August 23,2022.  See below.

Anish Chopra was interviewed on BNN, September 26, 2022, where he discussed: “Tips for navigating today’s market volatility and CEO succession at Canadian banks”