Recent market volatility and selloff

Nicole Rothe - May 06, 2022

We’ll get to our destination but there will be pit stops along the way

What is causing this recent market volatility and selloff?

 

2022 has not been kind to investors so far. The NASDAQ, S&P500 and the Dow Jones Industrial Average have all fallen significantly since the start of the year with the NASDAQ and S&P500 in correction territory.

 

This volatility has been caused by a few things:

 

  1. The Federal Reserve in the US has communicated that it will likely increase interest rates to try and battle inflationary pressures, and this increase may occur earlier than they originally expected. This has and will cause volatility and pain in the market. The market is very much acting in anticipation of this increase. Many companies have benefited from these ultra-low rates and when interest rates increase, this reduces their revenue streams and profits.
  2. Geopolitical risk – Tensions between Russia and Ukraine are at a renewed high. When these news sources flare up, we often see volatility follow in the market.

 

Is this this volatility due to a recession?

 

There are usually many leading indicators present to indicate a threat of recession. Other than positive inflationary trends, the other usual indicators are not currently present. Therefore, recessionary risk in 2022 is low.

 

As an investor, it is important to continue thinking long-term and remain focused on your long-term strategy. As per the remainder of our letter below, this volatility does not change any of the information that will follow. Moderate growth is still expected with short term setbacks and pit stops along the way. This pit stop just occurred earlier than was expected.

 

We’ll get to our destination but there will be pit stops along the way

 

Many of us have fond memories of piling into the car and embarking on a road trip to a desired destination. There were often ‘pit stops’ along the way—those that we anticipated, like stopping for meals or gas, and those that were unexpected, like road construction or a flat tire. Despite these short-term setbacks, we would inevitably reach our destination.

The investment landscape during the past couple of years has looked a bit like that of a road trip, complete with detours and bumps along the way. Last March marked the one-year anniversary of the pandemic, and global markets continued their recovery through 2021 fueled by vaccine rollouts, economic reopening, and strong consumer demand. In the third quarter, rising inflation and supply chain issues made headlines but U.S., Canadian, and European equity markets remained strong. And in the last weeks of December, COVID-19 cases soared once again due to the Omicron variant.

As we settle into a new year with the realization that it will take some time yet for the world to get a handle on the pandemic and facing the possibility of rising interest rates, it’s natural to feel nervous about the state of things. But the growth and inflationary environment remains favourable for investors.

 

Growth likely past peak but remains resilient. Global growth and earnings likely peaked during the summer of 2021. Although economic activity is expected to slow and will face continued challenges including supply chain disruptions, overall, the global manufacturing environment remains in a resilient position. Companies are predicting that production will be higher a year from now and historically, a strong manufacturing sector provides a healthy environment for earnings.

 

Inflation enduring but softer. The Consumer Price Index (CPI), which measures changes in prices over time, is currently at 6.8%. It’s expected to decrease but will likely remain above 3% through the summer. Inflation will continue to be a concern throughout 2022 but receive nowhere near the level of attention it’s receiving today.

 

Equity markets enter the “normalization” phase. In this next stage of post-recession recovery, earnings growth will moderate but remain strong. Growth in the 10-15% range is very possible for U.S. equities while S&P/TSX earnings are expected to come down from recent elevated levels but remain attractive through the first half of 2022. Based on year-over-year earnings growth, returns in the upper single digits/low double digits are likely for the S&P 500 Index.

 

A well-balanced portfolio will be paramount. Throughout the pandemic a smart strategy has been to take advantage of asset allocation and dollar-cost averaging. That approach is still wise today. A correction in the near term is entirely possible and we are likely to face some headwinds in the first half of the year, but we need to take these ‘pit stops’ in stride and focus on the road ahead to make sure we arrive at our destination.

 

RRSP deadline. The deadline for RRSP deposits this year is March 1st, 2022. If you need to make a contribution or a top up, please contact us to book an appointment. If you plan on completing this contribution virtually this cannot be left until the last week due to time constraints and the time it takes to transfer funds.

 

TFSA top ups. The government announced in November that individuals would be receive $6000.00 in additional tax-free savings contribution room for 2022. Please contact the office if you need to top up your TFSA, and if you don’t already have a tax-free savings account, want to learn about features/benefits and whether it is a good fit, please let me know.

 

As always, I am here to talk if you have any questions. I invite everyone to book a review meeting as ensuring your investments are positioned to meet your goals is always of primary importance. Wishing you the best in the new year,

 

Regards,

 

Nicole Rothe BSc, CFP®, EPC

Financial Planner, Manulife Securities Investment Services Inc. | Rothe Wealth Management