2022
Brodeur: Five key messages for investors amidst recent market volatility
2022 has seen one of the worst starts for markets in years. After a difficult first quarter in which both bonds and equities saw significant selloffs, markets continued to deteriorate right through April and May.
By some accounts the selloff in the U.S. 10-year Treasury through till April was the worst start of a year for that market since 1788, while the seven straight weeks of declines for U.S. equity markets is one of the worst streaks since the 1930s.
While neither of these factoids mean much in themselves, they do highlight just how unusual and uncomfortable markets have been this year.
As I type this note markets are set to finish this week on a strong bounce, breaking the seven-week losing streak and erasing much of May’s prior decline. Whether markets have bottomed or not remains to be seen but moral always improves when the beatings take a break.
I want to take a moment to step back and assess some of the drivers of the selloff and the potential implications and messages for investors going forward.
- Don’t Panic.
a. The secret to building wealth has always been compounding returns over years & decades, riding the waves along the way and sticking with a long-term investment plan. - This correction was not unexpected.
a. Stepping away from the daily noise, most of this year’s market activity has actually been healthy. At the beginning of the year, interest rates were too low (pandemic levels) and economic recovery was robust.
b. The Fed needed to raise rates as soon as possible, and although the Russian war and subsequent energy price spike increased inflationary pressure, with US 10-year yields reaching 3% there is an argument that the interest rate adjustment consistent with returning to neutral range is now done (priced-in). - Higher Interest Rates lead to downward pressure on equities.
a. In anticipation of this we reduced equity exposure in December as the market had to discount the move to higher interest rates.
b. Although the speed of rising rates caused more pain than expected, the view is that equities and bonds have now fully priced in the interest rate shift back to neutral, and depending on fundamental economic data to come, may have even overshot things slightly. - Outlook is Subdued but Constructive.
a. We do not expect an imminent recession, nor runaway persistent inflation. Growth is slowing as expected but it is hard to see the economy tipping into recession in the coming 6-12 months due to underlying health of consumer balance sheet and household incomes.
b. We expect a continued downward trajectory for inflation in the coming months, but the pace of decline is something we will be monitoring closely. - The Rate Reset is done.
a. Markets from here should move in line with fundamental outlook.
b. Our base case remains constructive that peak growth & inflation are behind us, and we are entering a more mature stage of the cycle. If we are correct in our fundamental outlook, while markets may continue to grind sideways, the sense is that we are in a bottoming process that should see a return to modestly higher markets towards year-end.
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Published May 30, 2022.
