One of the well-known quips about investing is that there are fewer things more humbling than markets. In last month’s commentary, we mused that by Labour Day markets would sense a pending shift by the Fed, be it dovish or hawkish. Then, lo and behold, near the end of April, in light of weakening Chinese data and plummeting U.S. housing data, market psychology assertively pivoted towards growth fears from concerns about inflation. The impact of this shift dominated market action during May, especially after Target Corp. (TGT.US) and Walmart Inc. (WMT.US) tabled sizable overhangs in their inventory positions and the latter joined Amazon.com Inc. (AMZN.US) in announcing a hiring freeze; two companies that employ three million people. As a result, markets exited May amidst a “perfect storm” of P/E multiple compression, profit margins that are rolling over and the rising prospect that revenue growth will roll over thanks to supply issues and the growing prospect of an economic slowdown.
Long-only investors endured a rough April as stocks unwound 100% of their H2 March rip higher, while bonds remained in the proverbial woodshed. NASDAQ suffered its steepest one-month decline (-13.24%) since October 2008, with April ensuring the S&P 500 is off to its 3rd worst year to date (-12.92%), with only the auspicious years of 1932 and 1939 having been worse. Here at home, the total return loss of -4.96% pushed the TSX into the red for 2022. For investors, the timing could not have been worse given equities as a percent of U.S. household assets stood at an all-time high of 41.9% at year-end 2021. The combination of rich valuations and fears towards inflation and growth, catalyzed this rout.
Driven largely by an influx of systematic capital flows and retail investors during the back half of the month plus a belief the Omicron-related Q1 economic dip was transitory, equities had a strong March. Markets appeared to be unfazed by higher interest rates and inflation, with limited impact from the Ukrainian situation. Despite the continuing conservative positioning held by each of our two funds, the table below highlights that each fund generated a positive net return. While we can identify catalysts that could cause equities to move higher, the combination of rising rates and slowing economic growth causes our bias to remain towards protection. The Energy sector continues to offer the best opportunity for offence.
In our 2022 Outlook Commentary, we suggested policy accommodation had peaked last Fall such that markets would ultimately turn on investors as this year progressed, but in the short term, ample liquidity would enable stocks to be okay. We also wrote that our constructive outlook on energy commodities and the value versus growth factor style of investing would enable Canadian stocks to outperform U.S. equities. Then by mid-January, the Fed turned hawkish and ever since, most financial assets, especially U.S. growth stocks, have had a volatile and rough time.