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CA-EN Advisors

Don’t Fight the Markets

February 6 to 10, 2023


Don’t Fight the Markets

February 6 to 10, 2023

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Weekly Commentary

Market Recap

  • The Federal Reserve raised rates by 25 bps this week, as expected; it reiterated that “ongoing increases in the target range will be appropriate”; and Chair Powell tried to talk up further rate hikes and labour-market tightness in his press conference. But the market wasn’t buying it (or rather, selling it), as risk assets and Treasuries both rallied strongly.
  • The S&P 500 rose 1.6% on the week, and the Nasdaq rallied 3.3% with high-beta names in technology and communication services leading the charge. The TSX lagged in this charged environment, gaining just 0.2% as energy and defensives slumped. Ten-year Treasury yields fell just over 10 bps before the Friday payrolls report and even Bitcoin lurched higher post-Fed.
  • Put it this way: If the Fed is concerned about easing financial conditions while their inflation fight is still underway, they took a step back this week.

Central Banks

Over the past several weeks, the Bank of Canada, U.S. Federal Reserve, European Central Bank (ECB) and Bank of England have all raised interest rates by at least 25 basis points. But despite those increases, equity markets are rallying. Are markets ignoring the messaging coming out of the central banks? It’s not quite that simple. In our view, the message that markets are receiving—and the reason they’ve rallied of late—is that rate hikes may be nearing an end. They don’t care that, for instance, the Fed may raise rates by another 25bps at their next meeting, or that the ECB may have some more work to do. The consensus view is that a pause is on the horizon, and a rate cut from some central banks is a possibility for the end of the year as long as inflation continues to decline. Recession fears are still there, of course. But with a downturn potentially having been pushed down the road, markets see room to move higher, especially with nothing terrible on the earnings front that would alter those expectations. Now, is the market correct? Will we actually see a rate cut by the end of the year? We remain skeptical. But it is worth noting that we don’t necessarily need a recession in order for central banks to cut rates. Once inflation is successfully calmed, interest rates can start to be normalized.

Bottom Line: With a rate hiking pause on the horizon, markets are understandably optimistic.

Oil Prices

U.S. oil production appears to be on the rise, but does this change the outlook for crude prices? In the short term, oil still faces some potential challenges—the economy is weakening, demand is slowing, and China still hasn’t fully reopened. These could prevent crude prices from rising in the near future. But looking further out, it’s a different story: OPEC is unlikely to increase supply materially; when China does finally reopen, demand will likely increase; and if the recession everyone’s expecting doesn’t come to pass, or if it’s not particularly severe, then demand could be greater than anticipated. In our evaluation, these factors mean that oil prices still have room to go higher, potentially into the $80-$90 per barrel range. So, we do like Energy from that perspective. But what’s different this year compared to last is that in 2022 oil was outperforming in a down market. Markets are now rallying, so the debate of which you want to own—oil vs. the market—is very different.

Bottom Line: Oil won’t outperform markets by as much as it did last year, but it could still outperform, at least in the long run.

Tech Stocks

Tech stocks surged in January, and while some believe it was a flash in the pan, we believe it was a sign of growth equities recovering. Tech was the first sector to really get punished when markets sputtered, and we’ve always expected it to be among the first to recover, even with recent layoffs. A key factor is that the market’s risk appetite has changed—risk-off sentiment is increasingly turning to risk-on. We’re seeing that in the crypto space, which has rebounded somewhat from its much-publicized lows, and even the more speculative Tech names are bouncing back. That bodes well for the sector as a whole. There’s also the earnings picture, which hasn’t been as disappointing as some were expecting. And, perhaps most importantly, Tech seems to have resumed its role as a market leader. Back in Q4, when Meta had a bad day, the market didn’t follow suit. But last week, Meta had a good day, and it filtered into the whole market. Cathie Wood’s ARK Innovation ETF, which is available in Canada through the BMO ARK Innovation Fund ETF Series (ARKK), is a great example of the tech rebound—it’s got appeal to the retail investor, some innovation out in the future, and some big names like Tesla.

Bottom Line: Tech is leading the charge again, and it’s wise not to be too underweight—even if there may be some volatility.


Right now, the big message is—don’t fight the markets. It’s markets that are driving what’s happening at the moment, and it’s clear that they want to go higher. We don’t think investors should bet against that, which is why we’re remaining neutral on equities for now.

Regionally, the U.S. remains the strongest economy, and we’re still seeing optimism on the China front—those bets will be reflected in our portfolios. In terms of bonds, the question now is—with the economy potentially pushing a recession further down the road, is it time to get back into lower-quality bonds like High Yield and Emerging Market Debt? Given their attractive yield and our expectation that they’re not going to be punished much given the strong chances of only a mild downturn, it’s a debate worth having. And finally, on the currency front, the U.S. dollar has been weakening, and we expect that to continue. We think that the CAD is undervalued and will continue to appreciate, especially as the appetite for risk continues to grow. We’re not concerned about a potential oil headwind—in our view, the CAD is currently only pricing in oil at around $60 per barrel, which means that if prices do come down in the short term, there won’t be much damage. Overall, this is a good market to be back to your strategic weights, not deviating too much even in light of the recent rally.


The viewpoints expressed by the Portfolio Manager represents their assessment of the markets at the time of publication. Those views are subject to change without notice at any time without any kind of notice. The information provided herein does not constitute a solicitation of an offer to buy, or an offer to sell securities nor should the information be relied upon as investment advice. Past performance is no guarantee of future results. This communication is intended for informational purposes only.

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