- Equity markets were down this week, alongside a run of lower-tier economic data, a further slide in oil prices and a Bank of Canada rate hike.
- The S&P 500 gave back 3.4%, with all sectors in the red. Energy, banks and telecom sat at the bottom of the pack.
- The TSX was down 2.6%, a curious outperformance in a week that saw oil prices get clipped hard. Canadian energy stocks were down a more modest 5.8% compared to an 8.4% spill in the U.S., while some rate-sensitive sectors held up relatively well.
Stock Market Dip
Last week, after a several-weeks-long rally, stock prices dipped somewhat. This wasn’t unexpected—I’d previously mentioned that prices may reverse course once the real economic picture became clearer, and that’s exactly what happened. The U.S. Federal Reserve’s most recent statement, which didn’t mention anything about the terminal rate needing to go higher, was more dovish than markets expected and was taken to mean that the end of the interest rate hiking cycle is near. That, combined with declining inflation numbers, gave investors some of the clarity that they’d previously been lacking, and markets reacted optimistically. Now, attention is turning to the earnings picture. Last quarter, companies that had announced poor results—like Meta, Alphabet, and Amazon—saw their prices dip, but there was no contagion in the markets. It will be interesting to see if this also occurs next quarter or if there’s a much broader impact. It all comes back to inflation: numbers are declining but still high, which will impact the consumer. This means that the earnings outlook for Q1 2023 is somewhat murky.
Bottom Line: Markets have been digesting the negative earnings outlook for early 2023—that, along with some tax-related selling, is likely what caused last week’s dip.
Over the past week, more information has come out about the easing of China’s zero-COVID policy. But what does this mean for Emerging Markets (EM) overall? Recently, we’ve upgraded our house view from neutral on EM to slightly bullish. This is based on our belief that China is finally turning the corner. It won’t happen overnight, but by the second quarter of 2023, we expect to see a broader re-opening and an economic bounce-back, and Chinese stocks have already moved up somewhat in anticipation of this. Opportunities are evident, given China’s status as one of the world’s leading economies, and we don’t see any major downside at this time. The reopening is also good news for the world economy as a whole and could help prevent a long-lasting recession.
Bottom Line: China’s re-opening potentially presents significant upside.
Recently, oil prices have stubbornly remained lower than expected despite some positive signs, like China’s reopening. Our evaluation, however, is that prices could still head higher, which would be good news for the Canadian economy. There are a few factors that bode well for a surge. As China reopens more fully, demand will rise. OPEC does not appear inclined to increase supply. We’re getting into the colder months in the northern hemisphere, which increases energy usage. And Russia doesn’t seem likely to do anything to help the oil situation. But it’s important to understand that even if energy prices stay around current levels, the Energy companies are still profitable—we don’t necessarily need to see massive price movement in order for Energy stocks to outperform.
Bottom Line: We’re still bullish on Energy, with multiple indicators pointing to higher prices.
We’ve recently held our monthly meeting to determine our house view, which has resulted in several positioning changes. For equities, we’ve raised our view from slightly bearish to neutral, increasing our exposure to the market as a whole since it’s difficult to tell which risk drivers will have the most or least impact—now is not the time to make massive, heroic calls. As mentioned earlier, we’re now slightly bullish on EM from our previous neutral rating, and we’ve also reduced our overweights to Canada and the United States and upgraded our International (EAFE) rating from bearish to slightly bearish. We’ve made some income from covered calls on Energy equities and will likely to continue that path. We still want to own more Quality. And we’re now slightly bullish on the Canadian dollar based on likely softening of the U.S. dollar once we get past what we expect to be a mild and short-lived recession.
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