- Equity markets endured a volatile week, flying out of the gate early, but eventually succumbing to the reality of a still-hawkish Fed and higher oil prices.
- The S&P 500 added 1.5% when it was all done, while the TSX gained 0.8%. Energy led on both sides of the border.
- Energy stocks rallied sharply on the week, with the sector up 9% in Canada and 14% in the U.S, but the move was a big negative for almost all others as the inflation battle rages.
Oil Price Surge
Bottom Line: With inflation dominating headlines through the summer, markets underweighted the geopolitical risks in energy prices.
U.S. Trade Deficit
Bottom Line: The shrinking U.S. trade deficit does not make us any more—or less—bullish on U.S. equities.
Bottom Line: Our stance on fixed income can be upgraded from underweight to neutral now that the worst of interest rate hikes are behind us.
We recently finalized our asset mix decisions for October, choosing to remain bearish on equities and bullish on cash. Interestingly, the month began on a positive note with two straight sessions in the green. But those rallies have been short-lived. Regionally, we’re still bullish on Canada, neutral on the U.S., and heavily bearish on Europe. Within fixed income, we’ve lowered our exposure to high yield, emerging market debt and investment grade credit in favour of more conservative corporate and government bonds. Our primary focus is to position defensively. And while we feel rising rates will have less impact moving forward, a recession is still likely as earnings come off and the employment picture starts to weaken. In an economic slow down, high yield is where spreads widen the most. As such, we want to limit our exposure on that side and bring fixed back into its role as an equity stabilizer. In terms of factors, we believe Growth still has some room to the downside—however, our team is in agreement that compelling opportunities are popping up here and there. On the other hand, we think value stocks may have less room for disappointment on the earnings front, as many did not benefit from the COVID lockdowns, so we have a slight tilt for value over growth but our focus currently remains on Quality.
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