Portfolio Strategy
Where Is the Wind Blowing…..Up, Down, Sideways?
Our view: The recent spike in volatility represents a good buying opportunity for long-term oriented investors. We recommend being selective and focus on adding to high-quality businesses that are trading at attractive valuations.
Boxing Day sales extended into 2022. As we warned in our December 9th Portfolio Strategy report, “Boxing Day Sales Arrive Early”, following a remarkable 2021, the double-digit equity market performance should not be expected in the years to follow, including in 2022. In the report we advised investors to reset expectations towards a more normalized risk/return profile of high single-digit to low double-digit returns for the S&P/TSX and the S&P 500 index in 2022. We also emphasized that uncertainties remained elevated heading into 2022 which would likely lead to greater market volatility. These uncertainties included COVID-19 (Omicron variant), policy normalization, elevated inflationary pressures, slowing growth in China, and more recently, geopolitical tensions between Russia and Ukraine. While our expectations for greater volatility came to fruition early in the year, we continue to expect a return to normal levels of volatility (+/-10% swings in the market) as we look forward into 2022.
Bargains galore with fundamentals in check despite all the noise! We continue to maintain a construction view for markets in 2022 given the following: 1) underlying fundamentals for the global economy, including real economic growth expectations for Canada and the US remain strong and well ahead of trend; 2) employment conditions are also healthy and sitting at or above pre-pandemic levels; 3) corporate fundamentals remain strong, in particular for mid/small cap and cyclical/value areas of the market, despite what the recent market sell-off would suggest; 4) our business cycle model suggests we continue to remain in the early-/mid-phase of the business cycle – i.e., there is more left in the tank for the recovery which is approaching only the second year in the cycle; and, 5) Raymond James Institutional Equity Analyst Tavis McCourt views the recent sell-off as bearing a striking resemblance to January 2016 in its timing of the rate hiking cycle, and the fears that gripped the equity markets, which caused an ~11% and ~6% pullback in the S&P 500 and the S&P/TSX, respectively, in January/early February of early 2016. More importantly, equity markets had a very strong two years in 2016/2017 while rates were moving up, and generally more economically cyclical sectors and smaller caps outperformed in that time period.
Act NOW and save 20%+ off the 52-week high. To help investors identify some of the best deals in the markets following the recent sell off, we have screened for stocks on both the S&P/TSX and the S&P 500 index that have fallen by more than 20% from their 52-week highs. We have also bolded stocks that are rated as Strong Buy/Outperform by Raymond James and Buy/Overweight on the Street. To further isolate ideas that investors may want to consider taking a closer look at, we filtered out the always on sale stocks (perennial underperformers relative to the broader market) and only highlighted stocks that, on a relative basis, have performed inline and/or above the 5- year annualized price return for the S&P/TSX (+6%) and the S&P 500 index (+14%).
