It is hard to believe we are saying that already after what has been a tumultuous year for the markets and the economy. All the more reason to look forward to enjoying time with family and friends and celebrating this wonderful time of the year!
We sent out an e:Blast last week, so this Monthly commentary will be shorter than usual.
Last week we had mentioned we moved into the Yellow Zone earlier in the week.. The change this week is that our Stoplight; Equity Action Call, has now moved into the Green Zone. It has come rather quickly as markets have moved up from the bottom, and so far, have held.
We finally received the news or catalyst we were waiting for, that could cause markets to push up and out of the overall sideways move they have been in for some time. That catalyst came in the form of an announcement from the US central bank Fed President Powell; who announced that rates will indeed continue to increase, but not as fast as they have been. With slight improvements in the inflation and some other economic numbers, the markets took hope that instead of a 75 basis point increase (3/4 of a percent), it may be only be 50 BP’s moves going forward, and or less.
As our Senior Economist and Director at BMO Capital Markets, Sal Guatieri noted:
As largely expected, Chair Powell ratified market expectations of a likely 50 bps rate hike on December 14, while underscoring that rates are likely to go higher than the Fed previously thought and remain elevated for a while. Powell said the time to moderate the pace of rate hikes could come as soon as the next meeting given substantial progress in taking policy toward a "sufficiently restrictive" stance and in recognition of the lagged effects of past policy moves. However, he also stuck to his recent script that the terminal policy rate is likely to go "somewhat higher" than the FOMC thought in September (4.50%-4.75% in late 2023) and may need to be held at a restrictive level "for some time", as the Fed has a long way to go to restore price stability.
So, despite one soft CPI print, the Chair hasn't changed his tune since the post-meeting presser of earlier this month. A tight labour market that has shown only "tentative" signs of moderation is clearly in his crosshairs. Until job growth slows more substantially, and the unemployment rate kicks higher, don't expect him to ease up on the hawkish rhetoric. Treasuries posted a modest rally with yields down about 4 bps shortly after the release of the speech.
Powell's comments support our call for a 50 bp hike in two weeks and a further 50 bps of increases spread over the first two meetings of next year, taking the policy target range to 4.75%-5.00%. The hawkish skew also supports our view of no rate cuts until 2024.
All this is important because it reduces the possibility of an increasing rate environment causing a slowing of the economy or pushing it into a steeper recession. It is likely we will still see some sort of recession, if we are not there already, but to reiterate; with slowing the rate increases, it may not be as harsh as market investors originally anticipated. On that news, the market shot higher.
From the technical view, we are going into a period of seasonality that is typically good for the markets with the possibility of a Santa Claus rally. Secondly, is that the US market (as represented by S&P500) has moved up out of the “channel” we have been using as our line the sand. This short-term trading signal, together with our Green Zone Equity Action Call, lead us to become fully invested. Should this signal hold, we will remain invested and expect markets to move back towards the highs of the begging of the year.
Of course, there are still several concerns. These include the possibility of further inflation, shortages, and potential recession. We have already seen a covid resurgence, particularly in China with some lock downs and resulting in demonstrations. The continuation of the Ukraine/Russian war also continues to create volatility and shortages. Furthermore, there is concern for energy shortages and rising costs.
That said, these concerns are more in the short term, for now. Investors in the markets are instead looking out 12 – 18 months and seeing that these concerns will have less and less impact on the economy and market. Investors therefore look to get invested on the expectation and anticipation of better times ahead.
Note we been holding off on any new cash deposits into the market and discussed with clients that we recommended they consider sitting on the sidelines in anticipation of a return to the Green Zone. Those funds will now be invested. Should you be contemplating the opportunity put cash to work, this would be a good time to do so. Also note that the TFSA minimum in January increases $500, from $6,000 to $6,500.
We are in the Green Zone in our Stoplight and also in our shorter term Footsteps (Price Action) indicators.
We are however still well aware of the risks to the market and sentiment. For this reason, we continue to utilize Exchange Traded Funds (ETF’s) rather than individual stocks. This allows us to mitigate individual security risk – that bad news on a single stock can hurt the portfolio. The ETF’s also allow us to drill a little deeper from improved returns in the stronger sectors, as apposed to just investing in the broad market. And finally, and most important, should markets not hold, should we instead see further negative “catalysts”, the ETF’s allow us to quickly trade and move aside, and again return to safety. We are invested but remain cautious.
We wish you and your family and friends, all the best that the holiday season brings!
Merry Christmas, Happy Hanukkah, Seasons Greetings, and a Happy New Year!
- John & Megan.