February 2022 - Monthly Update

“The S&P 500 posted its worst monthly loss since March 2020... The hawkish Fed shift and concerns related to the timing and pace of monetary policy tightening seemed to be the major contributors to the selloff, while inflation and supply chain worries, dampened fiscal support, omicron, and geopolitical tensions were also overhangs on sentiment. The path of least resistance for stocks was lower for most of the month, but a big bounce in the final two trading days helped the S&P 500 pare losses… While we never like to see investors lose money, it is important to note that market corrections are quite common and represent healthy parts of bull markets with this recent one likely long overdue... To be clear, we do not expect the intra -month pullback in January to morph into a 20% drawdown, despite rhetoric to the contrary , as bear market and recession ingredients are simply not present at this time, and the underlying fundamental and macro environments remain largely healthy, in our view. As such, this bout of volatility and price weakness in no way alters our bullish stance on US stocks. Don’t Fear the Second Derivative Despite the rebound off the 1/27 closing low, many investors still appear convinced that a 20% drawdown is imminent in the coming weeks, a notion we strongly disagree with given fundamental conditions. Yes, [fourth quarter earnings (Q4 EPS)] growth and surprises are coming in lower than the prior four quarters… That being said, this deceleration was always going to occur as a result of the blistering pace of recovery in price and earnings post-pandemic heights and the difficult [year over year comparisons]. However, it is important to note that Q4 EPS growth of 26% , 2022 consensus EPS growth of 9%, and 60% positive revisions breadth are still positives, not negatives. On top of that, profit margins have held up well amid rising inflation and supply chain issues, balance sheets are cash flush, and dividends and buybacks look headed toward record levels. Overall, these elements form a pretty good recipe for US stocks, in our view, rather than conditions preceding a bear market… The S&P/TSX posted a modest decline in January… Yes, while January saw a rise in volatility and stock correlation, our work suggests the correction was concentrated in the higher valuation areas of the market and not the broader market which posted a positive return on average. Overall, bouts of volatility are not surprising, and we continue to believe price momentum will slow and remain choppy as the market transitions to more of an earnings -driven market through 2022.”