- The choppy ride continued Friday, with equities staging a midday rebound to finish in positive territory after opening the day notably lower. Technology names led to the upside, while the drivers behind the volatility remained the same – upcoming U.S. Fed tightening and higher interest rates. The TSX failed to mount a rally on Friday afternoon given the lower exposure to the technology sector as well as weakness in the materials sector amid lower gold prices. The sharp moves, including sizable intraday swings between positive and negative territory this week, indicate that the market has not yet been able to fully price in the uncertainty of the Fed's tightening path this year. Commentary from the Bank of Canada this week indicated that domestic rate hikes are on their way, with the BoC having already reduced its bond purchases earlier in 2021. Inflation will hold the key, so market volatility will likely continue as investors digest incoming data. We doubt the stock market will erase the recent decline as quickly as it did for previous pullbacks in the last two years, and though we don't expect the volatility to be confined to this week, we don't believe this is the beginning of a more severe bear market.
- With equities rebounding as the day unfolded, interest rates turned slightly lower, as bond markets continued to reflect the changing environment around rate hikes. The 10-year Government of Canada bond rate moved below 1.75% today but is up from 1.43% to start the year. We think tighter central-bank policies are a material headwind, but we think fears that rate hikes in 2022 will snuff out the Canadian and U.S. expansions are too pessimistic. Data released Friday showed that U.S. consumer spending fell 0.6% in December, reflecting the impacts of omicron. This decline was less than consensus expectations and will, in our view, prove to be temporary, with GDP growth – led by household spending – reaccelerating as we progress in 2022. U.S. wage data out today showed private-sector wages rose by a whopping 5% in December – a 40-year high. This is a good indicator of the challenge the market is wrestling with at the moment, with strong wage growth providing healthy support for ongoing consumer spending, while also putting upward pressure on inflation. The Fed's response to this backdrop will be the primary issue for the markets in the near term.
- While equities have been under pressure from Fed rate-hike fears this week, there have been encouraging notes, with Apple's earnings results fitting that bill on Friday. Thursday's strong fourth-quarter GDP report, tells us that the fundamental foundation for this market remains intact. Investors should expect more volatility, but with the outlook for ongoing economic and corporate earnings growth, this pullback, to us, continues to look like a compelling buying opportunity for investors willing to exercise some patience.
Investment Policy Committee
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