Blog: The Market Correction
By Jeff Pollock
It’s often advised to be fearful when others are greedy and greedy when others are fearful.
There haven’t been many places to hide so far this year. As of May 10, the time of this writing, the Toronto market is down 6.3% since the start of the year. Our contraction has been far less severed than south of the border where the S&P 500 has declined 16% and the NASDAQ has dropped 25% so far in 2022.
Domestic declines have been buffered by gains in the energy sector, which has continued to benefit from its 2021 momentum. So far, it has appreciated by almost 44% since the start of the year.
Many investors and traders are expecting the bad news to persist with little or no chance of positive information crossing the wire any time soon. However, upbeat developments could turn the direction of this market rather quickly. No one is positioned for good news.
Tamer than feared inflation, a de-escalation of the Russian invasion, a less hawkish Federal Reserve, or a lockdown curtailment in China could all snap this presently bearish market out of its downbeat mood.
There’s no question that higher interest rates are the main culprit for heightened bearishness as of late. On April 21, Fed Chair Jay Powell said at an IMF conference that tamer inflation was “absolutely essential” and affirmed his intentions to raise rates by 50 basis points at the next central bank meeting. Since then, the S&P 500 has lost 10% of its value in less than a month.
Higher rates lead to lower stock valuation multiples, which hurt the expensive growth names most.Our client portfolios are biased towards dividend-paying stocks that perform stronger in this kind of an environment.
At the beginning of 2022, the S&P 500 traded at 21x earnings. Now, the market trades at 17x. Historically speaking, the market trades closer to 16x, suggesting that the bottom of this market correction may be near.
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