Market Update - Q4 2023 in Review
This quarter finally delivered the much-wanted relief of no rate hikes and, in the first weeks of the quarter, all of the talk surrounded “higher for longer”.
Equity Market Correction
February 1, 2022
The equity markets have experienced renewed bouts of volatility in the New Year. Year to Date, the S&P500 is down <red>-8.6%<red>, the NASDAQ is down <red>-13.46%<red>, while the TSX is down <red>-2.98%<red> [1].
Recent selling has pulled indices such as NASDAQ and the S&P500 into correction territory. A correction is defined as a market pullback of 10% or more from its prior peak. Much of the recent selling had to do with fears over the Federal Reserve’s plans to increase interest rates. We had talked about the impact such a move would have on the markets in our previous newsletter.
The most speculative corners of the market have been hit the hardest. We have repeatedly warned our investors not to participate in the frenzy in these asset classes. Cryptocurrency, meme stocks, and highly speculative tech shares have all suffered severe price declines. Bitcoin has lost nearly half its value from its peak in November 2021. Meme stocks have also taken a hit. AMC shares have declined <red>-39%<red> year-to-date [1].
Fundamentals Supportive
Although there are legitimate reasons for the selloff in certain assets, overall we believe the momentum from the selling has gone too far. Relative to other assets, we believe the U.S equity markets look attractive from a fundamental perspective, especially after the recent selloff. Corporate earnings are still supportive, as S&P500 companies are expected to grow earnings by 21.8% for the fourth quarter. Profit margins are expected to remain healthy, standing at 11.9% for Q4, ahead of the 5 year average of 11.0% [2]. Moreover, demand remains strong in the world’s largest economy. For instance, American Express stated that spending on goods and services was nearly 25% above pre-pandemic levels [3]. Further, we also believe the Canadian equity markets look attractive from a fundamental perspective. Many sectors in Canada trade at a valuation discount compared to the U.S while exhibiting resilient earnings. Consequently, we have incrementally added to our exposure in this market.
Finally, despite fears over Federal Reserve actions, most investors still find reasons to be bullish. A new survey from JP Morgan suggests that investors remain bullish on equity, with 75% of those surveyed expressing they are more likely to increase equity exposure in the coming days/weeks.
Our Positioning & Conclusion
Overall, our portfolios are well positioned and we are in a relatively good shape even after the market rout. We have avoided the speculative corners of the market, such as bitcoin and speculative tech shares. Moreover, we have positioned our portfolios in a way as to reduce the impact from interest rate hikes (more details in our January newsletter).
Further, we believe corrections are a sign of a healthy market. It is important to keep calm and take the long term view when thinking about market corrections. From a big picture perspective, equity markets have tended to reward the patient investor. The latest interest rate hike scare is just one item on a list of worries that the markets have plowed through over the decades. Looking at market performance from the lows of March 2009 to now, the S&P500 has experienced 9 corrections (including this one). However, despite this, the S&P500 has returned a total of 706% during this time period (averaging 17.5% including dividends).
We believe the surest way to enjoy the rewards of the market are to stay invested and think long term. Thus, we urge our investors to remain patient and optimistic.
[1] Factset December 31, 2021 Price Return – End of Trading Day
[4] Factset Total Returns – March 2, 2009 to January 25, 2022
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