Stock Market Update
2022 continues to be a tough year to be an investor.
After a strong start to September, investors were once again reminded that September is often the worst-performing month for markets. Following a worse-than-expected U.S. inflation number for August, the S&P 500 saw its largest one-day drop this year, falling 4.3%.
The U.S. Federal Reserve is now fully expected to increase their benchmark interest rates by 0.75% at their meeting next week. A similar increase is expected over the course of the next two meetings as well, bringing the overnight upper-bound target rate to 4%. The Bank of Canada’s rate is at 3.25% with an expected increase in October of another 0.75% also bringing it to 4%.
While the market reaction was quite strong to the inflation number, it was more so another readjustment—following the strong rally that occurred mid-June. Governments are talking a lot about raising interest rates and the speed and increase has been a surprise. They are very determined to get inflation decreasing and part of that is setting expectations.
The silver lining to this cloud is that we’re likely closer to some clarity on further Fed policy action, and once that happens, markets may turn back to focusing on individual company fundamentals, which could be a positive for individual stocks. Markets could rally with some good news especially when governments stop increasing interest rates.
Looking Forward
According to Manulife Co-Strategist Kevin Headland, they believe:
Above average volatility will likely be with us for some time. A lumpy return profile is likely ahead of us as investors continue to deal with uncertainty and begin to price in the potential for flat to negative earnings growth. So far in 2022, earnings have been better than expected.
Global Macro Environment
There’s little doubt that we’re seeing a slowdown in economic growth around the world. The “R-word,” recession, is being used more frequently to describe the risks in Europe, Asia, and North America. From a global perspective, the Purchasing Managers’ Index (PMI) gives a 30,000-foot view of the global economy.
Recent readings indicate support economic weakness, as many countries have moved into the “neutral area,” with some falling into “red.” The pace of the slowdown could continue if expectations of higher interest rates and runaway inflation remain for the rest of the year and into next.
Further complicating the issues are the extreme weather conditions in certain areas of the world, such as low water levels on the Rhine and the Yangtze Rivers, two extremely important waterways for the local economies and major exporting arteries.
Given the expectation of continued weakness in the PMIs, leading economic indicators, and financial conditions, we believe the U.S. and Canada will experience a mild recession, whereas we see a more severe recession in Europe as a result of the looming energy crisis.
Global purchasing managers’ indices—global activity has weakened going into September:
Source: Bloomberg, Manulife Investment Management, Capital Markets Strategy, as of August 31, 2022
Inflation
For the first 9 months of 2022, we’ve experienced the consequences of policies put into place at the depth of the pandemic. Inflation was also driven higher as a result of the conflict in Ukraine, which led to further energy and food inflation and continued supply chain disruptions with China’s shutting down of Shanghai and Beijing due to strict policies regarding the re-emergence of COVID-19. These factors drove inflation to multi-decade highs globally.
A slowing global economy will likely reduce demand and prices for global commodities. Inflation appears to be peaking and we believe will decelerate going into 2023. For our inflation model, our expectation is that CPI will trend between 4%–5% by year end and 3%–4% by the summer of 2023.
The year 2022 will be remembered for the increase in inflation and its impact on monetary policy and the global economy. In the short term, inflation remains a headwind for markets, but we believe there are catalysts throughout the year that’ll put downward pressure on inflation, and we’re likely to be discussing inflation a lot less next year.
Global Equity Data
| North America | August | Year to date | 2020 | 2019 | 2018 | 2017 | 2016 |
|---|---|---|---|---|---|---|---|
| S&P/TSX | -1.8% | -8.9% | 2.2 | 19.1 | -11.6 | 6.0 | 17.5 |
| S&P 500 ($US) | -4.2% | -17.0% | 16.3 | 28.9 | -6.2 | 19.4 | 9.5 |
| Dow Jones ($US) | -4.1% | -13.3% | 7.2 | 22.3 | -5.6 | 25.1 | 13.4 |
| Nasdaq ($US) | -4.6% | -24.5% | 43.6 | 35.2 | -3.9 | 28.2 | 7.5 |
| World | August | Year to date | 2020 | 2019 | 2018 | 2017 | 2016 |
| MSCI Europe ($US) | -5.2% | -13.8% | -5.4 | 22.2 | -13.1 | 7.3 | -0.5 |
| MSCI EAFE ($US) | -5.0% | -21.2% | 5.4 | 18.4 | -16.1 | 21.8 | -1.9 |
| MSCI Asia x Japan ($US) | -0.2% | -18.8% | 22.5 | 15.4 | -16.4 | 38.7 | 2.9 |
| MSCI Emerging Markets ($US) | 0.0% | 19.3% | 15.8 | 15.4 | -16.6 | 34.2]3 | 8.6 |
| 15.4 |
Source: Bloomberg, as of August 31, 2022.
Long Term
Remember we have been through this before – there have been 15 bear markets since the 1950’s and after each one is over the markets grow much higher than before. Focus on the long term and stick with companies that run strong businesses, have experienced management teams, continue to execute on their plans and you will see the benefit. Time in the markets matters more than market timing.
Let me know if you have any questions or concerns.
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