After last week’s US consumer price data, showing a further rise in the annual inflation rate to 8.6%, markets have returned to fear mode once again. Fear of yet more aggressive rate hikes by central banks and fear of what these hikes could do to the economy – potentially creating a recession. Since Thursday’s report, both stock and bond markets have corrected. At the time of writing, the TSX had declined by just over 6% in the past two sessions, while the S&P500 has fallen by more than 9% and the NASDAQ is down just over 10%. It hasn’t helped either that China has announced renewed covid restrictions and crypto currencies are falling out of bed.

 

Where you may have thought that investors would move money into bonds, this hasn’t happened either. The US Federal Reserve will decide on what to do with rates on Friday and Thursday’s CPI data has driven more analysts to call for a 0.75% increase. This heightened fear has driven the US 10yr government bond yield to above 3.30% today, for the first time in over 11 years. Canada’s 10yr yield is just above 3.45% - again, the highest since April 2011. It is understandable that investors are going to feel uneasy today and worried about what happens next. This doesn’t mean that individuals and businesses should panic and that is where stepping back and looking at fundamentals is needed.

 

For one, if investors are selling out of both equity and bond markets, cash levels are going up. At some point, these levels become so high that they become inconsistent with portfolio strategies aimed at generating above-inflation returns. Second, this growing fear over more aggressive rate hikes has to be weighed against several factors, such as the fact that core inflation in the US has actually declined for the past two months. Even if the Fed were to raise rates by three-quarters of a point on Wednesday, this would take the Fed’s key policy rate to 1.75%, which is still considered below neutral. What it would do, however, is cause business and consumer activity to slow – the very thing needed to cause inflation to slide. We talked about how housing is already starting to soften.

 

 

 

There is a difference though between a softening and a recession happening tomorrow (or even this year). Moreover, even with the declines of the last couple of days, markets are still above where they were prior to the pandemic. In the case of the TSX, we are up close to 10% and both the S&P500 and NASDAQ are 11% above that pre-pandemic high. This doesn’t necessarily mean we buy into the markets indiscriminately, but it does suggest that investors hold close to their underlying investment strategies. And for those with excess cash, the argument of dollar-cost averaging is even more valid today.

 

Ally and I typically don’t put out intra-week blog commentaries but, in light of recent developments, it was necessary. And we are always available to discuss the markets and what impact they might have on individual planning.

 

 

 

On behalf of the Pyle Group, have a wonderful week.

Andrew

 

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These are the personal opinions of Andrew Pyle and the Pyle Group and may not necessarily reflect those of CIBC World Markets Inc.