March 2022 Portfolio Management Team Update

Elvis Picardo

March 23, 2022

March 2022 Portfolio Management Team Update 
By Elvis Picardo, CFA®, CIM, Portfolio Manager, iA Private Wealth
March 18, 2022

Market & Economic Environment
Stock indices added to their January declines last month, as the Russian invasion of Ukraine on February 24 roiled commodity and stock markets.  

The TSX Composite was an exception to the global market weakness, eking out a 0.13% gain in February. Strong gains by the materials (+12.8%) and energy (+6.5%) groups offset declines in most sectors, with communication services (+2%) the only other TSX sector to advance. The technology group lagged for the second straight month, following up on its 20% drop in January with an 18% slump last month, as Shopify posted a record two-day plunge of 28% after forecasting slower growth for the year on February 16.   

U.S. indices continued to trend lower in February, with the S&P 500, Dow Jones Industrial Average and Nasdaq Composite falling at least 3%. Small-cap stocks made up for some of their January underperformance versus large-cap stocks, as the Russell 2000 gained 1.0% in February, compared with a 2.9% decline for the Russell 1000.  

Elsewhere, most major European bourses tumbled at least 5% in February following the outbreak of war between Russia and Ukraine. Russia’s RTS index plummeted 35% in the month, as economic sanctions imposed by the U.S. and other countries threatened to cripple the economy.  

(Data Source: FactSet)  

Our Strategy 
While the Russia-Ukraine war has replaced the pandemic as the biggest wildcard that could upend global economic growth, investor sentiment continues to be influenced primarily by the Federal Reserve’s monetary policy announcements.  

Investors were rattled earlier this month by the appearance of two potent recession signals: 

• Crude oil traded above $120 per barrel on March 8, at which point its year-to-date gains exceeded 60%. Oil price spikes of this magnitude have presaged economic contractions in the past.  
• The U.S. Treasury yield curve is potentially close to an inversion, which occurs when short-term bond yields rise above long-term yields. The spread between U.S. 10-year Treasuries (current yield = 2.15%) and two-year Treasuries (current yield = 1.95%) is now at 20 basis points, compared with more than 150 bps a year ago.  

However, Federal Reserve chairman Powell’s comments on March 16 about the strength of the U.S. economy reassured investors, with the S&P 500’s 5% gain for the week marking its best weekly performance since November 2020. On March 16, the Fed raised its benchmark rate by 25 basis points for the first time since 2018 and signaled rate increases at all six of its remaining meetings this year. Two weeks earlier, the Bank of Canada had raised its overnight lending rate by 25 basis points to 0.50%, the first time it has tightened monetary policy since 2018. According to a Bloomberg poll, economists forecast the Bank of Canada to increase interest rates five more times in 2022, which would take the benchmark rate to 1.75% by year-end.  

Despite rising interest rates and heightened geopolitical uncertainty, investors are presently buying the dips as the earnings outlook continues to be strong. Earnings growth for the TSX is forecast at 14% this year, buoyed by strong energy and commodity prices, and solid earnings from the financial sector that comprises one-third of the index. Earnings growth for the S&P 500 is forecast at between 9% and 10% for this year and next. Although input costs such as labour, materials, energy, and transportation are significantly higher in the current inflationary environment, U.S. companies are enjoying record profit margins as they have been able to pass on price increases to consumers. But such price increases across the board are stoking inflation, which is presently at its highest in decades in Canada and the U.S.  

Although markets have been the most volatile since 2020 so far this year, the TSX is benefiting from its substantial weight in energy and commodities to trade at new highs and outperform the S&P 500 by almost 10 percentage points YTD (+2.9% vs. -6.6%). The Portfolio Management Team (PMT) has been monitoring market conditions closely in this challenging environment. Earlier this month, the PMT rebalanced all client portfolios to take advantage of the 10% dip in the S&P 500 and deploy client contributions to registered accounts. With client portfolios heavily tilted towards the North American economy – which should outperform this year given the situation in Europe and diminished appeal of emerging markets including China – the PMT is comfortable with its current asset allocation and portfolio positioning.  

Please contact any member of the PMT if you have any questions or concerns regarding your accounts.