Riding the Market Roller-Coaster
The New Year brought volatility back as the S&P 500 had its worst week in 2 years during the week of January 17th declining 5.68%. Many factors are contributing to the sell-off such as the overvaluation of certain equities, geo-politics and inflation. Micro-bubbles in the overall market such as individual companies (Tesla, Rivian) and asset classes (NFTs, crypto currencies) are exacerbating the severity of the sell-off. A good illustration of this is looking at the S&P 500 versus “story stocks” 2-month performance from November 19, 2021 to January 19, 2022:
- S&P 500: -3.53%
- Tesla: -12.57%
- Rivian: -46.12%
- Virgin Galactic: -47.42%
- Robinhood: 51.20%
- GameStop: -53.36%
- AMC: -55.16%
Compare this to established companies with proven business models over the same time:
- Apple: 3.57%
- Royal Bank of Canada: 1.11%
- Emera: 0.06%
- Home Depot: -11.95%
- Nvidia: -24.12%
Different companies will react differently to the broader market and these figures will have changed by the time you read this but two things remain the same; markets will go up and down and quality wins over companies of questionable value or valuation such as meme stocks or companies with little to no revenue.
We are also monitoring the cost of living. According to PIMCO Investment Management, the bond market has priced in 4 rate hikes in 2022 and 4 rate hikes in 2023. Inflation could be 5% for the first half of the year and annualizing 3% by year end. Wage and rent inflation is also expected by year end. They (and us at Aura Wealth Management) feel it is very unlikely that there will be 8 rate hikes in two years but 4 increases is not unreasonable. PIMCO also believes that 2.5 – 3 million people will likely take early retirement due to Covid.
At the time of this writing, we believe the markets are oversold and prices could go lower but this also gives investors opportunities to buy high-quality companies at cheaper prices. It is interesting that the S&P 500’s forward earnings on December 31, 2020 was 23X earnings while it was 21X on December 31, 2021. This means the relative expensiveness of the market was higher at the beginning of 2021 than at the end; valuations have only gotten cheaper. Long-term investors are potentially in a good position if they have cash that’s been left on the sidelines that can now be deployed tactically.
This newsletter has been prepared by Stephen Maser & Joe Howorko of Raymond James Ltd. (“RJL”). It expresses the opinions of the writer, and not necessarily those of RJL. Statistics, factual data and other information are from sources believed to be reliable but accuracy cannot be guaranteed. It is furnished on the basis and understanding that RJL is to be under no liability whatsoever in respect thereof. It is for information purposes only and is not to be construed as an offer or solicitation for the sale or purchase of securities. RJL, its officers, directors, employees and their families may from time to time invest in the securities discussed in this newsletter. This provides links to other Internet sites for the convenience of users. Raymond James Ltd. is not responsible for the availability or content of these external sites, nor does Raymond James Ltd endorse, warrant or guarantee the products, services or information described or offered at these other Internet sites. Users cannot assume that the external sites will abide by the same Privacy Policy which Raymond James Ltd adheres to.It is intended for distribution only in those jurisdictions where RJL is registered as a dealer in securities. Distribution or dissemination of this newsletter in any other jurisdiction is strictly prohibited. This newsletter is not intended for nor should it be distributed to any person residing in the USA. Raymond James Limited is a Member Canadian Investor Protection Fund