You are most likely aware of the volatility we have seen in the market lately. The market has been dealing with three main problems that have scared investors. Those problems are inflation/rising rates, Chinese supply/covid lockdowns and the Russia/Ukraine conflict. The big issue of those three is inflation and the other two issues add to that problem in their own way.
If you listen to the media you would think the economic world is heading for a disaster. Unfortunately in the internet era the most extreme opinions get the most clicks. In-fact the economy and corporate earnings are holding up quite well during all the volatility and calls of a recession. We pay less attention to the prediction and flip flopping of the media and more attention towards important metrics. We believe that you should look to the bond market and the yield curve to really get an idea of the health of the market.
The bond market has send clear and consistent messages. Long before any action by the US Federal Reserve the interest rate on the 2 year bond began to rise. It is not a coincidence that when the 2 year interest rate began to rise that the stock market started its decline. Recently the 2 year interest rate stopped going up. This shows us that the bond market now believes that inflation will be brought under control in due course. The stock market did well last week for the first time in many weeks. Again we don’t think this is a coincidence. Any further improvement to any of the three issues listed will further bolster market improvements.
What do we do now?
We believe the recent volatility was very panic driven. We saw a lot of speculate assets like crypto coins and unprofitable tech stocks fall very hard. Many of these high risk investments were bought with borrowed money and the unwinding of these levered positions added to the downside. We said in our previous letter we wouldn’t be surprised to see a large sell day and this is usually the conclusion to bouts of negative markets. We believe that there is now opportunity in the market and there a lot of very high quality assets that have fallen well over 20%. In our view the risk/reward balance is now very favourable for these investments.
We firmly believe our Smart Income process has enabled us to weather these types of tantrums in the market. The companies we look to buy are managed prudently and pay sustainable dividends and we have even seen increases in dividend payments in a number of our holdings. The silver lining of tough markets like these is that many investments that were too expensive to buy a year ago are now very attractively valued.
Feel free to reach out to us if you have any questions.
Tchabushnig Wealth Group.
This communication has been prepared by Alan Tchabushnig and expresses the opinions of the authors and not necessarily those of Raymond James Ltd. (RJL). Statistics, factual data and other information are from sources RJL believes to be reliable but their accuracy cannot be guaranteed. It is for information purposes only and is not to be construed as an offer or solicitation for the sale or purchase of securities. It is intended for distribution only in those jurisdictions where RJL and the author are registered. Securities-related products and services are offered through Raymond James Ltd., member - Canadian Investor Protection Fund. Insurance products and services are offered through Raymond James Financial Planning Ltd., which is not a member - Canadian Investor Protection Fund.