{"id":529,"date":"2022-02-15T21:31:44","date_gmt":"2022-02-15T21:31:44","guid":{"rendered":"https:\/\/www.mcivercapital.com\/?p=529"},"modified":"2022-07-14T17:39:25","modified_gmt":"2022-07-14T17:39:25","slug":"market-forces-002","status":"publish","type":"post","link":"https:\/\/www.mcivercapital.com\/market-forces-002\/","title":{"rendered":"Market Forces 002"},"content":{"rendered":"\n\n\n
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Market Summary<\/h3>\n

The inaugural \u201cMarket Forces\u201d piece of two weeks ago highlighted our team\u2019s focus and monitoring of what we believe to be a key issue of relevance, namely inflationary fears, and by extension, rate concerns. With inflation expectations having increased significantly over the past couple weeks, the timing of our last piece has proved prescient, and we thought it worthwhile to update, and expand, upon our view.<\/p>\n

The past couple weeks has seen some step down in market volatility from that seen in January, with a rebound, albeit very modest, in key equity markets. The S&P 500 and NASDAQ moved up by 2-3%, off late January lows, but remain firmly in negative territory on a year-to-date basis (S&P down 6%, NASDAQ down 10%).<\/p>\n

The settling down in the market is welcome, though economic data releases over the past two weeks if anything justifies our reasons for concern over the inflationary pressures flowing through the economy. Notably the January 2022 inflation reading came in ahead of both December 2021 levels and market expectations, driven by continued increases in both the goods and services segment (see our prior\u00a0commentary<\/a>\u00a0for more on this issue).<\/p>\n

\"\"<\/p>\n

The impact of this has been a significant increase in rates expectations, with the market currently pricing in seven interest rate hikes in the US\u00a0totalling\u00a0\u00a0~170bps versus prior expectations (25 Jan 2022) of ~105bp of increases across four hikes. It is important to note that shipping rates remain elevated, and the increase in recent geopolitical tension (Russia\/Ukraine) has driven continued increases in oil prices (WTI now in the $90-95 range).<\/p>\n

The key debate on inflation is whether this increase is transitory or structural, or put another way, how much action (read rate increases) is required by central banks to contain inflationary pressures; all else equal the more one weighs on the structural side of the debate, the more one implicitly is factoring in the need for higher rates.<\/p>\n

In addition to the broader economic impact of elevated inflation levels (reduced consumer disposable income, margin implications for corporates unable to pass through input cost increases, etc), which take time to filter through the economy, the valuation impact of sustained inflation on equities, via the interest rate mechanism, is far more direct.<\/p>\n

Revisiting valuation first principles, at its core a company is worth the cash flows it will produce over time, discounted back to the present at the appropriate rate. This\u00a0discount rate<\/i>\u00a0is not the same for all companies, rather varying according to the riskiness of each individual company\u2019s cash flow stream. What is universal, however, is that the discount rate for\u00a0all<\/i>\u00a0companies is impacted by a given change in the interest rate on long-term government bonds.<\/p>\n

This mechanism, in our view, is the primary factor driving recent equity market moves and while we have seen market expectations become more aggressive on rates, our concerns remain.<\/p>\n

Central bankers in the United States (the Fed) follow a dual mandate (link\u00a0<\/a>) of ensuring maximum employment (i.e. low unemployment levels) and price stability (i.e. low and stable inflation levels). The Fed is vague when it comes to what it deems to be \u2018maximum employment\u2019, not specifying exactly what levels of employment (or unemployment) it aims to achieve. On the contrary, when it comes to inflation, the Fed is explicit, targeting 2% levels (the BOC similarly targets a 2% midpoint in a 1-3% range), though in the recent past they have shown an increased willingness for flexibility.<\/p>\n

The benign inflationary environment of the past (see table below), combined with understandable caution revolving around restrictive monetary policy (i.e. increasing rates) in the covid aftermath, appears to have lulled central bankers into a false sense of security.<\/p>\n

\"\"<\/p>\n

The past two cycles saw interest rates increase by just over 4% and just over 2% respectively. Current expectations remain for rate increases of less than 2%, yet this time around, inflation is significantly higher, economic growth is significantly stronger and unemployment levels are lower.<\/p>\n

The Fed is now clearly playing catch up.<\/p>\n

Our assessment of this issue is ongoing. We expect our research and analysis on how best to position client assets in this current environment, to play a key role in the upcoming quarterly rebalance on client portfolios.<\/p>\n

Sincerely,<\/p>\n

McIver Capital Management
\nPaul, Mark, Neil, Warren, Matt<\/i><\/p>\n

Your Model Performance (net-to-client, third-party audited):<\/p>\n

\"\"<\/p>\n

Follow us on twitter\u00a0@McIverCapital<\/a>\u00a0and\u00a0YouTube<\/a><\/td>\n<\/tr>\n<\/tbody>\n<\/table>\n<\/td>\n<\/tr>\n<\/tbody>\n<\/table>\n\n\n\n\n
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The comments and opinions expressed in this newsletter are solely the work of McIver Capital Management, not an official publication of Canaccord Genuity Corp., and may differ from the opinion of Canaccord Genuity Corp\u2019s. Research Department. Accordingly, they should not be considered as representative of Canaccord Genuity Corp\u2019s. beliefs, opinions or recommendations. All information is given as of the date appearing in this newsletter, is for general information only, does not constitute legal or tax advice, and the author McIver Capital Management does not assume any obligation to update it or to advise on further developments related. All information included herein has been compiled from sources believed to be reliable, but its accuracy and completeness is not guaranteed, nor in providing it do the author or Canaccord Genuity Corp. assume any liability.<\/p>\n

CANACCORD GENUITY WEALTH MANAGEMENT IS A DIVISION OF CANACCORD GENUITY CORP. CANACCORD GENUITY CORP. IS A MEMBER OF THE INVESTMENT INDUSTRY REGULATORY ORGANIZATION OF CANADA (IIROC) AND CANADIAN INVESTOR PROTECTION FUND (CIPF).<\/p>\n

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Market Summary The inaugural \u201cMarket Forces\u201d piece of two weeks ago highlighted our team\u2019s focus and monitoring of what we believe to be a key issue of relevance, namely inflationary fears, and by extension, rate concerns. 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