Investors’ excitement and feverishness have been palpable since the start of the year, with the Bank of Canada and the US Federal Reserve once again raising rates in an effort to calm the surge in inflation.
The NASDAQ gained 11% in January, while the main index of the Toronto Stock Exchange and the S&P 500 index recorded gains of 7% and 6% respectively.
Markets are focused on the future, which is why long-term interest rates have already started to fall and equity prices have stabilized, says portfolio manager Stephen Takacsy of Montreal firm Gestion Lester.
“Panic investors have so far missed a strong rebound from the mid-October 2022 lows,” he adds.
The turmoil at the start of the year reminded Jean-Philippe Bouchard, portfolio manager at Giverny Capital, of the importance of being present in the market at all times. “If you miss the top 10 days of the year, you miss a big percentage of the returns. There’s no point in trying to synchronize the market, he says. You have to have the humility to admit that you can’t predict the increases, he says.
Risk appetite
Strategist Sébastien Mc Mahon, of IA Asset Management, points to an outperformance of growth stocks and meme stocks (same stocks) – which have been popular with retail investors in 2021 – as well as a rebound in top short-selling stocks. This leads him to believe that the quality of the rebound may not be enough to sustain sustained progress.
In January 2021, cryptocurrencies and same stocks (stocks like GameStop, BlackBerry, etc.) had been pushed up sharply by retail investors.
Portfolio manager Marc L’Écuyer, from the firm Cote 100, also notes that the “riskiest” securities rose very steeply in January, thinking in particular of shares in the technology sector and cryptocurrencies.
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Marc L’Écuyer, Portfolio Manager at Cote 100
“We saw the euphoria return. English speakers talk about FOMO [fear of missing out] “, he says, which translates into the fear of missing an opportunity.
“I wouldn’t say it’s going to last very long. It will be short lived. »
Historically, the year following a negative year is mostly positive, says portfolio manager Ian McLean of McLean Capital.
He estimates that the probability that the stock market will register two consecutive negative years is less than 20%.
So just because everyone is gloomy and anticipating a recession doesn’t mean it won’t be a good year. The market is clearly saying: “inflation is over, and we are going back to more accommodating fiscal and monetary policies”.
Ian McLean, Portfolio Manager at McLean Capital
Stephen Takacsy says early signs of an easing labor shortage and lower prices in the ‘overvalued’ property market should lead to lower housing costs, which are an important component of the measures of inflation.
He adds that inflation expectations have fallen “sharply” and, as the economy and inflation slow, monetary policy should ultimately move towards lowering short-term interest rates and therefore an injection of liquidity into the financial system. “This is all part of the normal economic cycle and will create a much more favorable environment for financial asset prices. »
“The market seems to believe that we may have seen the worst of inflation,” adds Ian McLean.
“Some people think central banks got it wrong and went too aggressively. Others find 2022 to be a weird year. And yes, it was in many ways, but at the same time, previous years were weird. Rates at zero for so many years is not normal. It has abnormal impacts in all markets [obligataire, immobilier, actions]. People have become accustomed to a very financially accommodating world. We may now spend several years in a more normal world in this regard, ”says Ian McLean.
Bond competition
His colleague Marc L’Écuyer admits that the market can continue to do well, but calls for reflection. “We are in a period where it will be much more difficult to generate gains because today we have options that we did not have a year or two ago. »
He mainly thinks of bonds.
5% bonds, for many people, that’s where the money goes and not to the stock market. There may be money on the sidelines waiting to be reinvested, but it won’t necessarily go to the stock market.
Marc L’Écuyer, Portfolio Manager at Cote 100
A reallocation of assets towards fixed income is to be considered due to the rise in interest rates. “Even we, as portfolio managers, hadn’t asked ourselves the question for years. We want to be in the stock market as much as possible, but here we are taking a step back and there are discussions to be had. A return of 5% or 5.5% is attractive. We continue to favor the stock market, but let’s say that we have more interesting discussions on asset allocation than in the past,” says Marc L’Écuyer.
For example, he says he bought municipal bonds before the holidays. “It was one of the best rates I’ve had since the beginning of my career at Cote 100, in 2003. It goes back a long way. It’s been 20 years since we’ve had such attractive rates. Even during the financial crisis, it had not risen so much. »
However, Stephen Takacsy believes that as the year progresses and central banks begin to cut interest rates due to lower inflation, leadership should shift to the equity market. .