If you have been keeping an eye on the equity markets lately, then you are painfully aware that so far, 2022 has been a bumpy ride for stocks. Positions that felt untouchable during the pandemic have seen a material downward correction, and while Canadian markets have only seen a moderate decline thanks to our exposure to oil, the U.S. markets, although not yet in bear market territory (defined as a 20% decline from their peak), are already down approximately 14.5% from their highs in early January of this year. They may be pricing in a recession; the United States economy has already reported a decline in gross domestic product this past quarter.
Inflation appears to be the primary driver of the pessimism. Rising prices have proven stickier than economists had hoped for thanks to ongoing supply chain disruptions and the war in Ukraine. In addition, the US Federal Reserve recently hiked its policy rate by half a percentage point while announcing plans for quantitative tightening, undoing stimulus measures implemented during the pandemic. While these measures will help preserve the value of the dollar (and are likely to be copied here in Canada), it does mean more expensive debt, contracting stock valuations, and possibly lower profits for the companies we invest in, hence the downturn in stocks.
Times like these can indeed be stressful for investors, but likewise go to demonstrate the value of a diligent investment strategy. At WDS, high stock valuations and the risk of rising rates have been on the radar for some time, and we are confident we have taken the necessary precautions to not only manage the risks at hand, but also to take advantage of the current volatility.
The rest of 2022 may prove challenging still, but in monitoring the markets, managing our risk exposure, and carrying out the fundamental research to ensure our portfolios are focused on quality businesses, we truly face the best odds of thriving over the long-term. Should you have any questions or concerns around the current market environment, do not hesitate to reach out to our team.