Join Fund Library now and get free access to personalized features to help you manage your investments.

Market fatigue sets in and volatility arrives

Published on 12-16-2021

Share This Article

Looking ahead to 2022 as easier gains are behind us

 

After an amazing run for the last 18 months, the rate of change is beginning to slow, and it looks like the easier gains are behind us. For the month of November, markets spent most of the time at or near all-time highs, but there has been a notable increase in volatility.

Volatility is here

The first signs of volatility arrived in the bond market, which throughout the year has been the best leading indicator for all markets. In November, we saw yields gyrate between 1.5% and 1.7%. The push from global central banks to remove stimulus efforts, begin to taper quantitative easing (QE), and, in some cases, increase interest rates coincided with omicron, a new Covid-19 virus mutation that has threaten the reopening trade.

Commodity markets were the next areas to see the volatility. Faced with a stronger U.S. dollar, many commodities began to see prices pause their gains and rollover. A notable exception was in the gold market, which has held very well in this environment and may yet prove to be the inflation hedge it has long been thought to be.

Oil and energy commodities had the most volatile time in November. After touching $80 a barrel, fears of inflation from energy resulted in the first peacetime coordinated release of strategic reserves from several countries. This put a near-term top in markets, but new virus headlines caused a 15% drop in thin holiday markets.

All of this added to a headwind for equities. While most markets are at or near all-time highs, it seems like the risk/reward is beginning to look less favourable to investors.

Earnings season was impressively strong, but the pace of earnings growth slows as wages and costs increase to put a squeeze on margins. Combined with historically high multiples, it will be difficult to see another year of double-digit market gains.

Looking towards 2022

We expect the market in 2022 will be more volatile than the past year. Central banks are changing their tone to become more hawkish, and they’re beginning to normalize their interest rate policies. Economies will have to be strong enough to stand on their own, and there will be wobbles.

Volatility can be looked at as an opportunity, but it can also be seen as a sign of an increasingly nervous market. Given the amount of cash in the market looking for investment opportunities, we don’t expect to see a significant drop in markets. Still, given the stage of the cycle we are in, being a little more defensive may make sense.

Greg Taylor, CFA, is the Chief Investment Officer of Purpose Investments Inc.

Notes and disclaimer

© 2021 by Purpose Investments Inc. All rights reserved. Reproduction in whole or in part by any means without prior written permission is prohibited. This article first appeared on the “Thoughtful” page of the Purpose Investments’ website. Used with permission.

Charts are sourced from Bloomberg unless otherwise noted.

The content of this document is for informational purposes only, and is not being provided in the context of an offering of any securities described herein, nor is it a recommendation or solicitation to buy, hold or sell any security. The information is not investment advice, nor is it tailored to the needs or circumstances of any investor. Information contained in this document is not, and under no circumstances is it to be construed as an offering memorandum, prospectus, advertisement or public offering of securities. No securities commission or similar regulatory authority has reviewed this document and any representation to the contrary is an offence. Information contained in this document is believed to be accurate and reliable, however, we cannot guarantee that it is complete or current at all times. The information provided is subject to change without notice.

Commissions, trailing commissions, management fees and expenses all may be associated with investment funds. Please read the prospectus before investing. If the securities are purchased or sold on a stock exchange, you may pay more or receive less than the current net asset value. Investment funds are not guaranteed, their values change frequently and past performance may not be repeated. Certain statements in this document are forward-looking. Forward-looking statements (“FLS”) are statements that are predictive in nature, depend on or refer to future events or conditions, or that include words such as “may,” “will,” “should,” “could,” “expect,” “anticipate,” intend,” “plan,” “believe,” “estimate” or other similar expressions. Statements that look forward in time or include anything other than historical information are subject to risks and uncertainties, and actual results, actions or events could differ materially from those set forth in the FLS. FLS are not guarantees of future performance and are by their nature based on numerous assumptions. Although the FLS contained in this document are based upon what Purpose Investments and the portfolio manager believe to be reasonable assumptions, Purpose Investments and the portfolio manager cannot assure that actual results will be consistent with these FLS. The reader is cautioned to consider the FLS carefully and not to place undue reliance on the FLS. Unless required by applicable law, it is not undertaken, and specifically disclaimed, that there is any intention or obligation to update or revise FLS, whether as a result of new information, future events or otherwise.

Join Fund Library now and get free access to personalized features to help you manage your investments.