Seasonality foiled

Historical Spring pattern interrupted as markets lose ground

Looking at historical performance, April is usually one of the stronger months of the year. But like many other things that normally happen, in the Bizarro World that is 2022, it wasn’t the case this time.

We entered the month full of optimism coming off a very strong March. However, in the end there were too many macro headwinds that caused many investors to hit the sell button and head for the exit. The combination of interest rate fears, the Russia-Ukraine conflict, inflation, and lockdowns in China resulted in one of the worst monthly performances in years. For the Nasdaq, which was off 13%, it was the worst monthly performance since the global financial crisis.

Where the selling is most apparent has been in the technology sector. The days when investors could just chase momentum in this sector seems like a distant memory. As interest rates increase, the rule of thumb is valuation multiples contract, and this is the group that took the bulk of the hit.

One of the positives may be that we can retire the term “FANG” stocks. That acronym was created for the mega-cap technology stocks of Facebook, Amazon.com, Netflix, and Google as they enjoyed dominant market positions and years of positive returns. But of late, these stocks have been a massive drag on portfolios. The recent earnings season may signal the beginning of the end for several of these names, with Netflix falling back to levels not seen since 2018 and Amazon.com back to levels of early 2020.

The pain in the more speculative parts of the technology sector has been even more stunning. Companies that had been trading at elevated multiples of revenue without any near-term chance of profits have seen the biggest declines in price. In a situation that is reminding many of the dot.com collapse in 2001, many companies are down over 50% on the year and over 75% from their all-time highs. At many times, it has felt like there are no buyers left at any price.

As a contrarian, you may ask if this a buy the dip moment. And if it is, what will cause this to reverse?

It will all come down to the policymakers. The change in tone of central banks was widely expected this year, but the removal of record levels of stimulus in the face of a slowing economy has led to concerns of a policy error and crushed risk appetite for investors. Cash is being removed from the equity market and – for the first time in years – investors are looking seriously at holding GICs, which in a world of elevated inflation is essentially locking in a loss in “real terms.”

This seems like the perfect environment to be active and opportunistic. But for investors to fully embrace this and begin to deploy capital towards this market, we will need more confidence that central bankers have everything back under control. That won’t be an easy task and will take time.

The good news is that other sectors may take the lead. After a market that has been dominated by long-duration assets (including technology) for years, we may get some sector rotation. This may end up being great for Canada and the S&P/TSX Index. After many years of underperforming, the TSX is leading the S&P 500 by over 10% this year. Energy and materials have led this renaissance and show no signs of slowing down.

Equity markets have had the worst start to the year since the 1950s with the S&P 500 off 13% and the Nasdaq off 21%. While this is awful for many, it may bring a necessary shift to other areas. Investors had gotten complacent during the last few years and times are changing.

We need to evolve with the rest of the world and shift to what will work going forward. The 40-year bull market in bonds is over. This change has been violent, but it will bring opportunities for those who move forward.

Although there were not many places to hide in April, as capital begins to return to the market, new winners will emerge. Macro conditions can adjust very quickly and without warning. To take full advantage of this environment investors need to stay disciplined, nimble, and liquid.

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

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