Global equities: Fast money out, wise money steady

January 24, 2022

Steven Wieting

Chief Investment Strategist & Chief Economist

Joseph Fiorica

Head, Global Equity Strategy

SUMMARY

The recent sharp equity market moves are increasing the emotional component of the investing process. We believe these are times to keep calm, assess if fundamentals have actually changed, and act on data and analysis with a long-term view, not fear.

US monetary policy uncertainty of recent months has been a tipping point for the liquidation of financial assets, first led by fixed income, then the most highly valued speculative growth stocks, and now higher quality assets. Before a sharp intra-day reversal, the US Nasdaq composite slipped 14.0%, the S&P 500 10.0% and the Dow 7.7% in just over three weeks.

Fed policy tightening has generally followed the economy and markets up, only serving to catalyze retrenchment after very full business cycle recoveries and unhealthy booms. Early in 2022, it appears many market participants already assumed the end game of the Fed’s brush with excessive tightening in 2018. That’s because recent Fed’s policy communications have showed impatience with the present inflation backdrop and a desire to tighten monetary policy more quickly.

With the exception of deliberate steps to induce recessions in 1980 and 1982, Fed tightening hasn’t single-handedly driven US economic cycles. In the current backdrop, we believe the Fed can approach policy tightening gradually to avoid forcing the US economy into a new downturn.

There is a great deal of fast money volume generating heightened volatility. We believe very rapid turns in financial market sentiment are due, in part, to new trader participation. Open call and put volumes were nearly 60% above levels one-year ago.

Individual investor sentiment has now turned decisively bearish in the face of what we expect will be EPS gains for the fourth quarter 2021 exceeding 25%. This is usually a contrarian market indicator. However, we believe a recovery in shares will depend on the delivery of further EPS gains in the near term with views to sustaining them further in 2023.

Increasing emotional component of the investment/trading process has resulted in technical levels and momentum taking over from fundamentals – at least for now. But these are times to keep calm, particularly if long-term investment returns are the strategic objective.

While we’ve worked to position portfolios for greater risks last year - including reduced absolute equity weightings and shifts toward higher quality dividend growers - the speed at which markets have jumped to pessimistic views has surprised us.

While we don’t anticipate a more friendly turn in monetary policy that would return speculative investments to boom conditions, we are willing to add to positions in high conviction, long-term growth themes that have fallen sharply in price.

We see higher quality dividend growth shares – firms generating sufficient excess cash that they can raise payouts to investors – as our highest conviction core equity holding. Far from the speculative frenzy, these have outperformed this year.