NEI Market Update: Recent Market Volatility and Outlook

Jan 28, 2022

Volatility has notably increased since the start of 2022, with equity markets being hit the hardest.

The S&P 500 Index has recently seen a 10% price pullback, something markets haven’t experienced in over 12 months. Global equity markets have also been negatively impacted.

Such levels of volatility may be concerning for investors who have benefitted from periods of relatively uninterrupted growth throughout 2021. However, when viewed in a longer-term, historical context, we can see that periods of volatility are: 1) temporary, 2) normal, and 3) potentially beneficial, especially for investors who stay invested or even increase their investments in risk assets during turbulent times.

Let’s take a closer look at the current period of volatility, and what previous episodes can teach us about where to go from here.

What’s behind the recent volatility?

Much of today’s volatility has been tied to the beginning of central bank interest-rate hiking cycles around the world. Central banks, such as the U.S. Federal Reserve and Bank of Canada, are looking to increase rates to prevent inflation from getting even higher, in addition achieving other important economic goals. For example, current market consensus suggests the U.S. Federal Reserve will end asset purchases in March and increase their benchmark rate four times this year. Closer to home, while the Bank of Canada this month decided to hold its rates steady, they have stated that conditions to start raising interest rates have been met and markets are currently pricing in as many as six hikes by year end.

Expectations of rate hikes, which make borrowing more expensive and can cool economic expansion, have led to investors reassessing how to price assets in a changing landscape. Consequently, this lack of certainty is causing considerable volatility, especially in stock markets. Furthermore, volatility could also be driven by market participants responding to pandemic-era economic conditions amid less accommodative monetary policy and lower levels of liquidity, an environment that we have not witnessed for more than two years.

We expect volatility to become increasingly common as we get closer to, and deeper into, rising-rate cycles.

How much should I be concerned?

Market volatility can be unsettling. However, the recent 10% equity market pullback in the S&P 500 Index can also be interpreted as a healthy sign. Occasional market corrections can serve useful purposes, such as checking stocks that may have risen far beyond their intrinsic value, and giving selective investors a chance to buy into stocks at more reasonable prices.

Corrections are not uncommon events either: historically, equity markets experience a 10% pullback, considered a healthy correction, in two out of every three years (source: Bloomberg). Moreover, historical data also illustrate that in the three months before and after the first Fed rate hike of a given rising-rates cycle, stocks tend to trade in a narrow 10% range. Consequently, it is typical over this six-month period to have a 10% pullback in stocks. However, investors who stand pat during and after such a period of volatility could benefit, as stocks on average have gained 7% in the six months following this first hike, and 12% in the 12 months after.

​​​​​What are our best options?

While it might appear difficult during times of volatility, staying the course is often the best solution. We encourage investors to remain disciplined, as in our opinion, volatility is temporary. The long-term investment outlook shows that corporate earnings in the U.S. are expected to be in the high single digits this year. Companies with strong earnings and good balance sheets are poised to do well. Moreover, in advanced economies sustained consumer demand and still-favourable financing conditions are expected to underpin a strong recovery in investment. Against this backdrop, staying the course, despite short-term economic and market dislocations, could be key for investors. During these uncertain times, it is critical that investment advisors engage their clients to provide longer-term context to today’s market environment, to keep them invested and focused on their investment plan and financial goals.

Recent Posts

Aviso Weekly Market Monitor: March 13th – March 17th

Market developments Equities: On Friday the U.S. market gave back some of the weekly gains as major banks put restrictions on trading with Credit Suisse and First Republic dragging the regional banking sector index lower. First Republic got a show of support from the...

Four pillars of investment tax planning

Fully informing the tax strategy for your portfolio You harnessed your spending habits to set aside savings. You researched the investments you deemed worthy of your hard-earned dollars. And now, as you admire your accumulating wealth, there’s a dark cloud ahead...

NEI Monthly Market Insights: February 2023

Markets fatigued in February The sizzling rally in January may have gone too far and markets began to cool in February in response to signals that the economy remains too hot. Central banks may not be done in tightening just yet. Recent surprise in labour market data...

Aviso Weekly Market Monitor: March 6th – March 10th

Market developments Equities: The S&P500 finished the week down over -4.5%, the Nasdaq down -4.7% and the TSX around -4% as the turmoil caused by SVB Financial Group created concern within the banking sector and led to a spike in market volatility as the VIX hit...

Aviso Weekly Market Monitor: February 27th – March 3rd

Market developments Equities: The U.S. market bounced back after a difficult week last week as investors speculate that the Fed won’t raise rates above the peak rates that are currently being priced in. The S&P finished the week up nearly 2% and the Nasdaq around...

Ten things to do with your 2022 tax refund

Spending and saving in helpful harmony Other than those who work in the tax preparation business, no one looks forward to preparing an income tax return – that is, unless you’re expecting a refund! If you’re particularly keen and prepared, the Canada Revenue Agency...