North American markets saw one of their worst weeks post-pandemic from Jan. 17th to 21st and the bleeding has continued into this week with markets opening deep in the red on Monday. Investor’s sentiment is currently cautious/bearish due to the impending rate hikes from Central banks, Q4 earnings season, inflation numbers, and heightened tensions in Ukraine. Here is how the major indices are performing 3 weeks into 2022:

The TSX has been sheltered from the broad correction due to the high concentration of energy companies listed on the exchange which have seen constant outperformance over the last year due to the rise in oil prices. The rest of the market has gone through a correction phase which is not unexpected especially after the extremely high valuations that we saw throughout 2021. This correction puts additional focus on earnings season as major players release financials from the last quarter of 2021. Big names that are releasing earnings this week include Microsoft (Jan. 25th), Tesla (Jan. 26th), and Apple (Jan. 27th) followed by Amazon, Facebook, and Google next week.

The Fed meeting taking place this Wednesday will also be a focal point for the markets. As of right now, interest rates are forecasted to stay around zero for a little bit longer with the first hike currently expected at the next Fed meeting in March. However, there is the potential for the Fed to increase rates shorter than expected after the recent inflation numbers (+7% YoY in December) or potentially another market intervention to deal with the fallout of the Omicron variant.

The Ukraine conflict is also beginning to gain more momentum as the United Kingdom and US have begun to withdraw some staff from local embassies. Given the current backdrop, a global conflict between superpowers will not bode well for the financial markets.

Market Outlook:

With such a sharp drop to begin the year, we expect a short-term bounce over the next 2-4 weeks but overall, there is a general outlook of increased volatility and pressure to continue into Q2/Q3 of this year. This is common and expected in a 4-year market cycle, as of right now it appears, we have passed the market top and entering bear market territory. These corrections typically have an average drawdown of 15% and can last anywhere from a month to a year, for a point of reference, the S&P 500 is already down 8% YTD. Traditionally, once this correction is complete, the 4-year market cycle will reset, and a bull market will follow shortly thereafter.

This timing also aligns with where we are at in the global pandemic. Omicron will be a persistent issue throughout the first half of the year which will contribute to the bear market (Phase 4/5) and then the global economy could begin to fully reopen by the end of this year to begin the new bull market in the next 4-year cycle (Phase 1).

Our Advice:

While we are confident in our market forecasts, we firmly believe on never trying to time the market by selling or buying all at once. Instead, we advise to allocate capital systematically when opportunities arise, thus diversifying your timing risk to gain a well positioned portfolio. We have a dedicated research team here at Canaccord Genuity that gives advice on when we those opportunities are presenting themselves. In terms of which stocks we like in turbulent market conditions; we lean more towards brick-and-mortar companies as they tend to be more stable.

More on Market Updates: