Andrew Pyle, investment advisor and portfolio manager, CIBC Wood Gundy

FOCUS: North American equities

MARKET OUTLOOK:

We can’t compare the current environment to two years ago, but in some respects, investors are facing a similar level of anxiety with the overall outlook. Instead of one factor (the pandemic – which is still not over), market volatility is going to be fueled even more by the direct and ancillary effects of the Russian invasion of Ukraine and the transition to a significantly less accommodative monetary policy.

The fact that we have come out of one of the worst bond market corrections in recent memory underscores just how unsettled things have become, even for those that follow a balanced asset allocation approach.

The major risk is that we are about to experience the most rapid increase in interest rates since 1984. If the Fed hikes 50 basis points at the May meeting, even if it goes only a quarter point on June 15, this will have taken only 92 days to add 100 basis points in total. In the spring of 1984, it took only 80 days, but that was from a base of 8.5 per cent. In other words, a 12 per cent rise in rates versus a 400 per cent increase. Given that we are battling inflation that is stemming from supply constraints in 2022 versus demand-driven influences in 2021, the risk of an overshoot is real.

Consumer and business confidence are sliding in the face of everything from geopolitical uncertainty, higher inflation, monetary tightening and a necessary pullback in fiscal stimulus. The combined restrictiveness from interest rates and non-discretionary goods and services prices does threaten to put us on a lower growth trajectory at best – an earlier than anticipated recession at worst. This is one of the biggest gaps we have seen between the University of Michigan consumer sentiment index and the one-year change in the S&P 500 (which is still positive to the tune of about 10 per cent).

This doesn’t necessarily mean that investors should be jumping completely out of risk assets, nor should they necessarily be moving back into government bonds. Anything that suggests a resolution in Eastern Europe would likely bring commodity prices down and improve confidence. A case can be made for at least a moderate trimming of equities and higher-risk fixed income.

• Sign up for the Market Call Top Picks newsletter at bnnbloomberg.ca/subscribe

TOP PICKS:

WSP Global (WSP TSX)

Linamar (LNR TSX)

Mackenzie Maximum Diversification Emerging Markets ETF (MEE TSX)

PAST PICKS: July 9, 2021

Ballard Power (BLPD TSX)

• Then: $21.15
• Now: $15.26
• Return: -27.84%
• Total Return: -27.84%

Teck Resources (TECK/B TSX)

• Then: $29.28
• Now: $50.18
• Return: 71.37%
• Total Return: 73.85%

Barrick Gold (ABX TSX)

• Then: $26.32
• Now: $31.53
• Return:  19.79%
• Total Return: 22.51%

Total Return Average: 22.84%