As I mentioned in my note a few days ago, at one point this week, we had the S&P 500 down 10% and the NASDAQ down 20% from their all-time highs. For a lot of people this felt like a shock. Since March 2020, we have had a fairly steady market that has not had much volatility on the downside and some of us have forgotten that pullbacks and corrections are a normal part of the market. There is no doubt that people are concerned over how aggressive the Federal Reserve is going to be at raising interest rates. It appears that the market is pricing in at least 4-5 rate hikes. If we end up only seen three or four rate hikes you might see some surprises to the upside in the market.

Regardless of where the market moves, it is important to look at other data to help guide us. One piece of data that we think is important are credit spreads. Normally when you're heading into an economic recession or a market breakdown, the credit spreads widen which is usually a strong sign of a weak economy. As you can see from the chart below, the market has broken down over the last month and credit spreads have stayed in their narrow band. This is important because if credit spreads widen, corporations have to generally pay higher interest on the money that they borrow from their creditors. Credit is the lifeline for the economy and if the cost to carry that credit is not going up then that is usually a good sign for the market.

¹Source: Strategas, as of January 24, 2022, in An Update from David Fingold, David Fingold, 2022

I have also included a piece from our CIBC Economics team entitled “COVID After Omicron".

If you have any questions please feel free to give us a call anytime.

Have a great weekend.

Milan