After seven consecutive weeks of the markets falling, we have finally got an uptick! We are not out of the woods yet, however, if the market continues as it is at the time of writing, this will be two up weeks in a row.

 

Another piece of good news is the unwinding of the Covid restrictions in China. It appears that almost all of Shanghai's factories have now reopened. The reopening of China is important, as it will renew consumer spending and add to economic demand globally. However, one area of caution is China's demand for energy. With the price of oil already at high levels, more demand from China could cause further increases in energy-related prices.

 

Lastly, we may have seen inflation expectations finally ease. The chart below is the 5 and 10-year expected inflation rate. The expected inflation has dropped the most since the beginning of the pandemic. As I mentioned in a previous note, it is unlikely for the market to rally until inflation starts to roll over. Hopefully it has!

 

 

While all these things may create some cautious optimism, we still have to remember that earnings need to grow for the market to go up. As of writing, 2022 earnings-per-share is growing at 10% and expectations for 2023 are 9%. However, the earnings growth appears to be decelerating. A strong argument could be made that the pullback in the market has created a fairly valued market. But this means nothing if future corporate earnings don't keep pace with the market’s expectations. We could be walking into some massive headwinds if we start to see poor earnings results. As of now, we do not see that situation playing out, but it is something we will continue to monitor closely.

 

I have also included a piece from our CIBC Economics team entitled "Avoiding the hobgoblin of small minds".

 

As always, if you have any questions feel free to gives a call at any time.

 

Have a great weekend.

 

Milan

 

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