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Milan Cacic

December 02, 2022

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THE FED JUST BLINKED, WHAT NOW?

Over the past few weeks, we have talked about the potential of inflation peaking and starting to rollover which would allow the Federal Reserve to slow the pace of their rate increases. This week we may have been given an early Christmas gift. The Federal Reserve’s Chair Jerome Powell has stated “The time for moderating the pace of rate increases may come as soon as the December meeting.”

 

In previous notes, we mentioned that it would be very hard for the market to make a bottom and begin a new bull market until inflation rolled over and we could see an end to interest rate hikes by the Federal Reserve. With the potential of interest rate hikes coming to an end in the New Year, we thought this would be a good time to look at how the markets have done after a large decline. I want to point out that there are still a lot of issues that the market must deal with like the war, inflation, a high P/E ratio and a potential coming recession. It is times like these that it is best to use data and leave the emotions at the door.

 

The chart below shows the forward returns after the worst 9-month periods between 1970-2022. As you can see, it appears that abandoning equities after a large decline in the market has not been a good strategy. I don’t think you have to be a rocket scientist to figure this. It feels like common sense more than anything else. Having said that, once the markets start to recover, we have a tendency to want to sell once we are back to even. This also can have dire consequences on longer term performance. Once again, a well-diversified portfolio in both good and bad markets is usually the best remedy for performance.

 

Table 1

 

One other thing that I would like to point out is the current investor sentiment. Investors as a whole are underweight equities by 35% and overweight cash by 50% as illustrated by the chart below. Historically speaking, when the majority of investors are bearish this is usually a good entry point to invest. At some point all that cash has to come back into the market.

 

Graph 1

 

I have also included a piece from our CIBC Economics Team entitled “Coke or Pepsi?“.

 

As always if you have any question feel free to call us at any time.

 

Have a great weekend.

 

Milan

 

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CIBC Private Wealth” consists of services provided by CIBC and certain of its subsidiaries through CIBC Private Banking; CIBC Private Investment Counsel, a division of CIBC Asset Management Inc. (“CAM”); CIBC Trust Corporation; and CIBC Wood Gundy, a division of CIBC World Markets Inc. (“WMI”). CIBC Private Banking provides solutions from CIBC Investor Services Inc. (“ISI”), CAM and credit products. CIBC Private Wealth services are available to qualified individuals. Insurance services are only available through CIBC Wood Gundy Financial Services Inc. In Quebec, insurance services are only available through CIBC Wood Gundy Financial Services (Quebec) Inc.


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