July 2022 - BLOG 3

The probability of recession continues to rise and for those who are planning on waiting this market out, with the view that markets always come back, just consider that not all markets have. In other words, many markets including those in China and Japan, have had years and years where markets have not returned to old highs. It is also possible for this to happen in North America, although I certainly hope not. It is likely that we have started a downward earnings cycle, where higher costs bring down corporate earnings and consumer spending and as such companies report lower earnings. As a result, these companies start to lay off people to maintain profitability. As you likely surmised, less people working means even less spending and this could become a downward spiral. It is my opinion, and I have been saying this for quite some time, that a cautious posture when it comes to the stock markets is warranted at this time. The good news, everyone likes to buy things on sale, and in my opinion, it looks like we are embarking on an environment where we could see some excellent companies trading at low prices.

April 2022 - BLOG 2

Last month in my first Blog, I asked, “Is anybody out there?”. Thank you to the person who replied. I guess for now I will surmise that not many have found their way onto this blog. So I will repeat, if you are reading this, if possible, please send me an e-mail and let me know, to: brahm.satov@cibc.com.

As interest rates rise, bond markets usually perform poorly but equity markets can also reel from the effects. Let me explain, in terms of bonds- if we bought a 10 year government bond today yielding 10%/year, and in one month that same 10 year bond is yielding only 7%, the bond we initially purchased that is yielding 10% would have increased in value. As we would see very high demand for a bond yielding 10% when in the market the 10 year bond is yielding only 7%. Conversely, when we buy that same 10 year government bond that is yielding 10% and one month later the new 10 year bonds are yielding 12%, then the bond that we just purchased has seen its value fall. No one will want the 10 year 10% bond if the market is offering a 10 year 12% bond. Given that rates have been rising at the fastest rate in a very long time, bond values have been falling. In January the 10 year US government bond was yielding about 1%/year, it is now over 2.5%, a very big move, especially on a percentage basis.

In terms of the stock markets, they can also suffer from adverse effects of higher interest rates. Stock markets, as I’m sure everyone knows, is just a big basket of stocks. To determine the value a stock, one methodology is called discounted cashflow (DCF), to do this, one would take all the future projected cashflows of the business and using the time value of money formula, discount that back to present day. The issue is, as rates rise, the denominator, the discount rate, rises. So valuations become lower, if you will, as this discount rate rises. Having said this, we are in a rate hike cycle, central banks are raising interest rates to fight this high level of inflation, but part of this inflation could be due to supply constraints in China due to Covid, and war issues in Ukraine and Russia, and no matter how high rates go, this will not solve those inflationary pressures. I guess what I am trying to say is that it is common to have policy mistakes when central banks are raising rates, but this rate hike cycle, I think, the possibility of a policy mistake is higher than usual. That does not mean that we cannot have a soft landing, it is possible, just less likely. And we know hard landings, or recessions have not been friendly to stock markets. As such, I will repeated my recent mantra of suggesting caution in your investments portfolios at this time.  

March 2022 - BLOG 1

Is anybody out there? Please let me know if you are reading this, feel free to send me an e-mail to brahm.satov@cibc.com.

I have been saying for many months that we are likely going to be in for a period of higher than normal volatility. If we were in an airplane, I’d say much like flying through really rough weather with lots of air pockets. The reason for this is due to higher interest rates, the likely shrinking of central bank balance sheets (less liquidity) and heightened uncertainty due to war as well as the new Covid variant, BA.2. The equity markets, do not like uncertainty or tighter monetary or fiscal policy. Soft landings are like the Northern Lights, you hear about them happening, may have seen pictures, they are beautiful, but in truth they are very rare. The alternative of a soft landing, is obviously a hard one, and if this turns out to be the case, then it would be reasonable for stock markets to have a correction. I wrote a newsletter recently, “Better Too Early than Too Late”. I meant it, as I said in the newsletter, I do not expect a severe correction imminently, but the possibility of one has been rising, and perhaps investors should consider adjusting their portfolios accordingly