Benign Neglect? (TWTW – Jan 10-14, 2022)

Benign Neglect?

With a newly reformed FED Chair (as in pivoting away from the “transitory” label), markets are now bracing for the impact of faster than expected hikes. That … + oh, yes, the potential that the FED will look to unwind its huge holdings of bonds … THAT … could be interesting. In the meantime – did Jay turn (albeit likely temporarily) hawkish for political expediency reasons – as he had to face congressional hearings into his appointment to a second term?

Either way, many are seeing the FED as being behind the curve … What else can explain more than full employment with still huge accomodation, AND 7% inflation (transitory or not …)

Last week’s action saw a continuation of the first week of 2022: Themes under continued pressure; Canada’s market led by Energy, Financials, and Materials:

  • ARK Invest’s Cathie Wood’s Global Disruptive Innovation continuing under pressure

Lots of scrutiny on what has been happening of late with ARK’s fund and relative performance, such as this chart:

  • Clean Energy having possibly begun correcting a tad earlier faring slightly better on a relative basis last week
  • Defensive nature of Healthcare hasn’t prevented it coming under pressure in this new year
  • YTD – Travel and Leisure best amongst above themes, presumably on continuing optimism that OMICRON won’t be with us much longer

  • Notwithstanding being technically “overbought”, fundamentals for financials remain supportive, including, naturally, the notion that NIM (Net Interest margins) are poised to improve with rising yields
  • Energy – Leading strongly to the upside, fully recovering from late November/early December weakness, and now with rounds of price target increases from research houses revisiting their models and remaining constructive on the outlook for the space, which … well, is increasingly becoming a crowded trade, one would have to acknowledge. That said, the notion that banks were going to be increasing dividends, buying back shares et al was also very much consensus – which hasn’t prevented them from continuing delivering strong returns.
  • Inflation – with inflation hitting 7%, and a FED Chairman converted to the “inflation is a clear and present danger and we better do something about it”, markets are “adjusting” to the notion rate hikes might begin as early as March.

A breakdown visual on inflation, and some BMO observations:

  • FED -while the FED is talking the “rate hikes are coming” … what is it? 3-4? JPM’s Jamie Dimon foresees even more hikes. In passing, worth noting that disappointing earnings at JPM saw the stock under pressure Friday.
  • Canadian Banks – incidentally Bank CEOs here (RY) urging the BoC to tighten sooner as opposed to later.
  • First Trust abolishes DRIP – why? cost probably not worth what it brings in would be my guess
  • CI continues acquisition spree – this time around in Canada, acquiring Northwood Family office.

Other posts from last week:

Smiley Fries with that? Click HERE! 

revisiting sector weights within some key Canadian ETFs, as sector weights this year are obviously – as illustrated by how 2022 has started … – critical in terms of positioning for where we’re headed next …

of course the one chart that got people’s attention of late was this one, depicting Shopify’s fall from grace, and relative recent performance versus RY:

Random thoughts:

  • I’d expect dividend ETFs to be generally well bid in the context of rising rates – particularly so if the dividend stocks they contain have rising dividends in the cards
  • Energy – having led in 2021, may well repeat that feat in 2022, absent economic setbacks. As pointed out on numerous occasions – including at our Mindpath Virtual 2021 ETF conference – by Ninepoint’s Senior PM Eric Nuttal – the space has a hugely supportive Cash Flow generation forecast supporting further gains
  • Near term wouldn’t be surprising to see continuing rotation away from higher multiple areas into laggards, respectively value areas. After that … and after we find out how many hikes are really on the menu, respectively how much inflation is non-transitory … well, at that point, we’ll see …
  • Gold – I am probably missing something – to be sure – but Gold hasn’t exactly been that effective at dealing or hedging against that “inflation” spike we’re just witnessing. Will that change? OR, will Bitcoin turn around and steal whatever upside Gold might have otherwise enjoyed
  • Will Active to well in 2022? Interesting visual of Active’s results in different markets over various time frames:

Have a great week-end! 🙂