Market update
North American equities took another sharp step down this week, as investors stung by the
sharp global selloff two weeks ago showed their increasing concern for the economic outlook.
With Wednesday’s drop, the technology-laden NASDAQ Composite Index became the first of
the major North American benchmarks to drop into “correction” territory, with a drop of
greater than 10% from its high last summer. Toronto’s S&P/TSX Composite followed suit just
before the closing bell, while the S&P 500 remains just shy of the mark. The proximate trigger
for the latest bout of weakness appeared to be disappointing earnings and/or outlooks from
some of the companies reporting third quarter results. The heightened sensitivity to poor
results saw offending stocks, including Caterpillar, AT&T, and Texas Instruments, punished, and
put pressure on the broader market.
Is there any need to rush to a “risk-off” position? Likely not. Many more companies continue to
beat earnings expectations than disappoint. In fact, third quarter S&P 500 earnings are so far on
track to climb roughly 22% versus a year ago. Yes, that is a slower pace (widely expected) than
the year-over-year gains of 25% and 28% in the two preceding quarters. But 22% growth is
nothing to sneeze at. Economic activity in the U.S. and Canada remains firm, both consumer
and business confidence remains near all time highs, the labour market is robust, and most
economic indicators suggest little likelihood of a recession in the near term.
In our market update two weeks ago, after global equities saw the steep pullback triggered by
rising interest rates, we noted that increased volatility might be with us for some time. We
reminded you that pullbacks of this magnitude are frequent and normal. Solid economic growth
has both the U.S. Federal Reserve and the Bank of Canada on paths to tighter monetary policy,
which will continue to create headwinds for equity valuations and sustain higher levels of
volatility. Against this backdrop, there is no shortage of things to worry short-term investors:
Brexit negotiations, the European Union-Italy budget showdown, U.S. tensions with Saudi
Arabia/Russia/China, the upcoming U.S. mid-term elections.
The first leg of this equity market retreat was about investors adjusting to tighter monetary
conditions and the resulting compression of asset valuation multiples. This second leg is about
adding other rising risks into that outlook. What it is not about is lower earnings. And for
patient and thoughtful investors, earnings drive stock prices and equity returns. As always,
focus on your long-term objectives and stay disciplined. Time in the market, not timing the
market, is what builds wealth.
This Market update is published by IG Wealth Management. It represents the views of IG Wealth Management, and is provided as a general source of information.
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