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Maili’s Market Update – June 2022

The global markets continued to be volatile in June, triggered by economic data and a 0.75% interest rate increase by the US Federal Reserve. During the month the Energy sector came under pressure, despite still being the best performing sector this year, as investors traded towards recession risks over inflation concerns.

To gain clarity and greater context about the current market conditions and what to expect going forward, please watch this 18-minute video of Maili Wong and Satya Pradhuman, CEO & Director of Research at Cirrus Research LLC in New York, live in conversation earlier this month.

In this video we highlight the key risks affecting global markets today, as well as the opportunities and recent changes we’ve made in client portfolios.

What could be a positive trigger for the Equity and Bond markets?
Simply put, anything that could lead to Central Banks being more accommodative, including a lower U.S. Inflation number. Another possible positive trigger is the release of weak economicdata. We are in a unique moment where “bad news for the economy” could be “good news for the overall markets.” Any weak U.S. Unemployment or GDP data could lead to Central Banks slowing interest rate increases, in-turn boosting equity and bond markets. We are in a real-time data driven market, where all eyes are on the U.S. Consumer Price Index and Unemployment readings.

As well, there are large amounts of capital appearing on the sidelines for institutional investors. Any signal of their flow of capital back into the equity markets could lead to a strong global equity market recovery later this year.

What are the risks of a Recession in North America?
Canada and the U.S. look to be in a significantly better position than Europe and the Emerging Markets to weather a recession in the near-term.
In the U.S., the overall consumer and corporate balance sheets are still strong, with many companies having high cash and low debt (which has been re-financed at low rates). As well, the unemployment rate is still at historical lows. While a recession is possible, we don’t see the same market excesses and bloated balance sheets that hurt the economy in the years 2000 or 2008. This leads us to believe a North American recession would be shallow.

It is important to remember that while the US Federal Reserve is aggressively stifling economic growth with interest rate increases, they are also gaining back the ability to stimulate economic growth if needed down the road. By front-end loading the interest rate increases, they’re essentially creating a cushion with the tools necessary to decrease rates and therefore protect the economy from potential negative external shocks (i.e., another pandemic).

What is a “Quality” stock & why is it Important to own Quality?
In finance it means different things to different people. The most common measures of quality revolve around low debt, high cash generation, and high profit margins. Our New York-based equity research partners at Cirrus Research LLC, as highlighted in the video, like to focus on companies with consistent and transparent profits, as well as strong sales levels relative to peers.

Quality firms can perform well in difficult or uncertain environments. They often have the purchasing power to pass along highinflation to their customers and can be seen as a “safe haven” compared to other equities, regardless of which sector they are in.

What are some Signals that we may be seeing the peak in Inflation?
There are a few reasons to believe we may soon start seeing Inflation data ease:

1. Large Retailers like Target and Walmart are now starting to report excess inventory as supply chain issues resolve and as demand for goods starts to cool

2. Consumers are transitioning back to balancing out their spending between goods and services (instead of only purchasing goods, they are now enjoying more services like travel)

3. Medium and Long-Term inflation expectations continue to decline, as measured by longer maturity government bonds

4. The year over year comparison from a higher price level means the math of inflation rate calculations start to show a decline

What are the Opportunities?

As with most broad market selloffs, we are in a situation where investors seem to “throw the baby out with the bath water”, resulting in opportunities to buy good quality companies trading at “sale prices”. It is about sifting through the sand and finding high quality companies that demonstrate the resilience to survive stress to their business model, and whose share prices have been oversold due to investor fear and capitulation.

As always, we are here to help answer any questions you may have about the investment portfolios or how this relates to your financial plan. Feel free to call us at 778 655-2410 and we look forward to hearing from you.


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