Menu Close

Smart Money

Our regular summary of the capital markets. Check back each month for new updates.

Smart Money

May 01, 2022

Changes in Player Compensation

Smart Money

In July 2020, the NHL and the NHLPA agreed on an extension of the Collective Bargaining Agreement (CBA). The settlement added six seasons to the existing terms and promised hockey fans uninterrupted action through 2025-26. The extension provided players with increased visibility on salary figures, which include items such as entry-level contracts, individual/team bonus amounts, salary...

In July 2020, the NHL and the NHLPA agreed on an extension of the Collective Bargaining Agreement (CBA). The settlement added six seasons to the existing terms and promised hockey fans uninterrupted action through 2025-26. The extension provided players with increased visibility on salary figures, which include items such as entry-level contracts, individual/team bonus amounts, salary limits and, most notably, escrow withholdings. Click the link below to review upcoming changes!

New Compensation Data

April 28, 2022

Markets Bruised After Brutal April

Market Recap & Boxscore

Last month’s rally in equity markets quickly faded in April as aggressive and persistent selling led the S&P 500 and MSCI World indexes to declines of 7%. Even the TSX, which has defied gravity in 2022, fell 4.3%. Under the hood, the flight to safety accelerated with markets favouring staples, real estate and utilities, while selling discretionary, technology and financials. Unlik...

Last month’s rally in equity markets quickly faded in April as aggressive and persistent selling led the S&P 500 and MSCI World indexes to declines of 7%. Even the TSX, which has defied gravity in 2022, fell 4.3%. Under the hood, the flight to safety accelerated with markets favouring staples, real estate and utilities, while selling discretionary, technology and financials. Unlike earlier in the year, downside participation by large cap Generals contributed to the weakness during the period. Index-dominating names like Google and Apple crumbled over 16% and 8%, respectively. We always keep a close eye on credit markets to confirm a move in equities. Yields across corporate bonds persistently marched higher, and spreads, as measured by the BofA US High Yield Index OAS, rose 51bps to 3.89%. The trend in credit spreads is notable, but we are not yet at levels of excess stress.

Commodities did not cooperate with the decisive downward moves in equities and bonds. The results were mixed across the broad asset class, but collectively their winning streak extended for a fifth month. Gold head-faked another breakout, turning around and ending down 3.1% for the month. Oil swung for the fences, reaching +15% before settling at a 5.1% boost. Elsewhere, natural gas resumed its levitation trick, rising 23.4% as abnormally cold weather and supply issues emanating from Europe pressured supply. The agricultural commodities were positive as drought concerns and early indications of poor crop quality in the US led to gains of about 7% across the complex.

The uninterrupted upward move in bond yields carried on in April. The US 10-year yield increased 50bps to 2.86%; 2-year yields rose 33bps to 2.64% – an indication that an aggressive Fed will persist throughout 2022 and 2023. Equity drawdowns are logical given experience during periods of heightened economic uncertainly but the degree of weakness in the bond market has few comparables. The Bloomberg Aggregate Bond Index has slumped almost 9%. In fact, one would have visit the late 1970s to find a comparable decline for the index.

The U.S. Dollar continues to be a global wrecking ball in currency markets. The DXY strength was previously a function of its heavy weighting to EUR and JPY which were both faltering. However, in April even the mighty Canadian dollar fell 2.3% while the British pound fell 5.2%. Both the USD and yields have an outsized impact on corporate profitability so these factors will become more prominent in the evaluation of future earnings.

With a new quarter came the start of Q1 earnings season, and so far on aggregate we are seeing results that leave something to be desired. Probably the biggest surprise were the results from Netflix, which left the stock down 35% on earnings day, about 50% for the month and over 70% from its peak in November 2021. The carnage occurred despite beating on earnings and matching revenue expectations. However, investors keyed-in on a drop in global paid streaming subscribers as a sign of competition eating into the aggressive growth expectations that were baked into the stock’s price.

From a macro perspective, US GDP came in well below the estimated 1% growth rate in Q1, falling 1.4%. Upon further investigation, there are some positive signs of economic resilience. First, consumer and business spending remained robust, but this demand was satisfied through imports rather than domestically, while at the same time exports globally contracted. Second, government spending fell 2.7%. The question now will be whether the Fed will use this as an excuse to walk back some of their hawkish talk from May. Or, will they look through the weak headline number and reference the underlying positivity as a reason to continue their tightening program? With equities rising following the news release and yields remaining stubbornly high, it seems bond and stock markets are predicting different outcomes.

April 01, 2022

The Wall of Worry, Is It Different This Time?

First Quarter 2022 Newsletter

Bonds Face Worse Start to Calendar Year – March helped pull U.S. equity indices out of correction territory, defined as a peak-to-trough decline of more than 20%, as risk assets rebounded from a difficult start to the year. The key themes that dominated the market during the first quarter were inflation, rising rates and the conflict between Russia and Ukraine. With U.S. CPI reaching ...

Bonds Face Worse Start to Calendar Year – March helped pull U.S. equity indices out of correction territory, defined as a peak-to-trough decline of more than 20%, as risk assets rebounded from a difficult start to the year. The key themes that dominated the market during the first quarter were inflation, rising rates and the conflict between Russia and Ukraine. With U.S. CPI reaching 7.5% and European inflation touching 5.8%, there is strong pressure for the Fed and ECB to tighten monetary policy, through higher interest rates mainly. While raising rates can keep inflation under control in a growing economy, today’s situation is less certain. Inflation appears to be increasing as a result of excess liquidity, supply chain disruptions and inadequate capital expenditures. Furthermore, the yield curve (interest rates over different time periods) has already flattened, which has in the past been a good predictor of a coming growth slowdown or even a recession.

The Wall of Worry, Is It Different This Time? – There are no shortages of bearish narratives these days in global markets. The central banks raising short-term interest rates to combat inflation, the very sad news of war in Ukraine, continued lockdowns in China and the flattening yield curve makes it difficult to maintain a positive outlook. Sentiment certainly reflects this with the AAII Investor Sentiment Survey showing optimism among individual investors falling to a level not seen in nearly 30 years. Positioning is also beginning to echo sentiment with Large and Small Traders lowering their exposures. This combination has placed the market at an interesting juncture.

With inflation hitting the wallets of consumers around the world, Central Banks use rate increases to combat inflation. In theory, rate increases should slow demand as borrowing costs increase. Thus less discretionary spending occurs. This in turn slows the economy, particularly in the U.S. where consumption makes up the lion’s share of gross domestic product. A bit surprising, is the fact that stocks typically perform reasonable during the rate increase cycle. Over the last 12 rate hike cycles, Truist Advisory Services found the S&P500 posted a total return at an averaged annualized rate of 9.4%, showing positive returns in 11 of those periods.

This cycle naturally has its own nuances, in addition to having just injected the economy with the most capital ever outside of the World Wars, the world now faces the possibility of energy and food shortages due to the war in Ukraine. Higher energy prices played a significant role in the 2008 recession with prices going parabolic. Higher hydrocarbon prices not only impact corporate margins through raw material prices, it also slows demand for travel. But it is not just higher input costs crimping margins, wages are increasing as corporations attempt to lure people back into the job market. Declining margins have historically led to lower valuations.

A zero COVID policy continues to be implemented in China. The difficulty of managing locking down cities with 26 million people has become more evident as there are reports of food shortages and riots. Here in North America, supply chains are facing their largest challenges to date as factories and ports in China are shut down. This is coming at a time of already slowing earnings growth and putting further pressure on margins. The most severe of the impacts will begin to take place during the second quarter and extend for six to 9 months.

The yield curve, which maps the interest rate over different durations, has already inverted. This has a history of occurring just prior to recessions. While equities have indeed been spooked by the flattening, there are structural forces at play in the market causing yields to spike, particularly on the short end. With sentiment recognizing this, we anticipate a number of sharp rallies as volatility will remain high. During the 2000 bear market, there were 16 rallies by the NASDAQ that were greater than 10%, averaging just over 22%.

Therefore, with news flow, economic data and forward indicators pointing to more market downside, our preference remains to seek out quality investments, while remaining nimble to capture sharp rallies.

Download PDF Version

Subscribe

Success! You have been successfully been added to the mailing list.

Enter your email below to receive a monthly email with the latest market and company news.

We pride ourselves in dealing with professional athletes and protecting their information. Read more about our Privacy Policy.
You can unsubscribe at any time.

Gavin Hockey Wealth Specialists
Air Canada Centre, 50 Bay Street, Suite 1444, Toronto M5J 3A5
416-861-1998