After an amazing run for the last 18 months, the rate of change is beginning to slow, and it looks like the easier gains are behind us. For the month of November, markets spent most of the time at or near all-time highs, but there has been a notable increase in volatility.
Volatility is here
The first signs of volatility arrived in the bond market, which throughout the year has been the best leading indicator for all markets. In November, we saw yields gyrate between 1.5 and 1.7%. The push from global central banks to remove stimulus efforts, begin to taper QE, and, in some cases, increase interest rates coincided with Omicron, a new virus mutation that has threatened the reopening trade.
Commodity markets were the next areas to see the volatility. Faced with a stronger U.S. dollar, many commodities began to see prices pause their gains and rollover. A notable exception was in the gold market, which has held very well in this environment and may yet prove to be the inflation hedge it has long been thought as.
Oil and energy commodities had the most volatile time in November. After touching $80 a barrel, fears of inflation from energy resulted in the first peace time coordinated release of strategic reserves from several countries. This put a near-term top in markets, but new virus headlines caused a 15% drop in thin holiday markets.
All of this added to a headwind for equities. While most markets are at or near all-time highs, it seems like the risk/reward is beginning to look less favourable to investors.
Earnings season was impressively strong, but the pace of earnings growth slows as wages and costs increase to put a squeeze on margins. Combined with historically high multiples, it will be difficult to see another year of double-digit market gains.
Looking towards 2022
We expect the market in 2022 will be more volatile than the past year. Central banks are changing their tone to become more hawkish, and they're beginning to normalize their interest rate policies. Economies will have to be strong enough to stand on their own, and there will be wobbles.
Volatility can be looked at as an opportunity, but it can also be seen as a sign of an increasingly nervous market. Given the amount of cash in the market looking for investment opportunities, we don’t expect to see a significant drop in markets. Still, given the stage of the cycle we are in, being a little more defensive may make sense.
— Greg Taylor is the Chief Investment Officer at Purpose Investments
Sources: Charts are sourced to Bloomberg L.P.
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