Market Insights: Value Finally Having Its Day in the Sun

Milestone Wealth Management Ltd. - Feb 18, 2022

Macroeconomic and Market Developments:

  • North American markets were lower this week. In Canada, the S&P/TSX Composite Index was down 2.52%. In the U.S., the Dow Jones Industrial Average declined 1.90% and the S&P 500 Index fell 1.58%.
  • The Canadian dollar was down slightly this week, closing at 78.42 cents vs 78.48 cents last Friday.
  • Oil prices were also down this week. U.S. West Texas crude closed at $91.07 vs $93.94 USD last Friday, and the Western Canadian Select price closed at $77.36 vs $79.81 last Friday.
  • The gold price was higher this week, closing at $1,898 vs $1,863 USD last Friday.
  • Volatility continued this week. The markets’ main focus remains the conflict between Russia and Ukraine, with investors also continuing to contemplate the pace at which central banks will be increasing interest rates this year.
  • TC Energy (TRP), formerly Transcanada, reported earnings of $1.06/share vs $1.05/share expected, and announced that it is increasing its quarterly dividend by 3.4% to $0.90 from $0.87. The company is advancing $24 billion of commercially secured projects including approximately $6.5 billion that are expected to enter service in 2022.
  • Intel (INTC) has agreed to purchase Israeli chipmaker Tower Semiconductor (TSEM) for $53/share in cash, representing a total enterprise value of $5.4 billion. The deal comes amidst a global shortage in computer chips and will allow Intel to expand its production. This deal comes in addition to Intel’s planned $20 billion investment for a massive new manufacturing facility near Columbus, Ohio that it announced in January.
  • Canadian tech giant Shopify (SHOP), formerly Canada’s largest company, reported better than expected earnings of $1.36/share vs $1.30/share expected, as well as higher revenue of $1.38 billion vs $1.34 billion expected. However, the company also provided an outlook noting it anticipates revenue growth for the full year 2022 that is lower than the 57% revenue growth achieved in 2021. Even though the company beat earnings and revenue estimates, the lowered forward guidance led to a massive 17.1% selloff on Wednesday, leaving the stock down a whopping 61% (~$160 billion market cap equivalent decline) from its all-time high by the end of the week.
  • In yet another indication of escalating inflation, the U.S. Producer Price Index (PPI) rose 1.0% in January, well above the expected 0.5%, and is up 9.7% from a year ago. Energy prices rose 2.5% in January, while food prices increased 1.6%. Core producer prices (excluding food and energy) rose 0.8% in January and are up 8.3% in the past year.
  • In Canada, inflation also came in hotter than expected. The Consumer Price Index (CPI) rose 0.9% in January, well above the 0.6% expected. The Canadian CPI is up 5.1% year-over-year, which is an increase from the 4.8% pace last month.
  • Here is a link to a short video from Canaccord’s chief U.S. Strategist Tony Dwyer entitled A Big Bag of Nothing: DWYER VLOG

Weekly Diversion:

Check out this video of some of the best Superbowl commercials of 2022.

Charts of the Week:

To begin, we wanted to provide a quick update to the American Association of Individual Investors (AAII) Investor Sentiment Surveys that we highlighted in our comments three weeks ago. One of the surveys we discussed, the AAII Bullish Sentiment has continued to collapse down below 20 to a reading of 19.2%. When we posted this chart last it was at 23.1%. The only other times since the Great Recession/Financial Crisis that bullish sentiment was this low were in January and May of 2016. This is a historical level of pessimism. Although there is no shortage of concerns currently including geopolitical risk, one has to ask whether these levels of pessimism are starting to get a bit extreme. One positive aspect one could take from this is that markets have already priced in an extreme amount of negative news.

Source: Bespoke Investment Group

For the better part of the past decade, growth stocks have outperformed value stocks by a wide margin, but lately this trend has turned. Market participants like to neatly categorize value and growth companies, as many investors prefer one investing style over the other. The truth is a bit more complicated than that as some companies exhibit some elements of both. However, generally speaking, value stocks present an opportunity to buy shares below their actual value, whereas growth stocks exhibit above-average revenue and earnings growth potential. This is the key reason why the United States’ main large cap index, the S&P 500, has outperformed every major index in the world for some time now because of its technology-heavy weighting. That is pretty evident this year with the S&P 500 Index down over 9% year-to-date, whereas our S&P/TSX Composite is only down about 1%. Our country’s large cap index has benefitted from very strong energy and materials sectors (considered more value than growth), which have a larger weighting here than in the U.S. When you look at the U.S. large cap technology sector in isolation, as represented by the NASDAQ 100, it is now currently having its worst rolling 2-month performance since 2008.

Source: Liz Ann Sonders, Charles Schwab

Looking at overall value vs. growth, after value underperforming growth 11 of the past 15 years, and seven of the past eight years, value is now leading growth by over 9% in 2022, its best relative start to the year on record. It remains to be seen if that trend continues, but right now value is certainly finally having its day in the sun.

Source: Joseph Carr, Dow Jones

On another note, with the uncertainty surrounding the Russia and Ukraine tensions, we thought we would show how past geopolitical events have affected the stock market. This is not a list of everything that has occurred, but all the major ones. For most of these events, attempting to time markets in and out has essentially proven futile in the post-WWII period, outside of possibly the 1990 invasion of Kuwait. The only other large drawdown was 9/11, however, there wasn’t any opportunity to know that event could have occurred. With respect to the tension of the current situation and not trivializing its potential consequences, the bottom line is that equity markets tend to take most geopolitical events in stride, even if short-term volatility can be high.

Source: Ryan Detrick, LPL Research

Sources:, Globe and Mail, Financial Post, Connected Wealth, BNN Bloomberg, Tony Dwyer, Canaccord Genuity, First Trust, Bespoke Investment Group, Charles Schwab, LPL Research, Dow Jones