Market Insights: Comparing Prior Tightening Cycles to Today

Milestone Wealth Management Ltd. - May 13, 2022

Macroeconomic and Market Developments:

  • North American markets were down this week, with the U.S. markets now down six weeks in a row. In Canada, the S&P/TSX Composite Index declined 2.62%. In the U.S., the Dow Jones Industrial Average fell 2.14% and the S&P 500 Index was down 2.41% this week.
  • The Canadian dollar was flat this week, closing at 77.45 cents vs 77.45 cents last Friday.
  • Oil prices were also flat this week. U.S. West Texas crude closed at $110.41 vs $110.37 last Friday, and the Western Canadian Select price closed at $96.72 vs $96.41 last Friday.
  • The gold price was down this week, closing at $1,810 vs $1,883 last Friday. Gold had gotten a lift in late February and early March as a safe haven investment after the attack on Ukraine, but has now given all that gain back.
  • Volatility continued in the markets this week, but the bond market finally got a bit of an uptick. The interest rate on the U.S. 10-year government bond finally pulled back after hitting a high last week of 3.13%, finishing this week at 2.93%. When interest rates drop, bond prices go up, so this was a nice reprieve from the relentless decline in bond prices so far in 2022.
  • Suncor Energy (SU) reported better than expected operating earnings of $1.92 vs $1.64 forecast, and adjusted funds from operations of $2.86 vs $2.72 forecast. The company also provided guidance that includes an expectation to achieve the lower end of its 2025 targeted net debt range during the second half of 2022 and has increased its quarterly dividend by 11.9% to $0.47 from $0.42.
  • Ovintiv (OVV), formerly named Encana, reported operating income $559 million vs $873.3 million expected. Production came in at 500 Mboe/d vs 496.5 Mboe/d expected and it provided guidance that includes capital investment of $1.7 - 1.8 billion for fiscal year 2022 vs prior guidance of $1.5 billion. The company is increasing its quarterly dividend by 25.0% to $0.25 from $0.20.
  • The proposed merger of Shaw and Rogers was dealt a blow this week with the Competition Bureau saying that even divesting of Freedom Mobile would not be sufficient to stimulate competition. Both Shaw and Rogers’ stock prices dipped this week on the news.
  • U.S. inflation data came in hot once again for April. The Consumer Price Index (CPI) came in at 8.3%, more than the 8.1% estimate and near the highest level in more than 40 years. Core CPI, which excludes food and energy, also was higher than expected, rising 6.2% vs the 6.0% rate that had been forecast.
  • As technology stocks continue to drag down the markets, Apple (AAPL) lost its title as the world’s most valuable publicly traded company this week. Saudi Aramco recaptured the title it lost to Apple back in 2020 after increasing roughly 27% so far this year, while Apple has dropped by roughly 18% so far this year.
  • Here is a link to a short video from Canaccord’s chief U.S. Strategist Tony Dwyer entitled Inflation, Fed, and the Market: DWYER VLOG

Weekly Diversion:

Check out this video of an impressive catch by dad.

Charts of the Week:

Although equities had a strong day today, the S&P 500 closed down for the sixth straight week. This is a very rare event, one for which has historically provided very strong forward returns on average. It is important to keep a long-term view. When we look at the current environment we are in, where short-term interest rates are being raised by central banks (also known as a tightening cycle), let’s see where the S&P 500 Index is vs prior tightening cycles. The current market selloff we have seen is very much in line with historical norms following the first Fed rate hike. As shown below with the blue line being this year and the grey lines being past years, markets generally have found a bottom 1 - 2 months following the initial increase and are now very close to the lowest prior levels on the right side of the yellow dotted line. The good news is that generally markets have provided solid returns going forward for the next year after that point.


We have discussed historically negative sentiment, namely the bullish and bearish surveys of the American Association of Individual Investors (AAII) on more than one occasion over the past few weeks. This is one widely followed sentiment index and focuses on individual retail investors. However, there are two other widely followed industry sentiment indicators, one from Investor’s Intelligence (sentiment of advisors) and one from the National Association of Active Investment Managers (NAAIM). Fortunately, our source Bespoke Investment Group, has compiled the three sentiment indicators together into a Composite sentiment index to get a view of all three market participants in aggregate. Here is a chart of this Composite Net Bullish Sentiment over the last 15 years, and as you can see it has touched down to a level of just 35% which we have only seen a handful of times since 2006, all of which were periods surrounding either the great financial crisis or in late 2015/early 2016. The current level ranks below the 2nd percentile relative to all prior readings.

Source: Bespoke Investment Group

With overall economic growth still being relatively strong (albeit slowing), unemployment at a historically low level, U.S. household balance sheets and cash levels at formidable levels, interest rates still historically low (although rising), central banks still relatively accommodative overall, and credit stress levels still not overly elevated, we do not believe the current environment is anywhere near 2008/9. The positive news is that when you look at the following table showing all prior occurrences where the Composite Bullish Sentiment was at or below the 2nd percentile, the forward-looking returns were extremely strong, and this includes the two negative readings. On average, when this level was hit like today, the S&P 500 has returned on average almost 11% over the next six-month period and over 23% over the following year.

Source: Bespoke Investment Group

Sources:, Globe and Mail, Financial Post, Connected Wealth, BNN Bloomberg, Tony Dwyer, Canaccord Genuity, First Trust, Bespoke Investment Group