Market Insights: Stock Valuations Getting Attractive?

Milestone Wealth Management Ltd. - Jun 24, 2022

Macroeconomic and Market Developments:

  • North American markets rebounded this week. In Canada, the S&P/TSX Composite Index was up 0.69%, somewhat held back by a pullback in oil and gas stocks. In the U.S., the Dow Jones Industrial Average was up 5.41% and the S&P 500 Index was up 6.46% this week.
  • The Canadian dollar was up this week, closing at 77.55 cents vs 76.75 cents last Friday.
  • Oil prices were lower for the second week in a row. U.S. West Texas crude closed at $107.59 vs $110.07 last Friday, and the Western Canadian Select price closed at $89.70 vs $89.86 last Friday.
  • The gold price was down this week, closing at $1,826 vs $1,837 last Friday.
  • Canadian annual inflation rose 7.7% year-over-year in May, well above economist expectations for a 7.3% increase. This represented an increase from the 6.8% level in seen in April and is the highest inflation since January 1983. The inflation gauge rose 1.4% month-over-month with gasoline, hotel rates and cars among the largest contributors to the gains in May. The core inflation level, excluding volatile items like gasoline and food, rose to 4.73%, a record in data back to 1990.
  • In an effort to appease regulators related to the proposed takeover of Shaw (SJR.b), Rogers (RCI.b) has reached a deal to sell Freedom Mobile to media company Quebecor (QBR.b) for a total Enterprise Value of $2.85 billion. The transaction is conditional, among other things, on clearance under the Competition Act and would close in tandem with the potential closing of the Rogers-Shaw deal.
  • Kellogg (K) announced a plan to separate into three independent publicly traded companies, with the official names to be determined later. The three companies will be in the areas of Global Snacking, North America Cereal, and Plant-Based. Kellogg believes that the businesses would have significant potential for growth and flexibility as standalone companies.
  • Copper prices have significantly declined this month, ending the week at $3.735 from its high of $4.9375 on March 4, 2022. This may be a warning sign for the economy as copper is considered a gauge for the health of the global economy due to its widespread use across various sectors from construction to power transmission. In addition, copper is also a key to the green transition as it is a key input for electric vehicles.
  • Here is a link to a short video from Canaccord’s chief U.S. Strategist Tony Dwyer entitled Powell Reinforces Our View: DWYER VLOG

Weekly Diversion:

Check out this video of a girl learning to count backwards.

Charts of the Week:

The stock market achieved a small recovery from the recent leg of the current intermediate downturn. Prior to this week, the S&P 500 had dropped over 5% for two weeks in a row, for only the eighth time since the end of WWII. Whereas this is a painful moment in the markets on a short-term basis, let’s take a look back at the previous seven instances for some indication on what might happen from this point. In the following chart, one can see that all of those instances were at least somewhere near the bottom of their respective market pullbacks. Whereas this doesn’t predict anything for today’s market, it does put things into perspective for the longer-term outlook that we may once again be somewhere near the ultimate low in this cycle.

Source: Bespoke Investment Group       

When attempting to assess how oversold a market is and whether stock valuations have gotten ‘cheap’, one indicator is the percentage of stocks that are trading above the price targets that analysts have assigned to the companies. When the stock market is high, valuations get rich and sometimes stock prices exceed what analysts believe to be full value. In the following chart, one can see that as of June 16th, the percentage of S&P 500 stocks above their respective price targets was only 0.20%. When comparing this level to prior market bottoms, one can see that this is a very rare moment historically. Notably, even at the Great Recession low of March 9, 2009, there were still 4.67% of stocks trading above their price targets, much higher than today. This gives us some comfort that at these levels, some real value is starting to appear in the market.

Source: Bespoke Investment Group 

Market corrections and bear markets can be frustrating in the short-term, but they are a part of the investing process. In fact, they can ultimately be considered a long-term positive as they allow the market to get back to reasonable valuations and allow patient investors to buy in at those more reasonable levels.

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