Market Insights: Uncertainty Often Breeds Opportunity

Macroeconomic and Market Developments:

• North American markets declined this week. In Canada, the S&P/TSX Composite Index was down 2.10%. In the U.S., the Dow Jones Industrial Average fell 4.13% and the S&P 500 Index fell sharply by 4.77%.
• The Canadian dollar dropped this week, closing at 75.36 cents vs 76.78 cents last Friday, closing at its lowest level since October 2020.
• Oil prices were down this week as well. U.S. West Texas crude closed at $85.28 vs $86.19 USD, and the Western Canadian Select price closed at $63.94 vs $65.99 last Friday.
• The gold price was also down this week, closing at $1,675 vs $1,716 USD last week, its lowest level since April 2020.
• Calgary-based Tamarack Valley Energy (TVE) announced that it has entered into an agreement to acquire private company Deltastream Energy Corporation, for total net consideration of $1.425 billion. In conjunction with the acquisition, Tamarack approved a 25% increase to the monthly dividend.
• In a related transaction, Topaz Energy (TPZ) has entered into agreements with Deltastream for the purchase of a newly created 5% gross overriding royalty on all current and future oil production from Deltastream's entire Clearwater acreage in Alberta, for total cash consideration of $265.3 million.
• August inflation data was released in the U.S. this week, showing the Consumer Price Index (CPI) increased 0.1% for the month, well above the expected drop of 0.1%, totaling 8.3% over the past year vs the 8.0% expected. The Core CPI (excluding volatile food and energy costs) rose 0.6% from July and is up 6.3% year over year. The Producer Price Index (PPI), which measures wholesale prices, declined 0.1%, in line with expectations, and is up 8.7% year over year.
• Tech company Adobe (ADBE) announced on Thursday that it will acquire design software firm Figma in a deal worth roughly $20 billion in cash and stock. Investors perceived that Abode overpaid for the company, leading to a 17% plunge in Adobe’s stock price on Thursday.
• FedEx (FDX) spooked investors on Thursday by announcing significant cost-cutting actions and withdrawing its full-year earnings guidance, following what it called softness in global volume of shipments. As part of these cost-cutting initiatives, FedEx will close 90 office locations, close five corporate office facilities, defer hiring efforts, reduce flights and cancel projects. As a result, FedEx shares dropped a whopping 21.40% on Friday.
• Here is a link to a short video from Canaccord’s chief U.S. Strategist Tony Dwyer entitled Strategy As The Fall Fall Plays Out: DWYER VLOG

Weekly Diversion:

Check out this video of two pet otters getting a new swimming pool.

Charts of the Week:

This year, Fridays have been notoriously volatile for equities as the S&P 500 experienced a gain or loss of over 1% on the last trading day of the week for the 22nd time last Friday. In addition, the S&P 500 closed out that week with a 1%+ gain or loss for the fifth straight week. Today, this streak ended with the S&P 500 finishing down only 0.72%. It is just the 12th time this has happened since 1952 when the NYSE first started the 5-day trading week and eliminated trading on Saturdays. The following chart shows all occurrences of five straight weeks or more. There have been just four other streaks of six weeks, and only the 2020 ten-week streak during and after the COVID crash lasted longer than six weeks.

Source: Bespoke Investment Group

Volatility on a Friday is often a sign of uncertainty in the markets, and there is no doubt this year has been filled with just that. More often than not, volatile markets occur during periods when the market is weak, and this signal could certainly mean that volatility remains in the near-term. However, in markets, uncertainly often breeds opportunity, and in the past these occurrences have typically been followed by strong forward returns. For periods where the S&P 500 experienced this streak of five weeks or longer, forward performance tended to be weak in the very near-term (next few weeks), but much stronger than average over the intermediate term, especially over the next six-to-twelve months. The average one- and three-month forward performance in the past eleven occurrences produced returns of 4.5% and 5.3%, respectively, well over twice the historical average on the latter. For six and twelve months later, the average forward returns were 12.7% and 23.8%, which is close to three times the historical average of 4.3% and 8.9%. The positive return success rate of this signal over the following year has been 82%. In terms of maximum loss over the following year, performance wasn’t necessarily in a straight line as the maximum drawdown averaged just over 8%, but that is still close to being in line with historical average. On the flip side, the average maximum gain over the following year was close to three times the historical average, never lower than 5%, and in all but three periods the maximum gain was over 20%.

Source: Bespoke Investment Group

DISCLAIMER: Investing in equities is not guaranteed, values change frequently, and past performance is not necessarily an indicator of future performance. Investors cannot invest directly in an index. Index returns do not reflect any fees, expenses, or sales charges.

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