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Insights and Strategies

Are We There Yet?

As the summer holidays approach, it brings back happy childhood memories of the many road trips my family and I embarked on during our summer breaks. I fondly remember the days when my father would enter the living room with such excitement to surprise my sister and I with plans of a road trip adventure, similar to Clark Griswold from the National Lampoon’s hit film series. Although, instead of packing up the green wood-panel station wagon, we loaded up our grey 1989 Dodge Caravan with all our travel essentials. My dad even removed the center bench seat so we could sleep on the floor or play games while he drove us to our vacation destination – i.e., our road trip adventure - as he liked to call it.

In those simpler times, with no iPads or iPhones in sight to help pass the time, my sister and I quickly became bored and would annoy my father with frequent requests for washroom breaks, even though in many cases we had just stopped for one. Funny enough, we never had to go at the same time, but my father rarely found the humour in this. And, of course, there was the constant question of, “are we there yet?”. My father’s response would often be “no son, we are not there yet”. I see a parallel to the recent communication we have had with investors who are wondering the same thing, but as it relates to the sell-off in markets and the pick up in volatility observed across asset classes since the start of the year. As we have warned, volatility will remain a key theme for 2022, especially as central banks raise interest rates/tighten policy to cool the economy and, more importantly, inflation, which has soared to levels not seen in almost 40 years!

As demonstrated below, the net price impact to the S&P 500 index during past tightening cycles since the 1980s was flat to positive (i.e., the negative impact from multiple compression due to higher rates was more than offset by positive earnings growth), which has not yet played out the same way during the current tightening cycle. We suspect that this is due to not only the recent pace of interest rate increases, which has been more substantial than in past cycles, but also the extreme starting valuations at the beginning of this tightening cycle versus past cycles (excluding 1999-2000).


S&P 500 Estimated Breakdown of Changes during Historical Tightening Cycles [LHS]; S&P 500 Index Forward P/E [RHS], Source: Capital Economics; FactSet; Data as of May 26, 2022. All the returns are annualized.
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