Unnerving market mood swings

Emotion-charged market ramps up risk

Equity markets have been volatile to start the year but continue to push higher and set new record highs. It is a very dynamic market right now. And it’s charged with emotion. On the one hand, there is almost overwhelming optimism among investors that the worst of the pandemic may finally be over now that multiple vaccines are being rolled out and administered, and that, by extension, economies around the world can slowly return to full capacity. At the same time, stimulus measures of governments and central banks are tempering what lingering concerns investors may have as it relates to still-elevated Covid-19 case counts and the threat of more contagious virus variants proliferating in the future.

Moreover, these efforts are being validated by a U.S. earnings season that has largely beat expectations and some lofty GDP predictions, including one revised estimate from the U.S. Federal Reserve Bank of Atlanta that the U.S. economy will grow 9.5% in the first quarter of 2021. Still, there’s something also deeply unnerving about the current state of markets.

U.S. equity valuations, for instance, are expensive by most metrics and seem too far in front of the economic resurgence they clearly anticipate. Perhaps more worrying, however – and we’ve talked about this before – is the growing euphoria of investors themselves. It’s no secret that retail participation, in particular, has skyrocketed over the past year and been an important catalyst in the rally of stocks back to all-time highs.

But as we’ve seen recently, it isn’t without risks. If anything, the social media-induced short squeeze phenomenon demonstrates this best by showing how vulnerable markets can be when motivations for using them run counter to the fundamentals that help ground them.

Regional nuances

Many of the factors driving stock markets are universal, but that doesn’t mean they are playing out in the exact same way around the world. So nuances matter and can have a large impact on regional performance.

For instance, the speed at which each country can vaccinate its population and reopen its economy will surely influence the trajectory of its domestic market in relation to others. Likewise, the magnitude of future returns will at least in part be determined by a market’s sector composition. Take Canada, for example. Its vaccine rollout lags other countries to date and its largest city (and main financial hub), Toronto, is expected to remain partially locked down for another few weeks – if not longer. In turn, the S&P/TSX Composite Index has only just recently fully recovered from last year’s bear market selloff, and yet, because of its cyclical composition, it is also one of the best-performing equity benchmarks so far in 2021.

Geographic opportunities

Within the context of a 60/40 stock and bond portfolio, AGF’s asset allocation committee is overweight equities this quarter, and the U.S. market remains our largest exposure. That said, Europe, Japan, and other developed Asian markets such as Korea also look attractive, as do Emerging Markets, which should benefit from somewhat reduced trade frictions between China and the United States, as well as from an improving climate for manufacturing-based economies.

Kevin McCreadie is Chief Executive Officer and Chief Investment Officer at AGF Management Ltd. He is a regular contributor to AGF Perspectives.

Notes and Disclaimer

© 2021 by AGF Ltd. This article first appeared in AGF Perspectives. Reprinted with permission.

The commentaries contained herein are provided as a general source of information based on information available as of Feb. 11, 2021, and should not be considered as investment advice or an offer or solicitations to buy and/or sell securities. Every effort has been made to ensure accuracy in these commentaries at the time of publication, however, accuracy cannot be guaranteed. Investors are expected to obtain professional investment advice.

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