How to find opportunities: Market recap

Today we provide a market recap for investors who are patiently assessing the financial markets and trying to decide when and what to buy. This information will help direct you to pockets of opportunities and provide context for future market moves. Staying liquid is an important tenet of any investment strategy in the current environment.

Bond yields have more than doubled since the end of 2021:

We start with the Bond Market. Anyone who needs income will find value in a bond portfolio. Anyone who is nearing retirement and wishes to introduce lower risk options to their portfolio (but still compound growth) will also be looking at the bond market. We typically differentiate between “investment grade” bonds and “high yield” bonds – the former being lower risk investments and the latter being higher risk investments. Look at the yields available in each category both pre and post the current interest rate hiking cycle:

This means that investors can get double the return (that was available at the end of 2021) for the same risk level. Bond investors should stay short and patient – it's possible to get attractive yields on one year or shorter securities. This gives investors flexibility to reinvest further along the Fed’s hiking cycle.

The U.S. Stock Market is down and may have further to go

Rising interest rates and recession fears have pushed the stock market steadily lower for the first 6 months of 2022. The U.S. stock market is likely to fall even further depending on the magnitude of the anticipated recession and how quickly inflation responds to the tighter monetary and fiscal policy. The table below summarizes the year-to-date return, the average P/E of each index and the average annual growth rate of the last 20 years (assuming dividends were reinvested in the index) of 3 major U.S. stock indices. It is worth noting that while the price to earnings ratio is a popular metric used on the Jamaican Stock Market, Price to operating cash flow has become an important metric as accounting rules evolve. The consensus view is that any recession (if it occurs) will be “shallow and short lived”.

[1] Dividends reinvested in index

Commodities affected by geopolitical risks and economic growth expectations

While, Oil and Gas have had a stellar first half of the year, industrial metals (except for nickel and iron ore) have broadly declined. The oil and gas price rise in 2022 has been fueled by the war in Ukraine and OPEC’s supply discipline. However, the decline in metal prices suggests that consumer demand could weaken in the near term – a headwind for oil and gas prices.

What to watch out for:

Look out for moderating month on month inflation and consumer spending. Any surges in volatility or bond yields usually present good buying opportunities – however these are likely to become more attractive as the hiking cycles progresses.

Marian Ross is Vice President, Trading & Investment at Sterling Asset Management. Sterling provides financial advice and instruments in U.S. dollars and other hard currencies to the corporate, individual and institutional investor. Visit our website at www.sterling.com.jm

Feedback: If you wish to have Sterling address your investment questions in upcoming articles, e-mail us at: info@sterlingasset.net.jm