There are signs inflation may be close to reaching its peak. Will that lead to equity markets finding their bottom? Kim Parlee speaks with Brad Simpson, Chief Wealth Strategist, TD Wealth, about what a market bottom might look like.
X-TIMESTAMP-MAP=LOCAL:00:00:00.000,MPEGTS:0 Welcome back as markets continue to struggle with waves of volatility. Many investors are asking a simple question, where's the bottom and how will I know when we're there, but is that the right question to ask join me from Vancouver is brad Simpson, he is chief wealth strategist at td wealth brad, always good to see you. Um let's start off with just so much of this volatility which is being stoked by inflation fears right now. But you think and you're looking I know some of your group that's saying inflation may have peaked and you've got a chart here that might show that Yeah, I know it's a little bit hard to hear right here, your Bank of Canada today come out and say they're going to raise interest rates, another 50 basis points and inflation is higher than than what they thought it was and they think it might go a little bit higher and here we are saying that, but you know, it it you got to start looking out a little bit like our base case scenario is is that that inflation will start to improve as we get to around your end and really what we're looking at here is two year yields and the 10 year breakevens and and both of which are turning over and a little bit what that's telling you is is that the market itself is, is looking at the credit market is out looking at that and and saying that, you know, you know, we're certainly in the heat of it right now, but if you look at fiscal policy and monetary policy really starting to tighten up and household consumption. You know, people be infected by gas prices and the grocery store and service is starting to go up, they'll start tightening up there and of course you know the mortgage rates are going up so you start tightening up there and then you start loosening up some of the supply chains and we are starting to see some of that you can see as you get a little bit further up that that inflation will start will start to slow. Yeah. And and then we're starting to see that reaction in the overall equity markets as well. Um I know that that that is the big question that you get when you're dealing with clients all the time. Is that how will we know where the markets have priced all this in and when the markets have hit bottom and I know you put together a list to help people understand the kinds of things we should be looking at to understand where the markets are right now so community could take us through it please. Sure. No, absolutely. I mean that is that is the number one question we get asked every day and I mean I have people who phoned me, I haven't heard from in a decade and asked just to ask me that question. So we did indeed as you know we like to frame how we think and kind of know you know the best way to know where you are and where you're going to is to build some signposts so that we did this to really help our clients and ourselves quite frankly to build the frame where we are and and really the starting one is is two year, the two year yields and inflation breakevens rolling over, which is where we really started today. That was the first chart. And so that's in green, that's a positive. Now the bad news. We've got a lot of red from here, right the next one. But like, you know, the the curve steepening that was read a couple of weeks ago. And and we're not saying there's a top in really yields, but we're saying that yellow, we're certainly moving towards that now, as we know, we work into the bond markets, we start looking at the top and high yield spreads. So, you know, so far so far it's been pretty good in credit markets and and spreads have widened but but they haven't broken, but we'd probably want to see some more of that and we want to see some of that maybe that happening with kind of maybe a little increase in bankruptcies which we haven't seen for a decade. And, and and with great rates going up, we might start to see a little bit of that. So, you know, that would be more bad news, but we mean that would be kind of a good and then in equity markets we look for evaluations, we look for percentage and discount from the long term average, we're not there yet either, but and so still red. But I think that that we will get there the reversal, the defensive outflows right now. And and and really seeing people start, I mean the cyclicals and and really seeing moving back into those cyclicals thinking that we're going to see more growth and yes, believe it or not, we do measure volatility on volatility. Not only do we think about volatility, we have to measure the volatility of that of it into itself. So we definitely want to see that and then I think some pretty popular ones, but do make an awful lot of sense. You want to, you know, we want to see percentage of names that are that over the 50 day moving average and the 200 day moving average, uh, you know, we're both kind of below that. We'd like to see that improve. And then the and then the percentage of the S and P uh the week low of of over 40%. And and we'd probably see the lows there, of course the N. Y. S. C bullish index, see that north of 20 and you know what I think we sometimes forget it was about, you know, in the spring of 2020 and even and then december in 2000 and eight and and in 2018 we saw the vix kind of north of 40 and, and, and I think if we if we saw that for a few days, that would start to give you an idea that the end is of this, of this kind of downturn that we've in the middle would be there. It's the most excellent list brad and we appreciate you sharing it. And I, every time you come on, I want to see one thing tick green at least that's that's your job. I've only got 30 seconds here brad. But in all of this there any new opportunities being uncovered in this cycle. Yeah. You know what, I think the big opportunities uncovered is that, is that that I think one thing we have to remain mindful love is that, you know, we spent a decade talking about what are we going to do with the world that has slow growth and that is that is absolutely has to have central banks there to support it. And I think, you know, when we, when you go through transitions like this, this is a massive transition we're going through. But the other side of this is a world that not may not necessarily be so linked to central banks anymore is so reliant on that and having an and in them to help produce low levels of growth. We come on the other side of this where we have a place where we get two more historical growth levels and we're less reliant on central banks. And we get back to focusing on how companies are doing and what's going on in in bond markets based on credit quality. With that boy, I think that would actually be a really great outcome. And I think a lot of what we're going through is the process of getting us there brad. Always a pleasure. I look forward to have anyone really soon brad Simpson. Thanks so much. Thank you. Mhm, mm hmm. Yeah. Yeah. Mm hmm.