So how far down have we come? The Nasdaq is down 14% from its November high, putting it in correction territory, and has crumbled below its 200-day moving average. The one-year return has now come down to a paltry 1.8%. As we’ve noted at length in various spaces, it is the higher-flying, high-valuation, fundamentally questionable areas of the market, that feasted on stimulus, which are most exposed to an abrupt tightening cycle. It seems like we’re here. Meantime, the S&P 500 is down a more modest 8.3% from its January high, but has also cracked its 200-day moving average to close out the week. Interestingly, Canadian stocks have barely budged, with the TSX down just 5.2% from its recent high. There are a few factors at work helping keep the TSX on firmer footing:
- The TSX came into the year deeply discounted to the S&P 500 on a price-to-forward earnings basis. In other words, there has been less froth built up in Canadian equities on a relative basis, which means there is less cleaning up to do as tightening begins.
- Canada has less exposure to the high-flying, high-valuation segments of the market that are getting put back in their place right now. Keep in mind that technology and communication services make up 38% of the S&P 500, but just 13% of the TSX.
- The TSX has proven to be more sure-footed in inflationary environments. It certainly helps that oil prices pushed through $87 at one point this week, while financials are quietly benefiting from the prospect of higher interest rates—that right there is almost half the index.