Lexicon Financial Group Weekly Update 

Monday, May 9, 2022

Looking Back


“Curiouser and curiouser!”

This is what Alice said about the strange circumstances she found herself in Wonderland. So here we are. Most of the major markets endured a fifth consecutive week of losses as interest rate and inflation worries continue. The S&P 500 is down more than 10% while the Nasdaq Composite ended down more than 20%. Markets across the world are in the same position.

Source: Data provided by FactSet showing price returns of all Major indices as of 3.20pm ET Monday May 9th, 2022 in its respective local currency.


We had been bracing for a week of volatility. On Wednesday last week, Federal Reserve (Fed) policymakers announced a 50-basis-point (0.50 percentage point) increase in the federal funds target rate. This is the largest increase since 2000! The officials also announced that the Fed would begin allowing its holdings of Treasuries and agency mortgage-backed securities to decline in June at an initial combined monthly pace of USD 47.5 billion, stepping up over three months to USD 95 billion.

The markets reacted as expected. However, the Fed Chair Jerome Powell stated that a hike of 75 basis points (0.75 percentage point) was not being actively considered. He also stated that a recession was unlikely in the near term. These dovish comments were more than anticipated. Bond prices rose as longer-term bond yields decreased, and equity benchmarks rallied sharply in late Wednesday trading.

The market’s gains then proceeded to unwind on Thursday as investors appeared to reconsider whether a 75-basis-point increase was in fact really off the table. This concern was exacerbated by some potentially worrisome inflation data: nonfarm unit labour costs jumped 11.6% in the first quarter, well above elevated consensus forecasts of about 9.9%. The increase was largely due to a 7.5% drop in productivity, the biggest quarterly decrease in almost 75 years. While many economists cautioned that the figure was complicated by the surprise 1.4% annualized decline in first-quarter gross domestic product—which itself was further complicated by a record trade deficit—it was still a greater drop than most had anticipated.

The markets appeared to react negatively to Friday’s closely watched nonfarm payroll report, even though it came in largely in line with expectations. An encouraging sign was the fact that average hourly earnings, which rose 0.3% in April, down from 0.5% in March and below expectations. (1)

This is not new but what is new is investors are worried about bad stuff but ignoring good stuff. They buy one day and sell the next, which is just fuel for more market volatility.


Looking Around

Judging from the behaviour of the markets, investors are anxious about inflation and recession at the same time. Investors sell stocks one day on worries about inflation. The next day, they sell stocks because they are worried about recession. It should be noted that it is exceptionally rare for an economy to experience simultaneous recession and inflation. A recession saps demand and lower demand puts downward pressure on prices. Although central banks are raising interest rates to fight inflation, corporate earnings have been rising - most companies’ first-quarter earnings beat expectations.

Many investors are bearish at the moment yet some of the richest people in the world are going on spending sprees. Warren Buffett recently said that his company, Berkshire Hathaway, spent US$51 billion recently on equities and repurchased $3.2 billion of its own shares. This after complaining for years that he could find nothing to buy. It is true that the level of volatility moves this year has been anything but normal. (2)

Usually, when money flees stocks, it goes into bonds. However, even bonds have taken a beating - down about 10% so far this year. At the same time investing in real estate looks dubious and cryptocurrencies look even worse. The good run that energy and commodities have had seems to be fading. So where exactly is Alice going to invest her money in the short term?


Looking Beyond

Over long term, public markets have generated significant amounts of wealth. Indeed, it was only a scant two years ago that markets experience steep drops as the world grappled with the emergence of COVID-19. We all saw how they rallied and performed after hitting their lows in early 2020.

The markets have been dealing with a lot since the beginning of 2022 - surging inflation, interest rate hikes with more to follow, the Russian invasion of Ukraine, the resurgence of Covid in China, supply jams and shortages.

I am reminded of a Raymond James podcast called “The Advantaged Investor” where Raymond James Ltd. Head of Investment Strategy, Nadeem Kassam, MBA, CFA, provided a recap of Q1/2022 performance and his outlook for the rest of 2022. He acknowledged that recovery from Covid is more complicated and uneven. This is not helped by the uncertainty that markets continue to experience. In his view more diversification and avoiding taking big risks is what investors should be doing at this time. I agree with one other suggestion: remain calm and focused on the long-term.

It’s easy to preach “long-term” investing because the math is on our side. Markets traditionally go up over longer periods of time. But what about clients who have short-term spending requirements? How do they cope with market volatility?

One strategy that helps is to take a portion of an investment portfolio that covers day-to-day living expenses for a period of time. Let’s say two years. This portfolio can be invested ultra-conservatively, since it is designed to fund living expenses. The remainder of the portfolio can be invested with a more balanced approached, allowing for capital appreciation but also extending the time horizon, which will smooth over periods of short-term volatility. A final portion – perhaps reserved for legacy gifts upon death – can be invested more aggressively.

Sure, the overall risk level might be the same as a “balanced” investment portfolio, but it plays an important role in how people view their accounts. The conservative account reflects low risk – daily spending requirements will still be met. The “middle of the road” approach favours a medium-to-long-term investment strategy. And the aggressive approach? Well, that’s for investors who can ride out volatility because they don’t need access to their investments for a long time, if ever.

So maybe instead of talking about Alice, we should be talking about the Goldilocks, searching for a portfolio structure and strategy that is “just right”. Let’s grab time to discuss.


Further Reading

Markets & Investing – Raymond James

The Stock Market May Look Volatile, but the S&P 500 Has Seen Worse. Much Worse.

Avian influenza, Ukraine war push egg prices higher worldwide


The opinions expressed are those of Craig Swistun and not necessarily those of Raymond James Investment Counsel which is a subsidiary of Raymond James Ltd. Statistics and factual data and other information presented are from sources believed to be reliable but their accuracy cannot be guaranteed. It is furnished on the basis and understanding that Raymond James is to be under no liability whatsoever in respect thereof. It is for information purposes only and is not to be construed as an offer or solicitation for the sale or purchase of securities. Raymond James advisors are not tax advisors and we recommend that clients seek independent advice from a professional advisor on tax-related matters.



  1. Global Markets Weekly Update, T.Rowe Price, May, 6, 2022
  2. 2. Welcome to The Upside Down market, where strange things are the norm, Peter Hodson, Financial Post Investor, May 6, 2022