Market and Investment Insights

Inflation Relief Rally

May 2022 Commentary & Performance Review

The stronger performance in financial markets last month may reflect easing investor concerns about inflation and a willingness to re‐enter the market at more attractive valuations given the sell‐off since the start of the year. The global economic outlook and corporate earnings will be what ultimately  shapes the performance of financial markets in the second half of the year.

Target Co, along with many other retailers, is struggling with changing consumer preferences and higher labour costs, leading to a drop after they reported Q1 earnings. As inflation reduces discretionary consumption, a
‘bullwhip effect’, caused by a miscalculation of future demand, has led to an inventory build‐up amongst retailers, distributors, and manufacturers. If high inflation remains persistent, retailers may have to markdown their inventory, further impacting profit margins.

Crude oil continued to rally due to ongoing global supply issues. Oil producers have underspent on capacity meaning the market is incapable of meeting growing demand while also removing Russian supply. The difference between the price of a barrel of crude oil and what is being paid at the pump has recently come into focus. Oil refiners purchase barrels of oil, refine the product into a usable form, and then distribute to the end user. The difference between the price of crude and this final product is called the  ‘crack spread’ and includes the margin that refiners earn on sales. These margins are at historical highs, leading to record profits for oil producers.

At JPMorgan Chase’s investor day, CEO Jamie Dimon elaborated on his plan to invest heavily in the bank’s technological development. The bank will begin using blockchain, the technology behind cryptocurrency, as a form of collateral settlement allowing investors to settle transactions outside of traditional operating hours with lower frictional costs. Blockchain‐based settlements will initially be used for derivatives trading and securities lending and will later expand into equity and fixed income trading. Shares jumped nearly 9% the day following the event.

We continue to closely monitor high‐frequency economic data to prepare for changing conditions, whether positive or negative. While it’s likely Canada and the U.S. have seen a peak in inflation growth, we still believe inflation will settle near 3% over a longer term.


Portfolio Contributors

  • Shares of Tourmaline Oil (TOU‐CA) rose another 18% as oil prices remain high
  • Verizon Communications (VZ‐US) finished the month up 10.8% after hitting a 5‐year low.

Portfolio Detractors

  • Target (TGT‐US) fell 29.2% due to inventory issues and an earnings miss
  • Shares of Nucor Corporation (NUE‐US) fell 14.4% as valuations normalized after an abnormally strong start to the year

All returns are for the reported month and in local‐currency.
All data sourced from SIACharts and FACTSET.


Proxy funds used for benchmark indexes:

  • Canadian Universe Bond Index: iShares Canadian Universe Bond Index EFT (XBB.TO)
  • MSCI World Index (CAD): iShares MSCI World Index EFT (XWD.TO)