Making sense of the markets this week: March 13

by Ann deBruyn

A photo of the gas station is seen in the background

Photo by Lemon Pepper Pictures from Unsplash

Each week, Cut the Crap Investing founder Dale Roberts shares financial headlines and offers context for Canadian investors.

Schwab and the economic impact of war

I often go to Schwab for market commentary. (My favourite account on Twitter is Liz Sonders, chief investment strategist at Charles Schwab Co. Sonders tweets incredible charts, studies and commentary.) Schwab provides a very good overview with some high-level thinking on the war in Ukraine—and just what the heck is going on. The title of the article is “War: What is it Good For? Absolutely Nothing.” Of course, nothing is more important than the tragic situation on the ground in Ukraine. At the same time we will consider the economic and investment impacts. Here are a few highlights from the article:

“While it may indeed be true that pessimism has historically been consistent with stronger gains for equities, we’d emphasize that a positive catalyst is typically needed to provide a lift.”

Bearish sentiment is spiking.  The situation in Ukraine has accelerated the weakness that was growing in the U.S. stock market (pre-invasion into the Ukraine). 

Where can we look in history for insights or context? The article points to this past investment environment, which could parallel today: 

“We’re often asked about historical comparisons to the current environment. Two that come to mind are late 2018, when the market went into a tailspin courtesy of a Fed that was tightening monetary policy; and 1998, when Russia defaulted on its debt.”

Source: Schwab 

From the report, you will also see that massive spikes in oil prices and commodities often lead to a recession. (Read more about that below.)

Schwab also reinforces the issues I brought up in last week’s column: “Making sense of the markets this week: March 16.” This is from the Swab article:

“The global geopolitical crisis has made the Fed’s job even more difficult. Higher energy and food prices add upside pressure to headline inflation, which may in turn keep the heat on the Fed to stand firm in raising rates. However, there is a building risk that economic growth is dealt a larger blow if the current surge in energy prices continues unabated and destroys demand.”

It reports that central banks will be forced to hike rates while economies are experiencing economic declines. 

Schwab opines that rate hikes and inflation spikes will cause recessions in many countries: 

“This is a time for discipline; including diversification across and within asset classes and periodic rebalancing. For investors overweight equities, we recommend using counter-trend rallies to trim exposure back to strategic weights. For stock pickers, we continue to recommend a factor-based approach, with an over-arching emphasis on high quality—including factors like strong free cash flow yield, high earnings yield, positive earnings revisions and low volatility.”

No one knows what will happen in respect to Ukraine, the economy or the markets. The key is to be prepared. As I wrote in my columns over the past year, I was trimming my tech stocks. I added more gold, commodities and energy. I was more than happy to add to more defensive U.S. stocks in the healthcare and consumer staples sectors. I was building up the defensive wall. 

Playing on the defense can be important for those  in the retirement stage. Those in the accumulation stage might simply ensure they are investing within their risk tolerance. Keep on buying, stick to your investment plan.  

Low volatility and dividends are outperforming

We have seen dividend factors work quite well in Canada (VDY.TO). Dividend growth and high dividends are starting to outperform in the U.S. Low-volatility stocks are starting to outperform, as the low-volatility factor finds companies of higher quality and lower risk. 

Investors are seeking “safer” stocks. 

— Liz Ann Sonders (@LizAnnSonders) March 7, 2022

Here’s a good Wisdom Tree article on the outperformance of U.S. dividend stocks. It reports the outperformance of U.S., international and emerging market high-dividend stocks. 

I’ve reported on the strong performance of the big dividend payers in Canada. As I had suggested on my site, the energy-intensive iShares High Dividend (XEI.TO) had the potential to outperform Vanguard’s High Dividend (VDY.TO). 

Year-to-date XEI us up 8.7%, vs 7.4% for VDY. 

Checking in on the Canadian Low Volatility universe (ZLB), the index has returned 1.3% year-to-date vs SP/TSX Composite Index 0.4%, benefitting from an overall strong performance of the low-volatility strategy in 2022. 

The biggest positive driver has been the exclusion of Shopify, which has sold off approximately 60% to start the year. The grocers, Metro (MRU.TO), Loblaws, (L.TO) and Empire (EMP.A.TO) and telecoms are adding to ZLB outperformance. 

Trailing the 90-day volatility of ZLB is 9.4% versus 13.% for the TSX, showing that ZLB is true to its more defensive orientation. 

Canada is well-positioned to take advantage of high commodity prices 

Last week I wrote about  the inflationary effect of the war in Ukraine. Similar to Russia, Canada is a resource-rich nation. We are set to benefit from the very unfortunate events. 

A “you didn’t fire me, I resigned” moment, Putin bans export of products and raw materials until Dec 31. Might be subject to some details/exceptions, but this should push all key raw material prices further up.

Here’s Russia’s *exports* as % of production of key raw materials👇

— Emre Akcakmak (@akcakmak) March 8, 2022

Also, Russia temporarily suspended fertilizer exports. 

Over 30% of the Canadian market is weighted to resource stocks. Soaring commodity prices have translated to double-digit gains in the energy and materials stocks over the past two weeks. 

This recent National Bank of Canada report highlighted the resource comparisons between Russia and Canada. 

Source: National Bank 

“The significant overlap in Canada-Russia exports means the prices of many key Canadian exports have increased. It remains to be seen whether these prices are sustainable or whether they will push the world economy into recession. This remains a vital question for all market participants, and one difficult to handicap in the fog of war.”

The events will certainly impact our currency, stock and bond markets. Here’s another clip from the National Bank report:

“Make no mistake, Canadians are shocked, saddened and angered by Russia’s actions. No one in Canada is cheering the situation in Europe. Recession risks are rising, perhaps appreciably. But despite the unfolding tragedy, there are significant near-term implications for Canadian trade, equities, currency and credit markets, alongside a longer-term opportunity to stand-in for what could become a pariah nation.”

We’ve certainly experienced considerable volatility in the Canadian stock market. That said, Canadian stocks (XIC) are up some 3.6% since Russia invaded Ukraine on February 24. 

U.S. stocks (IVV) have fallen by over 2% over the last week, but they are essentially flat from February 24. International developed markets (XEM) are down 2.7%, while emerging markets (XEF) are down by 17.6% since the beginning of the invasion. 

U.S. ban on Russian oil imports 

Will Canadian oil producers be able to pick up those 672,000 barrels per day that the U.S. imports from Russia? 

Most of my research suggests, with respect to the oil sands and other projects in Alberta, the Canadian oil producers could modestly ramp up demand, but we lack the ability to transport the oil to the U.S. 

Remember, the first stroke of the pen for Joe Biden when he was elected president was to cancel permits for the Keystone Pipeline being constructed by TC Energy. That pipeline was meant to allow greater volumes of oil to be transported to the U.S. market. 


Alberta Premier Jason Kenney suggested the Keystone could be brought back to life. 

Even without Keystone, Canada might still be able to increase production. Here’s a clip from the Financial Post : 

“Alberta will produce and export record volumes of oil this year and the province can boost shipments abroad by about 10% by using existing pipeline and crude-by-rail facilities more efficiently, Kenney said. Enbridge Inc.’s new Line 3 pipeline and a so-called diluent recovery unit that allows heavier crude to be railed down to U.S. refineries will also help boost exports, he said.”

Newfoundland says it could cover the oil demand. 


I’m keeping an eye on Canadian oil production and transportation challenges. 

Will high oil prices cause a recession? 

Oil price shocks can certainly put the brakes on economic growth, and they do have a history of causing recessions. In fact, Seeking Alpha reports: 

“ ‘Not every recession has been caused by an oil price spike but every oil spike has caused a recession. This is likely to be a drawn-out affair and will have a sustained impact on commodity prices,’ said Brian O’Reilly, head of market strategy at Mediolanum International Funds. ‘Perhaps the scary part is that in 1990 [during the Gulf War], the Fed funds rate was 8% and eventually embarked on an easing cycle. Today, the Fed is at the beginning of a hiking cycle. It seems more and more likely a recession is unavoidable,’ added Ryan Grabinski, a strategist at Strategas Securities.”

And here’s a CNBC article that quotes our friends at DataTrek. I often source DataTrek for stock and bond market history and trends. 

From my perspective, the Federal Reserve is already stuck between a rock and a hard place with regard to monetary policy. The central bank may need to accelerate rate increases into soaring inflation. That risks tipping the economy into a recession. If they go easy on the inflation-fighting that might create even greater risk. Untamed inflation could also cause a recession. Damned if you do, damned if you don’t. 

While no one knows what will happen, investors should be prepared. Recession risks are certainly swirling. 

Invest within your risk tolerance level. If you need to protect your portfolio wealth, maintain a well-balanced portfolio and practice rebalancing. Readers of this column know I am a fan of holding commodities, gold and energy stocks or ETFs to cover inflation risks. 

Be careful out there. 

Helping Ukraine 

More than two million people have been displaced from Ukraine since February 24, 2022, and aid is urgently needed. Consider making a contribution to the Canadian Red Cross, Canada-Ukraine Foundation, Help Us Help, Save the Children Canada, Global Medic or another charitable organization of your choice. Be sure to donate to reputable charities actually making an impact, and beware of fundraising scams.

Dale Roberts is a proponent of low-fee investing, and he blogs at . Find him on Twitter @67Dodge for market updates and commentary, every morning.