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A market correction, falling bond prices, falling cryptocurrencies, and scorching inflation have set the stage for a hostile environment for your average investor. Adding to the pain, low correlation assets like REITs have also trailed the rest of the markets lower in recent weeks.
What should an investor do in the midst of one of the darkest markets in recent memory? It’s easy to sell here and tell yourself you’ll buy back once the market stabilizes. However, it’s hard to come back afterwards, unless you’re willing to pay higher prices later, perhaps much higher than today. The point is, it’s probably too late to be a net seller of securities.
Either way, investors should focus on inflation, with the Canadian CPI jumping 7.7%. This is an unprecedented high due to the lack of action by the Bank of Canada. No one knows if they can fix things. In any case, they are far behind the curve, perhaps so much that they are leading the US Federal Reserve ahead, with the 75 basis point hike delivered this month, with potential upside of 50 to 75 basis points. basis in July.
We cannot encourage the Bank of Canada to step up its fight against inflation. However, we can take advantage of the recent market correction by putting more cash to work. With inflation soaring and stock market valuations plummeting, it seems like a good time to take a second look at the stocks on your radar as the market looks to regain its footing in the second half of 2022.
Can things get worse for the markets?
Of course, the TSX index could follow the S&P 500 in a bear market before the end of the year. The recent decline in oil prices and energy stocks adds to the pain. That said, you are guaranteed to lose buying power or get a negative real return just by sticking to the silver. Inflation is hot, and inaction by the Bank of Canada could cause inflation to persist much longer than in the United States.
Indeed, the loonie has been slipping against the greenback lately. If the Bank of Canada doesn’t raise at least 100 basis points at its next meeting, things could go seriously wrong.
Market Correction Shopping List: Spin Master
Spin Master (TSX: TOY) is a toymaker stuck in a year-long consolidation period. Undoubtedly, the stock has become cheaper after falling 13% from its 52-week highs. Shares of the $4.4 billion entertainment company are 14.2 times trailing earnings. That’s way too cheap for a company that owns some of the strongest brands in the toy business.
The balance sheet is healthy, with enough room to profit from acquisitions in the context of the coming economic downturn. Although Spin has been very active on the M&A front, buying up companies like Gund and Etch-a-Sketch, the company’s organic growth is also a force to be reckoned with. Indeed, the pipeline of intriguing toy innovations and the strength of the digital games industry are capable of accelerating earnings growth, even as the economy slows.
With such a modest multiple, I wouldn’t hesitate to be a buyer here, as the next period of seasonal strength (holidays) may have the potential to be better than expected as supply issues are resolved.
The bottom line
In short, investors should applaud the market correction. Falling stock prices and rising inflation could be a gravitational force pushing investors away from cash and back into stocks. Yes, equities are risky, but cash has become much riskier from an opportunity cost perspective, with inflation at 7.7% (and higher).