Key Takeaways
U.S. Market Performance
It’s been a tough start to Q3 for the major U.S. stock market indices we track. From their peaks in mid-July, the S&P 500 dropped by 8.5%, now sitting at 12.00% year-to-date. The Nasdaq dropped 14%, still up for the year by 10%, while the Dow Jones Industrial Average gave back 6%, up 4.5% year-to-date. All three indices have bounced off their respective lows at the time of this recording.
The Magnificent Seven
Last month, we referenced the Magnificent Seven as continuing to lead the charge for the Market Cap Weighted S&P 500 and suggested that historically, periods of high concentration in a few stocks have often been followed by outperformance of equal-weight indices as the market rebalances.
SPY vs RSP
A follow-up comparison between the Market Cap Weighted S&P 500 ETF (SPY) and the Equal Weight S&P 500 ETF (RSP) shows the impact a higher concentration in this group of companies can have on the downside, with SPY giving back 8.5% against the RSP drop of 5% over the same time period. However, we can’t count the Magnificent Seven out just yet.
Global Growth Perspective
From a global growth perspective, the MSCI All Country World Index is up 8.5% year-to-date at the time of this recording, after suffering a peak to trough sell-off of approximately 8%. This is not surprising as a significant portion of the ACWI’s gains can be attributed to the strong performance of the technology sector, particularly in the U.S., which, as we have just discussed, has seen some profit-taking over the last few weeks.
Canadian Equities Performance
Shifting focus to Canada, Canadian equities have also experienced a sizeable swing since our last brief, with the TSX dropping 5.5% from its peak on July 31st to a year-to-date high of 6% at the time of this recording. Despite the drop, the TSX is still higher year-to-date from when we referenced it last month.
Canadian Fixed Income
Moving on to interest rates and fixed income, as a reminder, when interest rates decrease, bond prices increase to reflect the lower yield. Looking at the iShares Core Canadian Universe Bond Index ETF (XBB) as an example, we continue to see a noticeable move higher on a month-over-month basis as investors anticipate further rate cuts by the Bank of Canada. While XBB shares are off their highs for the year, the bond ETF is finally positive year-to-date at 0.60% at the time of this recording.
Global Market Volatility
For the most part, recent global market volatility can be tied back to the same general investor concerns:
- Recession Fears: The most significant driver in this latest sell-off has been the rising fear of a potential recession in the U.S. A weak jobs report for July, with fewer jobs added than expected and the previous months’ numbers revised downwards, has heightened these concerns.
- Global Economic Concerns: Japan’s decision to raise interest rates, leading to a stronger yen, also contributed to global market instability. The Nikkei 225 index experienced a significant drop, with cascading effects into other markets, including the U.S.
- Manufacturing and Corporate Outlook: Weak manufacturing data in the U.S. and disappointing earnings reports from major technology companies have compounded the sell-off. Negative forecasts from these firms have added to the market’s bearish sentiment.
- Sector Rotation: We are also seeing a broadening of market participation beyond just a few large-cap stocks, with some profit-taking in the tech leadership space being re-deployed into various other underperforming sectors, including cyclicals and small caps.
- Market Volatility in August: Historically, August is known for market volatility, which has been fueled this year by a combination of economic data and geopolitical factors.
Investment Strategy As with last month, we continue to maintain our overall strategy across the range of investment mandates we manage. While we do have exposure to the Magnificent Seven within our investment models, we are managing concentration risk through diversification by holding companies with robust fundamentals and resilient business models. We are actively managing to lock in profits and take advantage of pullbacks. It remains to be seen whether central bankers will be compelled to cut more aggressively based on recent key economic data. However, any rate cuts should benefit both bondholders and stockholders as bond prices recover and lower interest rates support higher asset prices. Regardless, U.S. equities have performed well year-to-date despite this recent sell-off.