Portfolio Managers’ Brief: June 2024

Key Takeaways

U.S. Market Performance

• As we approach the halfway point of the year, U.S. equities have continued to reach new highs.
• Year-to-date performance:
  • S&P 500: up 15.5%
  • Nasdaq: up 18%
  • Dow Jones Industrial Average: up 5%

The Magnificent Seven

• The Magnificent Seven (Apple, Microsoft, Amazon, Alphabet, Tesla, NVIDIA, Meta Platforms) continue to lead the market.
• Market Cap Weighted S&P 500 ETF (SPY) outperforms Equal Weight S&P 500 ETF (RSP) by almost 10%.
• These seven tech giants make up nearly 30% of the S&P 500’s market capitalization.

Global Growth Perspective

• MSCI All Country World Index: up 11.5% year to date.
• Contributing factors:
  1. Positive global economic data with strong GDP growth and corporate earnings.
  2. Strong performance of the technology sector, particularly in the U.S.
  3. Accommodative monetary policies from central banks, providing a favorable environment for equities.
  4. Broader market participation beyond large-cap stocks, with rotation into various sectors including cyclicals and small caps.

Canadian Market Performance

• Canadian equities are off their highs with the S&P TSX showing a 5% return year to date.

Canadian Economic Challenges

• TSX is struggling despite a recent 25 basis point interest rate cut from the Bank of Canada on June 5th.
• Factors include:
  1. TSX’s heavy weighting towards financials, energy, and materials sectors.
  2. Concerns over economic growth and potential loan defaults in the financial sector.
  3. Volatility and weak demand in the energy sector.
  4. Broader global economic uncertainties affecting investor sentiment.
  5. Declines in commodity prices impacting the Canadian economy and the TSX.
  6. Lag in the effects of the rate cut, with benefits yet to be seen in the stock market.

Canadian Fixed Income and Interest Rates

• Bond prices have increased with decreasing interest rates.
• Ishares Core Canadian Universe Bond Index ETF (XBB) showed a significant move higher in early June, followed by a slight pullback on June 5th, and a continued rise since.

Bank of Canada Comments

• June 5th statement highlighted:
  • Improvements in inflation metrics.
  • Slowdown in economic growth.
  • Loosening labor market.
  • Necessity of supportive measures to sustain economic momentum.
• Emphasis on managing potential impacts on the Canadian dollar and overall economic stability.

Canadian CPI

• May’s CPI came in higher than expected, rising from 2.7% to 2.9%, driven by increases in food and energy prices.
• This jump reduces the likelihood of a rate cut in July.

U.S. Inflation and Monetary Policy

• U.S. Central Bankers maintained rates at a 23-year high during the June 12th meeting.
• The Federal Reserve’s policy stance remains data-dependent, with Chair Jerome Powell highlighting the importance of assessing the economic landscape for informed decisions.

Rate Cut Forecast

• Bloomberg forecasts up to 2.5 cuts of 25 basis points each, expected to occur in the fall and into January 2025.

Investment Strategy

• Consistent with last month, managing concentration risk through diversification.
• Holding companies with robust fundamentals and resilient business models.
• Anticipation of upcoming rate cuts benefiting both bondholders (through recovering bond prices) and stockholders (through higher asset prices driven by lower interest rates).