The stock-market rebound in 2023 was fueled by diminishing investor concerns regarding inflation and less worry about the sustainability of economic growth. The rally was initially broad-based across regions but returns in recent months have been concentrated in a narrow set of U.S. mega-cap technology stocks. Apart from the U.S. large-cap market, which has been driven by excitement about artificial intelligence, most major indices were flat or down for the quarter. In fact, even within the S&P 500 Index, performance has been concentrated to just a few names. We would prefer to see expanding breadth alongside a rising stock-market index to confirm a healthy, bull market.
The bigger threat to the stock market is now the sustainability of corporate profits which have been struggling and will be vulnerable if the economy falls into recession. S&P 500 earnings growth has currently stalled as rising costs weigh on profit margins.
Canada’s benchmark S&P/TSX Composite Index posted a 0.3% gain for the second quarter of 2023. The U.S. dollar depreciated by 2.0% versus the Loonie during the quarter, slightly dampening the returns of foreign markets from a Canadian investor’s view.
Canadian investment grade bonds, as measured by the FTSE Canada Universe Bond Index, were down 0.7% during the quarter, while the global investment grade bond benchmark was down 1.5%.1
Most investors view large, established companies as a sound investment choice, as they’re generally considered less risky than small- or mid-cap names and they often pay dividends. However, the top 10 largest companies in the U.S. tend to underperform the overall market for the five-year period after entering this elite group. In the three-, five-, and 10-year periods prior to joining the top 10, the performance of these companies has been exceptionally strong, which makes sense given that to reach this pinnacle, they would have to be growing faster than the current set of top 10 companies. From 1927 to 2021, the average annualized outperformance for the top 10 companies three years before joining the list was 26%. However, after three years in the top 10, outperformance against the market was less than 1%. After 5 years, the mega-cap stocks start falling behind the market by 0.60%, with the gap widening to 1.5% after 10 years. For investors, this shows the diminishing returns associated with investing only in the largest companies in the U.S., despite their historically lower risk and volatility. It also suggests investors would do well to gain exposure to companies that are on a clear path towards becoming a top 10 name.2
It was recently when central banks were watching global inflation rates accelerate higher because they believed the inflation burst was transitory in nature and were eventually shocked into action as inflation failed to moderate. CPI inflation in the U.S. has already steeply declined from its peak of 9.1%.
Agriculture, metals, and energy prices are falling around the world. Wholesale prices are now deflating in many countries, despite widespread evidence of dissipating inflationary pressure, the world’s major central banks are likely to tighten policy settings somewhat further over coming months. The current CPI inflation readings are still too far above the long-run inflation targets for them to feel comfortable enough to take their foot off the brake.
Labor markets have provided an offsetting source of strength for the global economy. Ongoing employment gains across the developed world have helped to push the unemployment rate to a multi-year low level, providing the income necessary to support consumer expenditures.
Ongoing improvements in the inflation backdrop will likely continue to lend support to the bond market. At this stage, the central banks are standing in the way of more material price gains, but this is a performance roadblock which should begin to dissipate.
The portfolio’s attention remains on diversification across asset classes. Diversification benefits are enhanced by focusing more attention on allocation decisions made across assets than within them given that the performance of stocks is more correlated to each other, than to bonds, commodities, or other asset classes.
The allocation to alternatives remains a core focus and allows us to harvest higher yields than traditional methods.
As always, thank you for your continued trust in us,
Penmore Wealth Management iA Private Wealth
This information has been prepared by Roland Orban who is a Portfolio Manager for iA Private Wealth Inc. and does not necessarily reflect the opinion of iA Private Wealth. The information contained in this newsletter comes from sources we believe reliable, but we cannot guarantee its accuracy or reliability. The opinions expressed are based on an analysis and interpretation dating from the date of publication and are subject to change without notice. Furthermore, they do not constitute an offer or solicitation to buy or sell any of the securities mentioned. The information contained herein may not apply to all types of investors. The Portfolio Manager can open accounts only in the provinces in which they are registered. iA Private Wealth Inc. is a member of the Canadian Investor Protection Fund and the Investment Industry Regulatory Organization of Canada. iA Private Wealth is a trademark and business name under which iA Private Wealth Inc. operates.
1. Bloomberg; data as of June 30, 2023
2. Monthly Market Snapshot-iA Private Wealth July 2023
Roland Orban, CIM, PFP, Investment Advisor
304-8800 Dufferin Street, Concord, ON L4K0C5
T: 905-669-5577 Ext. 230 | TF: 1-866-229-2212 | F: 905-669-5738
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