MARKetS REPORT - 2023 2nd Quarter
Fear incites human action far more urgently than does the impressive weight of historical evidence.
- Jeremy Siegel, Stocks for the Long Run
The investor’s chief problem — and even his worst enemy — is likely to be himself.”
- Benjamin Graham, The Intelligent Investor
Dear client,
As a gentle reminder to investors who have likely seen some ups and downs in the markets over the past few years, I am quoting two heavyweights in the investment world. Jeremy Siegel is the Professor of Finance at the Wharton School of the University of Pennsylvania, a well known author and a leading current commentator on CNBC, CNN and NPR. Benjamin Graham was the father of value investing, author of Security Analysis and The Intelligent Investor, professor of Finance at Columbia Business School and taught Warren Buffett (CEO of Berkshire Hathaway and as of June 2023, the 5th richest person in the world). The core of what these 2 investment gurus are saying is don’t let emotion, either negative or positive, erode your investment framework.
The 2nd quarter of 2023 was the second successive strong quarter for investors as stocks continued their promising recovery this year and bond yields stabilized on growing economic optimism and cooling inflation.U.S., Canadian and global equities closed the quarter and first half of 2023 in positive territory. Technology was again the leading sector with the NASDAQ Composite Index logging its best start to a year on record. Despite briefly rising in May on uncertainty over the U.S. debt ceiling and concern about the U.S. regional banking sector (after the demise of another bank, First Republic Bank) bonds yields were stable in Q2. In the case of First Republic Bank, all of its 84 branches now operate under the JPMorgan bank brand, all deposits were transferred to JPMorgan, and no depositors lost any money as a result of First Republic’s closure.
There were a number of market-friendly economic indicators in Q2 as well. Overall job creation in the U.S. and Canada continued to be resilient. While the creation of new jobs is welcome, the trend for the U.S. labour market does now appear to be slowing with wage pressures easing. This will be viewed favourably by the U.S. Federal Reserve Board in its ongoing battle with inflation. U.S. house prices also posted their largest annual drop in 11 years. And a survey of U.S. small and medium size businesses revealed hiring, sales expectations and credit availability have at a minimum slowed, which are also positive indicators in the inflationary fight.
And even though the broader inflationary trend in the U.S. shows prices are easing, this trend is at a slow pace. Inflation fell early in the quarter to 4.9%, its lowest level in nearly two years. However, core CPI, which excludes energy and food, crept up 0.44% later in Q2, led in part by housing costs and used car prices. The U.S. Federal Reserve Board also raised its target interest rate by another 25 basis points to 5.25% in May. That is the tenth interest raise in 15 months, all trying to slow U.S. inflation. Federal Reserve Board chair Jerome Powell then announced a “hawkish pause” in June, but signaled there might still be more interest rate hikes needed in the second half of 2023. The Fed’s next interest rate meeting is set for July 26th.
The Bank of England, European Central Bank and Reserve Bank of Australia aligned their monetary policy with the U.S. Federal Reserve, and raised interest rates twice during the past 3 months. All three increased rates 0.25% in May, then a month later, in June, hiked a further 0.50%, 0.35% and 0.25% respectively. The Bank of England in particular is grappling with inflation in the U.K. that is the highest in the G7 at 8.7%. Can you believe that a pint of Old Speckled Hen is now £4.10 at The Beer House at Charing Cross??
Canadian inflation cooled through the quarter. Year over year comparison dropped from 5.2% in April to 3.4% in June, its lowest level since June 2021. According to Statistics Canada, this was largely due to lower gasoline prices although food and housing costs remain elevated. After a four month break, the Bank of Canada surprised pundits by hiking rates 25 basis points to 4.75%. The decision was based on concern over excess demand in the economy, a tight labour market, and increased housing market activity.
Capital Markets in Q2
Stock markets were mainly positive in the 2nd quarter of 2023. The Canadian S&P/TSX Composite Index ended the quarter up 1.1%, the U.S. S&P 500 Index was up 6.3%, the MSCI EAFE (Europe, Australasia and Far East) Index was up 0.9% and the MSCI World Index up 4.6%.
Equity markets rose through April but then dipped in May as the banking sector, falling oil prices and the U.S. debt ceiling negotiations weighed on performance, before getting back on track in June. The broad U.S., Canadian and global stock indexes ended Q2 and the first half of 2023 in positive territory. Technology was again the leading sector with the NASDAQ Composite Index logging its best start to a year on record and Apple becoming the first company to reach a market cap of $3 trillion (in US$). The S&P 500 (the largest 500 publicly traded companies in the US) also had its best first half performance since 2021. In Canada, the TSX gains were a bit a more modest as a result of its high exposure to Canadian banking and oil sectors but it is still significantly up from the October market low last year. Global stock gains were somewhat held back too by a slower than expected post-pandemic recovery in China.
Many big technology companies released earnings which in general depicted a better picture than anticipated. Investors were comforted by these results, sparking hope the worst of big tech’s post-pandemic slump, including its recent large job cuts, might be over. U.S. chipmaker Nvidia Corp. also announced earnings that surpassed estimates by more than 50%, highlighting strong demand for its computer chip technology which is used to power AI applications.
In contrast to technology, it was a tough quarter for the banking sector which was rocked by the regional bank failures in the U.S. Silicon Valley Bank, Signature Bank and then First Republic Bank were all shut down. However, US federal regulators have promised to make all former depositors whole. In addition to woes in the U.S., four of Canada’s top five banks released earnings revealing profits were down compared to a year ago, though in absolute terms performance remained resilient. In global equity markets, Japanese stocks experienced a resurgence, with local indices reaching their highest level in 33 years. This growth is primarily driven by increasing demand from foreign investors.
Despite briefly rising mid-quarter, U.S. and Canadian bond yields remained overall stable in the 2nd quarter of 2023. Yields were stable in April, reflecting investor optimism and cooling inflation, then rose in May on uncertainty over the U.S. debt ceiling negotiations and concern about the U.S. regional banking sector. A better-than-expected economic backdrop also impacted the outlook for interest rates which influenced the trajectory of yields as well. But through June, bond yields stabilized again as Democrats and Republicans in Congress reached an agreement to extend the U.S. debt limit until 2025 and worries over the recent bank failures subsided.
Directed by Saudi Arabia, the world’s largest oil producer, OPEC announced a cut in oil production in April, reducing it by 1.1 million barrels a day. This was in response to oil prices dropping to their lowest level since late 2021. Saudi Arabia then introduced a second production cut two months later, reducing output by another one million barrels a day.
What we can expect now?
This round of rate hikes has sent a clear message: The battle against inflation is ongoing and far from over. Consumer demand for goods and services sector prices remain high, housing activity is increasing again while wage growth is much higher than historical averages. In response, central banks are prepared to increase rates further. But going forward, we expect to hear more questions on the ability of monetary policy alone to solve more structural economic issues, such as labour and housing market imbalances.
Regardless of where we are in the market cycle, it’s important to take a disciplined approach to investing and stay focused on your long-term goals. This strategy helps you keep your emotions out of investing, typically buying high and selling low like many investors do. Ongoing monitoring and reviewing of your portfolio also ensures it remains on track. Diversifying investments reduces risk as well.
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Thank you for your continued trust in me and my team for the opportunity to assist you in working toward your financial goals. We are with you every step of your investment journey.
Should you have any questions regarding your portfolio, or wish to set up a meeting either in person, by phone or online by Zoom, please do not hesitate to contact my office at 519-432-6744. My assistant Susan can be reached at extension 239 and I can be reached at extension 238.
Until we speak again, I hope you have a wonderful summer!
All the best,
Mark McConnell, BA (Econ.) DipBIS
Senior Investment Advisor, Branch Manager
Mandeville Private Client Inc. is a member of the Investment Industry Regulatory Organization of Canada and a member of the Canadian Investor Protection Fund.
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The information in this letter is derived from various sources, including CI Global Asset Management, Statistics Canada, Bank of Canada, Bloomberg, U.S. Bureau of Labor Statistics Reuters, National Post, NY Times, Forbes, KWWL.com, Global and Mail, Investment Executive, Advisor.ca, Wall Street Journal, Markets Insider, Toronto Sun, Daily Mail, LinkedIn, MarketWatch, Investing.com, Canadian Press, MSN, and Barron’s as at various dates. This material is provided for general information and is subject to change without notice. Every effort has been made to compile this material from reliable sources and reasonable steps have been taken to ensure their accuracy. Market conditions may change which may impact the information contained in this document. Before acting on any of the above, please contact me for individual financial advice based on your personal circumstances.