May 2022 Portfolio Management Update

Elvis Picardo

May 27, 2022

May 2022 Portfolio Management Team Update
By Elvis Picardo, CFA®, CIM, Portfolio Manager, iA Private Wealth
May 24, 2022

Market & Economic Environment
North American stock indices plunged in April, beset by concerns about a potential recession, as equities resumed their downtrend after a brief hiatus in March.

The TSX Composite fell 5.2% last month, while the S&P 500 tumbled 8.8% in the worst monthly performance for both indices since March 2020 when the pandemic broke out. The TSX decline was led by the technology sector, which plummeted 19.9% in the month, while a continued retreat in cannabis-related companies contributed to a 17.8% drop for the health care group. Energy and consumer staples were the only two sectors to weather the storm, with gains of 2.7% and 0.4% respectively. The defensive communication services and utilities groups also outperformed the index, with declines of 1.4% and 1.5% respectively.

The S&P 500’s 8.8% fall in April took it into official correction territory with a YTD decline of 13.3%. The Dow Jones Industrial Average retreated 4.9%, while the Nasdaq Composite plunged 13.3% for its worst monthly performance since October 2008. Large-cap U.S. stocks performed marginally better than small-cap stocks in the month, with the Russell 1000 index down 9.0% while the Russell 2000 fell 10.0%.

(Data Source: FactSet)

Our Strategy
After effectively scaling the “Wall of Worry” in the preceding two years, equity markets seem to be sliding down it, having run out of steam so far in 2022. Inflation and hawkish central banks top the list of investors’ concerns, which also include the Russia-Ukraine conflict, a China slowdown brought on by zero-Covid policy shutdowns, and global supply chain issues that have been worsened by these developments.

As we had noted last month, the Federal Reserve (the “Fed”) and the Bank of Canada’s increasingly tough talk on countering inflation may be a tacit acknowledgement that they are well behind the curve in terms of doing so. Traders are now pricing in another 50-basis point hike by the Bank of Canada at its June 1 meeting, following a 50 bps increase on April 13. On May 4, the Federal Reserve also boosted its benchmark rate by 50 basis points – the biggest hike since 2000 – with Fed chairman Powell noting that similar increases were on the table for the next couple of Fed meetings.

While such “jawboning” by the Fed and Bank of Canada has already resulted in dissipating much of the excessive froth in speculative assets such as cryptocurrencies, SPACs and “meme” stocks, it has also taken a toll on the influential technology sector, which was the runaway market leader in recent years. The FAANG heavyweights are down by an average of 40% YTD (as of May 24) – led by Netflix (-70% YTD) and Meta Platforms (formerly Facebook, -46%), with former favorites like Shopify (-76% YTD) and Snap (-70% YTD, including a 43% plunge on May 24) faring even worse.

The huge spike in bond yields resulted in record declines of about 10% in Q1 for many bond funds and ETFS. On a somewhat positive note, 10-year bond yields have retreated in recent sessions from multi-year highs reached on May 9, 2022. The 10-year Government of Canada bond yield is currently at 2.81%, compared with 3.14% on May 9, while the 10-year U.S. Treasury is at 2.75%, down from 3.20% on May 9.

Bond yields need to stabilize for markets to reach bottom, as this may enable technology stocks (which are perceived as “long duration” because their profitability may be years away) to rebound from current technically oversold levels. In the meantime, the rotation in market leadership from technology to energy and commodities has benefited the TSX, which has a combined 32% weight in these two sectors. The TSX is currently outperforming the S&P 500 by almost 13 percentage points YTD (-4.41% vs. -17.30%), its widest margin of outperformance since 2005.

Corporate earnings estimates remain optimistic despite heightened uncertainty about the economic outlook. Consensus estimates continue to factor in 10% earnings growth for the S&P 500 this year and next, and 19% earnings growth for the TSX this year, moderating to 4% next year (FactSet estimates).

Luft Financial client portfolios were rebalanced in the second week of May. The Portfolio Management Team (PMT) booked some profits in stocks that have been significant outperformers this year – such as Loblaws, Nutrien, Hydro One and Pembina Pipeline – and deployed it in securities that have lagged, including the Platinum Growth Fund, Disney, Qualcomm, and CI Canadian REIT ETF. Although the PMT is comfortable with the current asset allocation and positioning of client portfolios in this challenging environment, it remains vigilant for buying opportunities generated by volatile markets.

Please contact any member of the PMT if you have any questions or concerns regarding your accounts.