May 2023 Portfolio Management Team Update

Elvis Picardo

May 26, 2023

May 2023 Portfolio Management Team Update
By Elvis Picardo, CFA®, CIM, Portfolio Manager, iA Private Wealth
May 24, 2023

Market Review
Global equities moved broadly higher in April, as fears about systemic risk in the financial system receded and investors looked forward to a potential end to the interest rate-hike cycle.

The TSX Composite gained 2.7% last month, led by three of its largest sectors that collectively make up 60% of the index – financials (+2.6%), energy (+4.6%) and materials (+3.2%). All 11 sectors gained in the month, with the biggest increases made by communication services (+6.6%) and health care (+5.5%).

In the U.S., the S&P 500 rose 1.5% and the Dow Jones Industrial Average gained 2.5% in April, while the Nasdaq Composite traded virtually unchanged for the month after surging 16.8% in Q1. Most European and Asian equity indices also traded higher in April. (Data Source: FactSet).

Our Strategy
On May 3, the Federal Reserve (the “Fed”) raised its benchmark federal funds rate by 25 basis points to a target range of 5.00% – 5.25%, the highest level since 2007. Given that the base rate was close to zero in early 2022, this has been the most aggressive monetary tightening campaign since the 1980s.

The Fed also hinted that this could be the final interest rate hike for some time, as its statement omitted a line from the March announcement which said it “anticipates that some additional policy firming may be appropriate.” At the press conference following the May 3 rate announcement, Fed chair Powell noted that the central bank no longer saying it anticipates further interest rate increases was a “meaningful change.” Powell also said that decisions at future Fed meetings will be driven by incoming data, starting with the June meeting.

Rather than the Federal Reserve, however, investors’ attention over the past couple of weeks has been fixated on the U.S. debt ceiling. With negotiations among policymakers continuing to drag on, concern that the U.S. may be forced into a historic debt default as soon as June 1 has led to the S&P 500 retreating from a nine-month high of 4,200 reached on May 18.

On the earnings front, as of mid-May, over 90% of S&P 500 companies had reported Q1 earnings, with 78% beating earnings estimates, which is above the 10-year average of 73% (source: FactSet). The strong Q1 numbers posted by most of the technology mega-caps may provide ongoing support to the markets, based on this group’s leadership position. Overall, aggregate earnings compiled by FactSet suggest a potential earnings rebound for the TSX and S&P 500 in 2024. Earnings for the TSX are forecast to increase 10% next year (compared with an expected 5.5% decline in 2023), while S&P 500 earnings are forecast to rebound 12% next year after showing little growth this year.

In April, the Portfolio Management Team (PMT) completed an asset allocation review and major rebalance of all client portfolios. The PMT’s view that these changes would position client portfolios appropriately for market volatility that typically erupts from May onwards has been borne out by the pullback so far this month (as of May 24: TSX -3.4%, S&P 500 -1.3%, Dow Jones -3.8%). The PMT believes that the U.S. will most likely avoid a debt default and the resultant self-inflicted damage. That said, based on the risk of a significant pullback should the unthinkable happen, the PMT is temporarily staying on the sidelines and is refraining from deploying excess cash in client portfolios until the situation is resolved.

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

This information has been prepared by Elvis Picardo, 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.