August 2022 Portfolio Management Team Update
By Elvis Picardo, CFA®, CIM, Portfolio Manager, iA Private Wealth
August 24, 2022
Market & Economic Environment
After a dismal first half, global equity indices rebounded strongly in July, led by U.S. indices on Q2 earnings that were better than expected, and optimism that the Federal Reserve would raise interest rates less aggressively than anticipated.
The TSX Composite gained 4.4% in July – its best monthly performance since October 2021 – as nine of its 11 groups rose, led by the industrials, technology, and consumer discretionary sectors. Declines in mining companies led the materials sector lower, while the health care group fell 8.6% as cannabis companies plunged. The S&P 500 surged 9.1% in July, its best monthly performance since November 2020, while the Nasdaq Composite soared 12.4% for its best month since April 2020. Most major bourses in Europe and Asia also rebounded in July from steep declines in the first half. (Data Source: FactSet)
Our Strategy
While inflation continues to hold at its highest level in decades, some of the “inflation panic” that was evident in the second quarter seems to have dissipated partly due to the retreat in crude oil and commodity prices from their peaks earlier in the year. That said, expectations about the trajectory and pace of future interest rate hikes by the Federal Reserve currently has the biggest influence on market direction.
On July 27, the Federal Reserve raised the federal funds rate by 75 basis points for the second straight meeting, while saying that monetary policy would be adjusted as necessary if risks emerged that could attain the attainment of its objectives. Interpreting the Fed statement and comments by chairman Powell as signaling a dovish tilt by the central bank, investors boosted the S&P 500 up by nearly 4% for the biggest two-day gain on record following Fed tightening.
However, multiple Federal Reserve officials have subsequently dampened expectations about the Fed’s policy pivot, saying that the fight to control inflation is far from away. As a result, the U.S. 10-year Treasury yield, which had plunged after the Fed’s July 27 meeting, has surged by 35 basis points over the past month to trade at 3.10%. (Data Source: FactSet, Bloomberg).
Due to the heightened degree of uncertainty in the markets, coupled with conflicting economic data, the Portfolio Management Team (PMT) is proceeding cautiously with making changes to client portfolios. As noted in previous reports, our gameplan for the rest of the year hinges on whether recession concerns intensify or recede. The PMT intends to use market volatility to increase the defensive tilt in client portfolios ahead of the seasonally turbulent months of September and October.
Please contact any member of the PMT if you have any questions or concerns regarding your accounts.
