June 2022 Portfolio Management Team Update
By Elvis Picardo, CFA®, CIM, Portfolio Manager, iA Private Wealth
June 27, 2022
Market & Economic Environment
The TSX traded marginally lower in May, while the S&P 500 and Dow Jones Industrial Average were virtually unchanged over the month as a late surge erased earlier losses.
The TSX Composite declined 0.16% in May, as gains in its two largest sectors – financials and energy – and the utilities group offset declines in the other eight sectors. The energy sector rose 7.9%, propelled by a 9% surge in crude oil prices, while stable earnings reported by Canadian banks helped the financial sector. The health care sector plunged for the second month, declining 25.5% as cannabis-related companies continued to plummet.
Stateside, the S&P 500’s 6.6% surge in the week ended May 27 – its best weekly performance since the first week of November 2020 – enabled the index to finish the month up 0.01%. The Dow Jones was also little changed, up 0.04%, and the Nasdaq Composite fell 2.05%.
(Data Source: FactSet)
Our Strategy
Investors are currently preoccupied by concerns that with inflation running rampant, central banks may continue to ratchet interest rates higher and tip the economy into recession. Annual inflation is presently at a four-decade high of 8.6% in the U.S. and 7.7% in Canada. On June 15, the U.S. Federal Reserve raised the federal funds rate by 75 basis points (bps), its largest rate hike since 1994. Economists’ expectations are that the Bank of Canada will boost its benchmark rate by a similar magnitude in July.
The surge in bond yields over the past year – by 193 basis points in Canada and 167 basis points in the U.S. – has taken a toll on bonds and equities. Earlier this month, the TSX Composite and U.S. indices recorded their worst weekly performance since the pandemic-induced selloff in March 2020.
With recession fears now weighing on energy and commodities, the TSX has slumped over 7% so far in June, compared with a decline of less than 6% for the S&P 500. As a result, the margin of outperformance for the TSX over the S&P 500 has narrowed to about nine percentage points YTD, compared with almost 13 percentage points at end-April, which was its widest margin of outperformance since 2005.
The Portfolio Management Team (PMT) at Luft Financial is monitoring the situation closely considering elevated market volatility. The PMT’s view is that a recession may be likely, but is not inevitable, and with many high-quality stocks down significantly so far this year, buying opportunities are cropping up in many sectors. The PMT is currently assessing its asset allocation with a view to increasing the defensive tilt in client portfolios over the summer.
Please contact any member of the PMT if you have any questions or concerns regarding your accounts.
