The stock markets performed well in June as the Nasdaq, Dow Jones and S&P improved their year-to-date performances with only the TSX giving back some prior month’s gains in June. The year-to-date performance figures to the end of June are shown below. Central banks continue to raise rates and are signaling that is likely to continue. In June the Bank of England raised rates 50 basis points, The Bank of Canada raised rates 25 basis points, the ECB had a 25-basis point increase and the US Central Bank kept rates unchanged but signaling that more rate increases are coming. The impact of the rate increases on the economy has been less than what Central Banks expected in slowing the economy and inflation to their target inflation rate of 2%. When you look at the stock market and sectors such as financials, utilities, health care, real estate, and other sectors the stock values of these companies continue to come under pressure due to the interest rate environment. We are seeing yields above 6% and 7% in these sectors as interest rates rise and expectations for further increases are reflected in the price of securities. Sooner or later the bite of higher rates will be more impactful on the economy. There has been an untick in defaults and bankruptcies in the US and other countries. Governments are discussing with banks measures that could be taken to provide some breathing room to households as higher rates put more pressure on their budgets. Measure such as extending amortization periods and delaying any foreclosure action. As the bite of interest rates continues there will be more pain coming but that also provides opportunity. The rate increase cycle will end and as yields on many securities rise to levels we have not seen in a while those that are positioned to take advantage of that will have the benefit of excellent yields and then capital appreciation when the interest rate tightening cycle ends, and an easing cycle begins. Currently money market funds are yielding approximately 5% and is a good place to wait and chip away at those opportunities for higher yield and future capital appreciation. The yield curve is still inverted, which has been a good indicator of future recessions and we expect a technical recession in the next 6-12 months. Those companies that are reliant on borrowing for operations and/or growth will continue to be negatively impacted by the interest rate environment and those companies that have fortress balance sheets and plenty of cash will benefit.
In summary, at Investment Strategies, our stance remains unchanged, we are constructive but cautious on the market. We feel that it will not be until later this year past October-November to determine if any significant issues or event will emerge that would have a material impact on the stock market, such as material bank failures, commercial real estate issues, and debt restructuring due to high rates. A new bull market may have begun as the signaling of further rate hikes by central banks are having little negative impact on the stock market. The market may be looking past rate increases as we are near the end of the tightening cycle and the economy has performed well under higher rates and the employment picture remains robust. As per our January commentary we felt the bottom was in for the market at that time. It appears the stock market as a leading indicator is signaling that the economy will remain in relatively good shape going forward. There are powerful economic conditions such as the move to sustainability, tight labour markets, adjustments to global supply chains away from China, technological changes and demographic trends that will continue to positively impact the economy and stock market for quite some time. In summary we continue to put money to work in the market to take advantage of high yields and capital appreciation.
A Summary of equity index performance YTD to end of June is outlined as follows:
Dow Jones Industrial Average + 3.80%
S&P 500 +15.49%
Nasdaq +30.52%
S&P/TSX + 3.98%
The current prime interest rate in Canada is 6.95% and 8.25% in the US.
