The stock market indexes gave back some of their gains in May except for the Nasdaq that continued higher.  The Nasdaq gained close to 6% in May.  The economies of North America continued to defy expectations on the upside with central banks being surprised again by the economic resilience despite rate increases.  Today the Bank of Canada unexpectantly raised rates another quarter of percentage.  We expect further rate increases as the labour market continues to be robust and consumers appear to have adjusted to higher prices and continue their spending patterns.  At some point the higher rates will bite into some economic sectors to a greater degree.  Those companies with fortress balance sheets like big tech names such as Microsoft, Amazon, Google, Meta, Nvidia, and others will prosper further and those companies dependent on outside funding to operate and grow will struggle with the impact of higher rates.  The market gains on the Nasdaq have been narrow with no broad-based rally occurring, with most of the gains of the index being driven by a relatively small number of big tech names.  The other averages improved in the beginning of June but have not fared as well as the tech heavy Nasdaq.  The index is ahead of itself and either the rally will broaden out, or if not, then we would expect a pullback as a narrow-driven market is not sustainable.

We see a moderate recession in North America in the next 6-18 months and the current inverted yield curve clearly signals a recession risk.  Sustained higher rates could still result in banking issues to come and we remain cautious on this front.  The commercial real estate sector is a possible major risk as many properties still remain vacant as work from home still persists and companies have adjusted to less space coupled with higher rates that will have a negative impact going forward over the next 1-2 years.

We continue to hold the view that if the market can move along without major disruptions past October this year, the stock market will continue to improve thereafter.

We continue to monitor the stock market and economy seeking opportunities to invest.  As I outlined above, we are now and will be in an age of great change and innovation that provides risks but also opportunities.

In summary, our stance remains unchanged, we are constructive but cautious on the market.  We feel that it will not be until after later this year around October to determine if any significant issues or event will emerge that would have a material impact on the stock market.   Barring unforeseen economic events such as further material bank failures, commercial real estate issues, and debt restructuring due to high rates, could still present challenges.

There has been a tremendous amount of debt taken on and debt levels are at all-time highs.  Consumers will need to adjust what they can afford in a higher rate environment, especially as it relates to big ticket homes and autos.  Consumers will continue to spend but will be able to afford lower prices on homes and autos, and interest rates will impact monthly payments.

A Summary of equity index performance YTD to end of May is outlined as follows:

Dow Jones Industrial Average               – 0.72%

S&P 500                                               + 8.48%

Nasdaq                                                +22.44%

S&P/TSX                                              + 0.97%

The current prime interest rate in Canada is 6.7% and 8.25% in the US.