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Investment Commentary – June 30, 2023

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Q2 was a second successive strong quarter for investors as stocks continued their promising 2023 recovery and bond yields stabilized on growing economic optimism and cooling inflation.

U.S. Canadian and global equities closed the quarter and first half of 2023 in positive territory. Technology was again the leading sector with the Nasdaq logging its best start to a year on record. Despite briefly rising in May on uncertainty over the U.S. debt ceiling and concern about the U.S. regional banking sector after the demise of another bank, First Republic, bonds yields were stable in Q2.

There were a number of market-friendly economic indicators. Overall job creation in the U.S. and Canada continued to be resilient. While the creation of new jobs is welcome, the trend for the U.S. labour market does now appear to be slowing with wage pressures easing. This will be viewed favourably by the Fed in its ongoing battle with inflation. U.S. house prices also posted their largest annual drop in 11 years. And a survey of U.S. small and medium size businesses revealed hiring, sales expectations and credit availability have at a minimum slowed, which are also positive indicators in the inflationary fight.

The Bank of England, European Central Bank and Reserve Bank of Australia aligned monetary policy with the Fed, and raised rates twice during Q2. All three increased rates 25 basis points in May, then in June hiked a further 50 basis points, 35 basis points and 25 basis points respectively. The Bank of England in particular is grappling with inflation in the U.K. that is the highest in the G7 at 8.7%.

The broader inflationary trend in the U.S. shows prices are easing, albeit at a slow pace. Inflation fell early in the quarter to 4.9%, its lowest level in nearly two years. However, core CPI, which excludes energy and food, crept up 0.44% later in Q2, led in part by housing costs and used car prices. The Fed also raised its target interest rate by another 25 basis points to 5-5.25% in May, the tenth raise in 15 months. Fed chair Powell then announced a “hawkish pause” in June, but signaled there might still be more hikes needed in the second half of 2023. The Fed’s next interest rate meeting is set for July 26.

Canadian inflation cooled through the quarter, from 5.2% to 3.4%, its lowest level since June 2021. According to Statistics Canada, this was largely due to lower gasoline prices although food and housing costs remain elevated. After a four month break, the Bank of Canada surprised by hiking rates 25 basis points to 4.75%. The decision was based on concern over excess demand in the economy, a tight labour market, and increased housing market activity.

Capital Markets in Q2

The S&P/TSX Composite Index ended the quarter up 1.1%, the S&P 500 Index up 6.3%, the MSCI EAFE Index up 0.9% and the MSCI World Index up 4.6%.

Equity markets rose through April but then dipped in May as the banking sector, falling oil prices and the U.S. debt ceiling negotiations weighed on performance, before getting back on track in June. U.S., Canadian and global stocks ended Q2 and the first half of 2023 in positive territory. Technology was again the leading sector with the Nasdaq logging its best start to a year on record and Apple becoming the first company to reach a market cap of US$3trillion. The S&P 500 also had its best first half performance since 2021. TSX gains were a bit a more modest as a result of its high exposure to the banking and oil sectors but it is still significantly up from the October market low last year. Global stock gains were somewhat held back too by a slower than expected post-pandemic recovery in China.

Many big tech names released earnings which in general depicted a better picture than anticipated. Investors were comforted by these results, sparking hope the worst of big tech’s post-pandemic slump, including its recent large job cuts, might be over. U.S. chipmaker Nvidia Corp. also announced earnings that surpassed estimates by more than 50%, highlighting strong demand for its computer chip technology which is used to power AI applications.

It was a tough quarter for the banking sector which was rocked by the regional bank failures in the U.S. Four of Canada’s top five banks released earnings revealing profits were down compared to a year ago, though in absolute terms performance remained resilient. In global equity markets, Japanese stocks experienced a resurgence, with local indices reaching their highest level in 33 years. This growth is primarily driven by increasing demand from foreign investors.

Despite briefly rising mid-quarter, U.S. and Canadian bond yields were overall stable in Q2. Yields were stable in April, reflecting investor optimism and cooling inflation, then rose in May on uncertainty over the U.S. debt ceiling negotiations and concern about the U.S. regional banking sector. A better-than-expected economic backdrop also impacted the outlook for interest rates which influenced the trajectory of yields as well. But through June, bond yields stabilized again as Democrats and Republicans in Congress reached an agreement to extend the U.S. debt limit until 2025 and worries over the recent bank failures subsided.

Directed by Saudi Arabia, the world’s largest oil producer, OPEC announced a cut in oil production in April, reducing it by 1.1 million barrels a day. This was in response to oil prices dropping to their lowest level since late 2021. Saudi Arabia then introduced a second production cut two months later, reducing output by another one million barrels a day.

What we can expect now?

This round of rate hikes has sent a clear message: The battle against inflation is ongoing and far from over. Consumer demand for goods and services sector prices remain high, housing activity is increasing again while wage growth is much higher than historical averages. In response, central banks are prepared to increase rates further. But going forward, we expect to hear more questions on the ability of monetary policy alone to solve more structural economic issues, such as labour and housing market imbalances.

Regardless of where we are in the market cycle, it’s important to take a disciplined approach to investing and stay focused on your long-term goals. This strategy helps you keep your emotions out of investing, typically buying high and selling low like many investors do. Ongoing monitoring and reviewing of your portfolio also ensures it remains on track. Diversifying investments reduces risk as well.As always, if you have any questions about the markets, your investments, or any financial matter, please reach out to us.  We are here to help.

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The information in this letter is derived from various sources, including CI Global Asset Management, Statistics Canada, Bank of Canada, Bloomberg, U.S. Bureau of Labor Statistics Reuters, National Post, NY Times, Forbes, KWWL.com, Global and Mail, Investment Executive, Advisor.ca, Wall Street Journal, Markets Insider, Toronto Sun, Daily Mail, LinkedIn, MarketWatch, Investing.com, Canadian Press, MSN, and Barron’s as at various dates. This material is provided for general information and is subject to change without notice. Every effort has been made to compile this material from reliable sources and reasonable steps have been taken to ensure their accuracy. Market conditions may change which may impact the information contained in this document. Before acting on any of the above, please contact me for individual financial advice based on your personal circumstances.