MARKET OUTLOOK:
In July, growth stocks pushed the Nasdaq up 12 per cent, cyclical stocks lagged, gold bounced up nearly $100 and 10-yr bond yields fell almost a full point from the mid-June peak. Markets, rightly or wrongly, have clearly bought into the idea that growth is slowing and U.S. Federal Reserve is closer to ‘done’ on rate increases.
We think it is far too early to start to price in an end to the rate hiking cycle. We are a long way from seeing a reversal in Fed policy like we saw at the end of 2018 after stocks had dropped over 20 per cent. Central banks have only just begun their tightening while inflationary expectations have become somewhat ‘embedded.’ While experts may debate whether or not the U.S. is in recession after two consecutive quarters of negative growth, the reality is that economic growth is slowing down.
Meanwhile, the slowdown means that earnings estimates will have to come down further. Despite these headwinds for growth and earnings, we are maintaining a neutral weight in stocks. Valuations have compressed sharply since the beginning of the year and many sectors are already reflecting recessionary conditions. Most importantly though, investors are positioned quite bearishly, which should limit the downside in stocks from here.
In the last month, we added to positions in core U.S. tech stocks including Alphabet, Microsoft, Qualcomm, Paypal and AMD; also positions in GM, FedEx, Magna, BRP, Air Canada and U.S. financials on first-half weakness. Additionally, we see opportunities in energy, where the stocks dropped over 20 per cent in the June-July period despite trading at record low valuations. But the forces keeping energy prices high are enduring, whether there is a recession or not.
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