It may have been Leap Day yesterday on the 29th of February, but for the markets and our portfolios it was more like “Leap Month” and sees us well into the Green Zone mid to longer term.
As of writing the US stock markets are at or just shy of their all-time highs. The S&P500 (SPY ETF) is up 6.89% and the tech loaded Nasdaq (QQQ ETF) is up 7.2% year to date. The broader index of the DOW (DIA ETF) is up at 3.47% and the Canadian market is lagging at 2.31%. The performance of both the DOW and the TSX reflect the reduced exposure to technology and specifically the so called Magnificent Seven, which includes Apple, Microsoft, Amazon, Alphabet (Google), Tesla, Nvidia and Meta Platforms.
Fortunately, our model portfolios that have the All Equity (stock component) in the large account portfolios are up over 10.8% and the mid size accounts are at 7.4%, while our Balanced Portfolios are up 7.5% year to date. The return figures are after fees and may differ slightly between accounts. We attribute much of the outperformance partially due to the focus on tech, but also to the changes we made to the models in the middle of last year.
Markets may be topping out and could potentially pull back after the recent run. That has us more in the Yellow Zone in our shorter-term indicators and we may look at increasing our defensive position. Any pullback, however, will likely be rather short lived and would be healthy for the markets as markets that go straight up often tend to come down harder.
Our priority going forward, then, must be to ensure that we hang on to these returns to date, especially as the market is reaching a “Resistance” point from a technical investment strategy view with these new highs, with a particular focus on the technology sector of the market (and especially those magnificent seven). Usually, the sectors that have done the best tend to underperform in the next stages of the market. Those tech stocks have had their run, and the expectation is that they may now hand off the baton. We have discussed many times regarding our concerns of buy and hold. An important part of our investment strategy is the ability to move to defence, when necessary. Just as important is the ability to move and rotate out to the stronger and improving sectors and away from those topping out or potentially weakening.
With that, we still have exposure to tech stocks, but we are seeing the market broaden out and money is moving out of tech stocks and rotating into other sectors of the economy. This is a welcome and positive progression. The market is potentially transitioning from the technology trade towards broader sectors. We are doing the same with moves to add sectors including industrials and transports like CP, a railroad, and Linde, chemical company. Moreover, financials, banks and insurance companies, like VISA, Bank of America and Manulife, are improving. Other sectors like health care stocks and consumer staples look to be turning the corner as well; and we have ensured our exposure to them by owning companies such as Lilly and Costco.
With markets reaching new highs, the concern becomes whether they are rolling over and potentially rolling downward or are they setting up for the next “leg up”. Not only is it important to look at other sectors, but also to get somewhat defensive, as we have, until we have some indication of the direction of where markets move from here. As such, we have added some defense and increased cash to about 20%. That provides us with two opportunities. Firstly, the moves will protect us should markets breakdown and may give us the ability to make money on the downside. Secondly, it gives us dry powder should markets instead break higher and, as we identify with technical analysis, the relatively stronger positions to take advantage of.
Markets also go through seasonal tendencies. Accordingly, we were expecting the latter half of February to be rather soft as it usually has been each year. However, global markets have still been positive. We did increase defense and based purely on those seasonal tendencies and assuming no other contingencies, our objective is to be fully invested by St. Patrick’s Day. We shall see.
Markets go up, down or sideways. The majority of time, stock markets move sideways as they are doing now. Many stocks have pulled back from their highs, but have not started “breaking down”. Apple, for example, is at a three-month low, but it is not enough of a pullback to have us sell it yet. Overall, markets have actually held the lines even after the run since the bottom last fall, and there are of course market concerns, such as rates, inflation, and geopolitical concerns (which we will get into). Yet markets, again, are still holding important lines. As we have said many times -- “markets that do not go down on bad news are strong markets.”
A couple weeks ago, there was a great earnings report from the semi-conductor company Nvidia. They make computer chips for cars, cell phones, gaming, etc. The report was so positive that it pushed the whole market higher. That is an example of a positive catalyst that moves the market, whereas a report of rising inflation and rates is a negative catalyst that may move the market lower. Right now we wait patiently, and even cautiously, for that next catalyst to move markets out of the current sideways motion for the next move up, or down.
Inflation and rates have been the biggest mover of markets this past year. Anticipation of lower interest rates, which allow for businesses to operate at lower costs (particularly growth stocks), drove stocks higher.
More recently, the U.S. Fed and other central banks have signalled that inflation continues to be stickier than previously thought and therefore, the expectation of higher rates for longer and even fears of recession could explain why markets are stalling here. The U.S. election causes uncertainty. The failure of the US to renew their bills and potentially shut down the government is becoming a very regular concern. Fortunately on Thursday, the House once again approved a stopgap bill to avoid partial government shutdown, pushing the first deadline to March 8th. Add to that the geopolitical concerns from Ukraine vs. Russia and Israel vs. Hamas (where we may see a ceasefire agreement this weekend), rhetoric from China and global commercial real estate concerns, we may continue to see more confusion which leads to volatility and a decrease in buying momentum.
Stock markets don’t require selling to decline, just a lack of buying, and negative action in any of these could act as the next catalyst to the downside. That said, positive developments could send markets much higher.
If we had to predict on one, we would expect that we will see that the global economy may lead to a softer landing and rates will be able to come down, thus spurring on growth and markets as well. And while we are in a US election year and uncertainty rules, it does historically lead to a strong year for markets.
We are in the Green Zone in our mid to longer term signals while shorter term markets are stalling. A better way to put it is that we are taking a much-needed breather as we look for the next catalyst to gauge future direction. It will not be without bumps along the way, and we are currently set up to look to minimize those, but the current bias for the market, and probabilities are still for higher shorter-term performance that will carry through to the rest of the year.
Should you have any questions or would like to get together to review your portfolios or financial plans in person or by conference, we would be pleased to do so. Please contact us anytime.
- Have a great weekend!
- John, Victor and Megan