No Eggs Laid This Quarter...

 

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The curtain closed on a historic first quarter for North American benchmarks. The S&P 500 was flat Thursday as it wrapped up its best first-quarter performance in five years. For the quarter, the S&P 500 was up 10%. Its best first-quarter gain since 2019, when it rallied 13.1%. The 30-stock Dow, up 5.5% during the period, had its strongest first-quarter performance since 2021 when it advanced 7.4%. As a welcomed change of pace, the Nasdaq wasn’t the clear winner this quarter, up 9%. Canada’s TSX was a minor laggard, up ~6%.

As we reiterated last week, we believe Canada remains the predominant contrarian call in terms of developed equity markets in 2024. Granted, the TSX composite has recently eclipsed all-time price highs, but overall index performance pales in comparison to its neighbour to the south. From our lens, Canadian small cap stocks are an even deeper contrarian call within an already contrarian context with respect to overall Canadian equities – an asset class that we believe is primed for a catch-up trade that could even eclipse the large cap stocks.

Source: Canadian Strategy Snapshot: Canadian Small Cap Primed for Catch-Up Trade

In fact, while the S&P/TSX small cap index has managed to keep pace with its large cap peers so far this year, the index remains well off its 2022 historical high. Furthermore, our work suggests the fundamental underpinnings are improving faster than its large cap peers, with earnings growth set to rebound to double digits over the next twelve months, well ahead of the single-digit growth expectations for the overall S&P/TSX composite. As such, we believe investors should be looking within the Canadian small cap universe for both value and growth opportunities with a tilt toward traditional cyclical areas of the market. To this point, within our discretionary mandate we started a new position in a mid-cap Canadian industrial company and added to an existing position of a Canadian airliner.

Source: Canadian Strategy Snapshot: Canadian Small Cap Primed for Catch-Up Trade

Something we have been discussing in ongoing edition is our expectation for market breadth to expand. It’s no secret that the bulk of the returns witnessed in the last 5-6 months has been centered around a handful of mega-cap technology stocks. Well, in recent weeks we have begun to witness a broadening of the rally out of technology and into new sector leadership. Notably, the small-cap and mid-cap indexes have outperformed the broader S&P 500 after the Fed meeting last Wednesday. These included cyclical sectors like financials, energy, and industrials. And we expect these trends to continue for the balance of 2024.

Ending this week with an interesting chart out of JP Morgan, their team did an analysis of market returns around the end of a Fed hiking cycle. While we haven’t had complete assurance of this just yet, recent Fed Commentary would largely suggest the next move out of the US Fed is a move lower, not higher, and the last rate hike witnessed in July 2023 might very well be the last in this cycle. The analysis shows that after a rocky few months last summer, the market is now in the early innings of a new bull cycle.

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