June 2022 - Monthly Update

Ian Peebles - Jun 01, 2022

Trust this note finds you and your family well.

Monthly Update, Peebles Martin Wealth Management, BMO Nesbitt Burns

Your investment portfolio declined in May - It remains with positive performance over the past 12 months.

May was another turbulent month for stock markets . New lows for 2022 were touched during the first two weeks, only to be completely reversed one week later to end the month unchanged.

For perspective on where we are on the economic/investment journey, as well as where we are headed, let’s first revisit the response measures from the beginning of the pandemic.

In an effort to avoid an economic depression, central banks decreased interest rates to 0% and governments transferred cash into bank accounts in March of 2020. Throughout 2021, the economy transitioned into a new cycle of growth. Towards the end of 2021, concerns were raised about the pace of growth ahead in 2022 and 2023. There was a risk identified that a permanent cycle of higher prices (greater than the economy can absorb) was being created over the medium term.

Beginning this March, central banks in Canada and the United States (U.S.) began raising interest rates to bring them back to more normal levels. At the same time, prices for goods and services moved higher. This reflects the short-term imbalance caused by disruptions to supply without a change in demand.

Higher prices and rising interest rate expenses reduce potential spending and slow the pace of economic growth. In response, consumers shift spending behavior into lower priced products as well as deferring purchases.

The objective is to lengthen the amount of time before the next recession by spreading out growth and spending over a number of years (rather than months) while bringing supply and demand back into balance.

There is emerging evidence that prices are declining in some areas due to reduced demand and increased supply.

  • Target Corp (A discount retailer in the U.S.) has announced it is slashing prices on stay at home pandemic related goods

  • Wholesale lumber prices are down 50% from March 2022. These inventories and lower prices make their way onto the shelves in 4 to 6 weeks

In the months ahead we expect to see this trend expand and continue.

That said, demand for goods remains strong as illustrated by U.S. manufacturing activity expanded at a faster than expected pace in May. From the most recent meeting of the U.S. Federal Reserve: “All participants concurred that the US economy was very strong, the labour market was extremely tight, and inflation was very high… “A number of FED participants, however, said data had begun to indicate that inflation may no longer be worsening… but… it was too early to be confident that inflation had peaked”.”

Today, we are experiencing slowing growth (not contraction) against the backdrop of a strong North American economy and a lumpy return to the balance between demand and supply. The fundamentals for the individual businesses we own remain sound as confirmed by their most recent quarter of earnings and heightened guidance for what we should expect over the next twelve months.

You and your investment portfolio are in a strong position.

The view from Brian Belski, BMO’s Chief Investment Strategist:

“The S&P 500 was flat in May, courtesy of a strong … rebound during the week ending 5/27, which snapped a seven-week losing streak for the index. That said, US stocks made new YTD price lows in May, falling deeper into correction territory as monetary tightening, persistently high inflation, growth/recession fears, and lack of capitulation worries continued to weigh on performance... From our lens, the transition to normalcy and shift to more fundamentally driven strategies… were jumpstarted by the aggressive de-rating in equities, setting up an accelerated path to more normalized returns and valuations. However, the secular bull market remains intact, in our view. Indeed, as the market recalibrates return trajectories over the near term, it reinforces the staying power of the bull. This is especially evident given the potential great unwind of the 40-year bull market in bonds, let alone continued fundamental uncertainty in other regions that will likely drive non-US investors back to the US.... The S&P/TSX [was flat] on a price return basis in May after briefly entering correction territory on May 12. In fact, the TSX rebound… in the back half of the month and is now just 6% shy of setting a new all-time high. Overall, we continue to believe Canadian equities remain a strong relative-value play and offers many key points of stability within global equity markets… Canadian equities face similar challenges to the US as earnings momentum fades as part of the broader “transition to normalcy.” However, Canadian stocks have several key advantages; Canada’s strong relative value position, multiples broadly below historical average, and significant exposure to commodity prices place Canada in a very attractive position to weather the volatility that is part and parcel of the overall transition process. To be clear, we continue to believe Canada will track US performance longer term, but it also represents a timely and increasingly attractive value market that offers stability, cash flow, equity income, and valuation support during these periods of heightened volatility.”

Portfolio Strategy – June 2022. BMO Capital Markets.

 

Stocks in your portfolio that made a new 52 week high this past month:

Bristol-Myers, Fortis*, Kraft-Heinz*

Stocks in your portfolio that made a new 52 week low this past month:

Accenture*, Home Depot*, Microsoft*, S&P 500 Index

The Loonie gained half a cent versus the U.S. dollar to:

$0.79

Thank you and all our best,

Ian, Gab & Kaitlyn