July 2022 - Monthly Update
Ian Peebles - Jul 01, 2022
Trust this note finds you and your family well while enjoying an excellent start to the summer.
Your investment portfolio declined somewhat in June and is showing a slight decrease over the last 12 months.
During June, stock markets were down double digits at times. Your investment portfolio displayed material resilience against this turbulence backdrop.
There is a lack of consensus in markets over three items. This is driving the selling pressure and the unusually persistent volatility that has defined 2022 to date.
Inflation -When will it peak and return to normal levels of 2-3%?
Interest rates - How high will central banks raise interest rates to bring down inflation by reducing demand?
Economic growth. What are the implications given 1&2 above?
The volatility (up and down) for stocks and bonds will likely continue until a greater consensus in markets emerges.
That said, we have a very clear view on all three based on the data and our experience.
The pace of inflationary head winds are high yet they are not getting worse at an accelerating pace. Prices for inputs like oil, copper, raw wood etc. are all down 25-40% from their March peaks. There is a lag for these lower inputs to make their way to finished goods. We are starting to see this anecdotally with prices at the pump and building centres noticeably lower today than much of this year.
On interest rates, it is likely that much of the increases have already been completed. The lagging and magnified effect on spending and demand pressures are taking effect while in some areas supply chain issues are slowly improving to help bring equilibrium to lower prices from the other side of the equation.
Economic growth? The foundation of strength remains the domestic North American economy and corporations. The world is less international and more local/domestic. These trends continue to favour the domestic United States and by extension Canada and Mexico.
Our long term strategy remains unchanged. Continue to focus on businesses central to the U.S. domestic economy and North America. These areas remain fundamentally strong and stable as evidenced by their increasing dividends, record levels of cash on balance sheets and best in class leadership.
In the weeks ahead, a new quarter of earnings will be announced. This real-time data and guidance will be used to refine our list of new investment opportunities we are waiting to add to the portfolio using the cash we have been carefully building in 2022.
You and your investment portfolio are insulated from the near-term market volatility and well positioned for the future.
The view from Brian Belski, BMO's Chief Investment Strategist:
“The S&P 500 fell 8.4% in June, entering official bear market territory for the first time since Mar ‘20 as inflation, Fed tightening, and economic growth worries led to broad risk- off sentiment in the market. The 16.4% loss in Q2 marked the worst quarterly decline for the index since Q1'20, while the 20.6% 1H drop represented the biggest since 1970. This price weakness has led to overwhelmingly negative sentiment among investors with many prognosticating that a severe and protracted recession is looming, a conclusion we disagree with. From our perspective, market valuation has already significantly de-rated, the consumer has been fairly resilient, and corporate earnings have held up well with 2022 S&P 500 EPS increasing YTD– which represent major parts of the reason why we expect US stocks to rally into year-end from current levels. Therefore, we continue to remind investors that difficult times such as these require process and discipline since emotional or panic trading typically lead to poor investment results, in our view... The selloff in June has brought the one-year loss for the S&P 500 to 11.9%, below the -1 std mark, which has historically been followed by a sharp snapback. In fact, the current y/y decline for the index is more severe than prior cycle lows in Mar ‘20, Dec ‘18, and Feb ‘16, and sits at the lowest level since the 2008-09 period… The S&P/TSX declined 9% on a price return basis in June pushing deeper into correction territory. In fact, the sell-off was broad based with all 11 sectors posting negative returns... Despite this sell-off, our models continue to show stable fundamentals and, in many cases, improving revision trends. Furthermore, this backdrop has pushed our valuation composite to the lowest level since March 2020 and near one-standard deviation below average.”
Stocks in your portfolio that made a new 52 week high this past month:
Bristol-Myers, Fortis*
Stocks in your portfolio that made a new 52 week low this past month:
Home Depot*, MasterCard*, Microsoft*, Royal Bank*, S&P 500 Index, Thermo Fisher Scientific, Qualcomm
The Loonie shed one and a half cents versus the U.S. dollar to:
$0.775
Thank you and all our best,
Ian, Gab, Kaitlyn & Nataliia