Despite a few days of heightened volatility in August, the month ended slightly positive and further added to the strong performance for portfolios so far this year. From January and into July we had seen large US growth/tech companies leading the way, but August brought in a rotation into equity markets as we began to see these very large companies pull back. Cash then began to flow into other segments of the markets such as the ‘blue chip’ dividend paying companies and in particular small & medium sized companies. This to us is a sign of a healthy market, as a broader participation tends to be more sustainable over the long term.
Why is this occurring? Much of this rotation stems from the shifting interest rate environment. We are now just beginning to see interest rates fall with Canada’s central bank having completed two interest rate cuts and now sits at 4.5%, and we expect the US central bank (the Fed) to initiate their first cut this month. Smaller sized companies tend to be more dependent on loans, and therefore lower interest rates are positive for their cash flow.
In the near term we are already seeing and expecting further choppiness through most of September and into October. Historically September tends to be a weak month, and this year it also coincides with the upcoming US election. So while we may see some ‘weak seasonality’ between now and election day, this is all occurring within the context of a strong stock market, and we expect to see the second half of 2024 to finish strong.
Recent macro-economic data has not changed the main narrative embedded in market expectations of a “soft landing” for the global economy. For now, the balance of evidence remains consistent with this scenario, where economic growth transitions into a slower but steady trend, inflation steadies near target levels, and central banks implement rate cuts. This backdrop―characterized by ongoing economic growth coupled with easier financial conditions has helped keep corporate earnings on an upward trajectory, which we believe will likely continue to provide fundamental support for equities in the months ahead.
Should you have any questions or comments, please don’t hesitate to reach out to our team.
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