At nearly the midway point of the year, financial markets have shown surprising resilience despite numerous headwinds. These include multiple rate hikes by the Fed amid economic uncertainty, instability in the US regional banking system and corporate earnings forecasts that were, until recently, on the decline.

Monetary Tightening Cycle is Likely Drawing to a Close

Although Wednesday, June 7th marked the renewal of the Bank of Canada's current monetary tightening cycle, we are probably much closer to the end of monetary tightening than the beginning. Inflation remains resiliently moderate, and cracks are beginning to appear in the labour market. Continued aggressive tightening by central banks is therefore less and less justified. Future data will be crucial in guiding central bank actions, but it's important to remember that the Bank of Canada has already raised short-term interest rates by 4.5% since March 2022. The effects of today's higher interest rates take time to be felt in the economy. Rather than risk doing too little, the Bank of Canada is being proactive in ensuring that it does enough to slow inflation.

Here's What We Know

• The headline consumer price index rose by 4% in May, compared with 4.9% in April,
• The slowing trend in overall inflation is largely due to falling energy prices - year-on-year, energy costs are down 11.7%,
• The core consumer price index, which excludes food and energy products, slowed slightly to 5.3% in May, in line with expectations,
• Rising rental prices remained a key factor supporting the core consumer price index.

The Bottom Line

Inflation continues to slow in the US and the number of problematic areas continues to decline, but we haven't yet reached the finish line.

Credit trends remain the main concern. Most people expect Canadian banks to regularly increase their provisions to reflect an increasingly difficult environment. While, on average, banks have indeed seen their provisions rise, the increases recorded to date have remained well below expectations. In summary, actions and commentary to date suggest that Canadian banks are preparing for a significant and widespread deterioration in credit trends, but have yet to see it.

Our Strategy

Last year was one of the worst for financial markets, and since the start of the year, despite all the problems brewing in the US, markets have been on the rise.

When stocks fall, our emotions lead us to believe that they will continue to fall. Conversely, when stocks rise, our emotions lead us to believe that they will continue to rise. That's why we always suggest having and keeping an investment plan that you'll continue to follow in a wide variety of market and economic environments.

As difficult as it may be, try not to let your emotions influence your investment decisions. When market volatility increases, even experienced investors can become overly attentive to short-term movements. This can lead to hasty decisions. The key to avoid making rushed investment decisions is to maintain perspective and focus on the long-term. With a well-structured plan in place, you can confidently remain committed to it, knowing that day-to-day market fluctuations are likely to have little impact on your longer-term objectives or on the investment strategy designed to get you there.

Our advice is to stay the course, stay prepared and don't try to predict. Maintaining the status quo (while continuing to receive dividends and other investment income) is often the best option.

Our Action Plan

• Use short-term volatility to our advantage,
• Add several high-dividend-yielding securities,
• Buy discount bonds, which now provide income in excess of 5% (as well as certain tax advantages in taxable portfolios),
• Remain conservative and ready to deploy even more capital in the event of a downturn, when (and if!) a recession occurs,
• Focus on high-quality, dominant stocks, often linked to a monopoly or oligopoly.

Key Takeaways

• Corrections are normal and part of stock market cycles,
• Maintaining investment discipline is crucial to achieving objectives,
• Time in the market is more important than timing the market,
• There is a significant opportunity cost to missing the best days in the stock market. Staying invested guarantees that you'll catch the wave when it passes.

To sum up, our recommended positioning remains unchanged. We recommend maintaining a balanced portfolio, with stocks emphasizing quality, strong balance sheets, sustainable dividends and business models that are not highly sensitive to economic cycles.

We remain committed to selecting high-quality assets for your portfolios that generate solid returns, while promoting downside protection.
 

"Without a saving faith in the future, no one would ever invest.
To be an investor, you have to believe in a better tomorrow."
- Benjamin Graham
 

Finally, with summer just around the corner our team members will be taking a few days off to recharge their batteries. For this reason, there will be no newsletter for the month of July. That being said, rest assured that back-ups will be put into place, in order to provide you with the service that you've come to expect. Enjoy the good weather!
 

We remain at your disposal to answer any questions you may have and wish you an excellent start to the summer season!
 

Benoit Legros, CIM, FCSI
Portfolio Manager and Senior Wealth Advisor