Market Drivers are Changing. That Works for Us.

Global stock markets have had a strong start to the year – up about 8% as of this writing – despite a rise in interest rates. It appears that, contrary to 2023, the driver of returns has shifted from inflation and central bank activity to a focus on earnings and expectations. This is a major development. As a consequence, stock selection has become more important as investors can no longer rely on macroeconomic forces to do the work for them. Our research indicates this trend will likely continue as long as rates stay in the current, historically “normal” 3-6% range.

This shift has so far been a net benefit to our clients. We’re pleased to see our actively managed portfolios are well ahead of their respective benchmarks and category averages to start the year. Our overweight allocation to US equities has done well for us as the country has outperformed the rest of the world. Our picks in the semiconductor space have also been helpful; Nvidia gets all the limelight here, but our positions in the broader global chip supply chain (AMD, ASML, Taiwan Semiconductors, etc.) have boosted our portfolios as well. Meanwhile, our core allocation to quality tech companies like Microsoft and Meta, as well as our more growth-focused stock selection within Canada (ex: WSP Global and Waste Connections) have helped keep us ahead of the pack.

Rebalancing into Strength

Moving forward, our cyclical views (i.e. where we believe the economy/market is headed over the next 12 months or so) are optimistic, but admittedly more defensive than the rest of the industry. We think it is likely that the world will avoid a recession and continue to experience moderate growth in the near future. However, there are risks on the horizon that warrant caution. Though the risk of recession has receded, there is still potential for a global slowdown given the elevated state of interest rates and generally declining liquidity. The risks in China are also on our radar as it grapples with two crises: one in real estate and another in confidence; the jury is still out on whether the Xi administration can convince investors that China is open to doing business. Add to that the ongoing geopolitical tensions across the world and their potential spillover effects and there is a strong case to maintain a measure of caution in portfolios.  

Closer to home, we note that parts of the market have entered a state of euphoria, particularly as it relates to artificial intelligence (AI) and its offshoots. This kind of unbridled optimism always puts our “capital preservation” guard up. As with any emerging technology, some of the hype is real but some of it is overblown. We therefore think it would be healthy to see a period of consolidation as investors digest the latest leg up in markets. On this note, we believe Q2 is going to be more volatile than Q1 and are bracing our clients and portfolios accordingly.

We have taken this opportunity to rebalance our portfolios. This involves trimming some of our biggest winners and re-allocating to other stocks/asset classes we believe have room to run. Notably, we lowered our exposure to semiconductors and mega cap names that have grown the most over the past few years (AAPL, etc.) and boosted our positioning in “everybody else,” including companies in the energy and health care sectors. Moves like these naturally cushion us in the event of market turbulence as it boosts the parts of the portfolio that are less exposed in a market downturn. This is part of the ongoing vigilance our clients can expect from us as we look to grow and protect their capital.

Beyond 2024: Room to Run

Despite our relatively more cautious tone over the short term, we are confident about the potential for meaningful equity returns over the next 3-5 years. We believe we are in the midst of a new bull market, one that started just as the bear market of 2022 ended. Since the 1950s, these periods last about 5.5 years and return an average of 180% (using the S&P 500 as a proxy for stocks). The extent to which investors participate in these periods dictates the strength of their long term returns. In other words, whether or not an investor is going to feel good about their portfolios over the long run is primarily a function of how much they participate in bull markets. For this reason, and particularly because we are still in the early days of the current cycle, we believe getting and staying invested is more crucial than any other factor in investing today. Granted, this should always be done in the context of one’s personal financial plan, including their tolerance for volatility. This is why we take pride in the bench strength of our wealth management team as they work daily to ensure our clients stay on the right path for them and their families.