WHY IS TECH DOING SO WELL?
It’s a great time to be invested in certain assets. In tech stocks in particular. The S&P 500, which we consider to be the authoritative index of how the markets are doing, was up 7.5% in the first quarter of this year, and here is the really interesting thing: two-thirds of that return is from tech stocks. Specifically, the tech sector increased 22% in Q1, while the rest of the index returned just 2.2%.
Why is tech doing so well? Earnings have been strong (see the “Earnings” section below). Also because the investments they make in new products are more speculative: the nature of innovation means their earnings are further in the future than companies in other industries. When interest rates are low, those future earnings, and hence their current stock prices, are worth more. Some investors recognize this, and also recognize that interest rates are probably going to continue going lower, so they are buying now – before the rest of the market catches on.
Remember when tech was tanking in January of last year? That’s because interest rates were rising. You can see our analysis in that month’s edition of this blog.
Interest rates, which were raised in an effort to slow spending and thus decrease inflation, have been dropping. For example, a 10-year bond in Canada now pays 2.8%, versus 3.75% in the last year – almost a full 1% decline. We expect that rates will remain around these levels until approximately this time next year, because inflation has been more stubborn than expected, driven primarily by grocery prices, mortgage interest and gasoline. Thinking back to the start of the pandemic, the gasoline in my truck was lasting more than two months, because there was nowhere to drive. Now I am driving everywhere and filling up the tank several times a month, which, thanks to gas prices at $1.57 per litre, really adds up.
And then there was this headline on April 2nd from Reuters: “OPEC+ announces surprise oil output cuts.” The article continues:
“Saudi Arabia and other OPEC+ oil producers on Sunday announced further oil output cuts of around 1.16 million barrels per day, in a surprise move that analysts said would cause an immediate rise in prices and the United States called inadvisable.”
Although inflation is now at 4.3%, its lowest level since August of 2021, we do not expect it to drop to the rate targeted by both the US Federal Reserve and the Bank of Canada (2%) until the end of next year.
OUTPERFORMING
Last year, we reported that we had been selectively adding to tech stocks. As expressed in the September 2022 issue of this blog, our view was that many growth stocks actually represented more value than value stocks. Among our additions were:
Amazon (up 27% year-to-date)
Google (up 19% YTD)
Visa (up 13% YTD)
Disney (up 13% YTD)
These companies have been leading contributors to our progress so far this year, in which we are again outperforming the market. But we are never done: we always carefully continue to monitor the market for opportunities to prudently increase our exposure to companies that we believe are trading at significant discounts to their intrinsic value. And overall, we view lower inflation and thus lower interest rates as positive for all asset classes: not just equities, but stocks, bonds and real estate as well. Thus we are judiciously putting money to work in all asset classes before – and that is the crucial qualifier, before – the market reflects our optimism and prices go higher.
With respect to long-term bonds in particular, in the last year we were buying more of them than ever before (as mentioned in our July, September and October 2022 blogs), because we thought the window to lock in higher rates would eventually close. And indeed, it has been closing – as evidenced by the drop in the yield of the 10 year-bond. Buying bonds is still a wise move for some investors, but with interest rates no longer increasing and having already come down, it is not the obvious choice it was as early as April of last year.
In a nutshell, for long-term investors, this is a good time to invest in all asset classes, and especially in undervalued businesses. I have had many conversations with clients on this aspect of our overall strategy. If you would like to talk about it, please reach out.
A NOTE ON ARTIFICIAL INTELLIGENCE (AI)
“Artificial intelligence is as revolutionary as mobile phones and the Internet.”
That’s what none other than Bill Gates wrote in a blogpost, “The Age of AI has begun,” on March 21st. His post is an extensive and helpful primer on what AI is, and how he sees it changing our lives. In summary:
“It will change the way people work, learn, travel, get health care, and communicate with each other. Entire industries will reorient around it. Businesses will distinguish themselves by how well they use it.”
We anticipate that the opportunity presented by AI, from an investing standpoint, will be substantial. As AI is a very rapidly-changing technology, it is too early to know how to be properly positioned. That said, we already own a number of companies that are themselves using and investing in AI technologies – giving us safe exposure while we develop an approach that fully aligns with our overall strategy, mentioned just above. We will keep you informed.
EARNINGS SEASON
We are currently in one of the year’s four earnings seasons, being the month or so after each quarter in which publicly-traded companies report their results. And there is good news: S&P 500 companies have had their best start to an earnings season since 2012. Ninety percent of them did better than expected and beat their Q1 targets.
This suggests to us that a recession, if it arrives this year, will be mild vs deep. It is common for the markets to decline many months in advance of a recession, but this effect will not be as pronounced if it looks like the recession will be mild. Regardless, if there is volatility, as always we will take advantage of it, by looking for underpriced assets to buy at a discount – provided they fit our very carefully defined investment criteria.
In fact, whether a recession is mild or deep is not a huge concern for us, because of our focus on buying assets with a margin of safety. By margin of safety, I am referring to companies that:
-we believe are priced below their intrinsic value – so we have more to gain when the market eventually recognizes their value
-pay dividends, so we benefit from more than just an increase in the stock price
-are able to pass along price increases to their customers, which is especially important in an inflationary environment
In summary, we expect a mild recession, but that the net effect will be positive for our clients’ portfolios, because it is during recessions that financial markets tend to recover. We also remain confident in our strategy for the long term.
KIMBERLEY PLEWES
I would like to put the spotlight this month on a new member of our unrivalled team of experts: Kimberley Plewes. Kim is a Philanthropic Advisory Specialist with RBC Family Office Services. She joined RBC after more than 15 years working in the charitable sector, engaging with families across North America to help them develop personalized strategies that aligned with their charitable giving goals. This experience provided Kim countless opportunities to build deep and meaningful relationships with many of Canada’s leading philanthropists in order to help them realize their charitable giving goals and engage in bespoke engagement opportunities.
With this unique perspective on the intersection of charitable gift planning and major gifts fundraising, Kim works alongside the wider group of RBC Family Office Services professionals to provide strategic advice and guidance to high net worth and ultra-high net worth clients in developing their charitable giving and legacy plans as part of their broader wealth management planning.
Based in Toronto, Kim is a member of the Canadian Association of Gift Planners, and holds the Master Financial Advisor – Philanthropy certification and an undergraduate degree from American University in International Studies with a focus on International Development in Africa.Kim works closely with us to identify strategies and solutions that merge your charitable giving intentions with your financial goals and objectives in a manner that addresses your overall wealth planning needs, which you would then discuss and implement with us and your accountant or lawyer as appropriate.
Interested in a meeting with Kim? Just reach out to our office.
Happy Spring!
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We don’t speak jargon. We’re all about uncomplicating your life, so we speak plain English. If there is someone you care about – someone who would appreciate this simple and straightforward approach – please feel free to share this message with them or put us in touch.
Want to discuss any aspect of this month’s blog, or any other issue on your mind? Have a story idea? I am always happy to receive your call or email.
Tyler Marche, MBA, CFP, FCSI
Your life, uncomplicated
tyler.marche@rbc.com
1-416-974-4810
www.tylermarche.com
WHO WE ARE
Tyler Marche, MBA, CFP, FCSI – Senior Portfolio Manager and Wealth Advisor
Tracy McClure, CPA, CA, CFP – Financial Planner
Joy Loewen – Associate
Jean Jeevaratnam – Administrative Assistant
Karen Snowdon-Steacy, TEP – Senior Trust Advisor
Steve Mogdan, CPA, CA – Financial Planning Specialist
Andrew Sipes, CLU, CFP – Will and Estate Planning Specialist
Alleen Sakarian, LL.B., TEP – Will and Estate Specialist
Kimberley Plewes, MFA-P – Philanthropic Advisory Specialist
**To learn about our unrivalled team of experts, delivering Canada’s widest array of wealth management services to our clients, visit our website, here and here.
WHAT WE DO
