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Smart Money

Our regular summary of the capital markets. Check back each month for new updates.

Smart Money

July 29, 2022

Mid-Summer Relief

Market Recap & Boxscore

A rally in the back-half of July propelled stock market indices to a positive month. The MSCI World led the way, up 5%, while the S&P 500 followed with a 4% return. The TSX lagged, with a gain of under 1%, as the heavy weight in Financials and Energy slowed the year-to-date leader. Interestingly, it was the year-to-date losers that guided the S&P 500’s 11% rally off its June l...

A rally in the back-half of July propelled stock market indices to a positive month. The MSCI World led the way, up 5%, while the S&P 500 followed with a 4% return. The TSX lagged, with a gain of under 1%, as the heavy weight in Financials and Energy slowed the year-to-date leader. Interestingly, it was the year-to-date losers that guided the S&P 500’s 11% rally off its June low. Consumer Discretionary and Tech stocks registered gains of nearly 12% and 10%, respectively. The sole outlier was Communications as Meta Platforms Inc. produced quarterly results that once again disappointed across almost all metrics. The company, formerly named Facebook Inc., accounts for 24% of the Communications sector.

Commodities continued to weaken in July. Corn fell over 19% and WTI oil and copper dropped 13.4% and 7.9%, respectively. Gold slumped 3.9% during the period. However, real rates and the U.S. dollar faded into month-end, allowing gold to rebound 4% off its July bottom.

About half of the S&P 500’s constituents have reported Q2 results. It was feared that earnings would fall far short of analyst consensus estimates. However, panic has not materialised. Refinitiv reported 69% of companies beat expectations. Moreover, the reaction to company results has been an important difference from prior quarterly reporting periods. For instance, Microsoft Corp. and Alphabet Inc. both reported revenue and earnings that fell short of expectations. Nevertheless, their share prices popped 7% and 8%, respectively, on the day. This is in stark contrast to the relentless selling that greeted even strong earning reports earlier in 2022.

Continuing on the topic of counterintuitive follow-throughs, U.S. GDP fell 0.9% in the second quarter, which followed a 1.6% decline in Q1. Agreement on the definition of a technical recession is contentious. However, it is undeniable that the economic landscape is far from rosy given the clouding job picture and two consecutive negative GDP prints. Despite the GDP report on 28-Jul-22, stocks failed to give back any of the outsized gains that accrued following the Fed’s announcement of a 75bp rate increase a day earlier.

In our previous Monthly Recap, we commented about the profound weakness in the equity markets to start the year. In consideration of the first half bust, the outsized short position in S&P 500 futures and the low level of gross exposure among hedge funds, it is not overly surprising that stocks rallied in the face of negative economic news. Time will tell whether this is simply another aggressive bear market rally or if the bounce is more durable. For insight into the possible market direction going forward, there are three key indicators that require constant evaluation (i) the U.S. Dollar, (ii) credit spreads, (iii) the yield curve. The USD, represented by the DXY, is a key measure as it gauges the Federal Reserves determination for fighting inflation and it acts as a safe haven in times of stress. It rose another 2% in July, though it backed off 3% from the high on 14-Jul-22. The yield curve became negative during the month. The short end of the curve is lifted due to the Federal Reserve rate hikes while the bond market anticipates an economic slowdown and lowers bond yields on the long end. Despite the strong dollar and the recession signal, credit spreads tightened which typically suggest a willingness to take more risk and potentially improving economic conditions. The ICE BofA US High Yield OAS contracted from 5.26% to 5.07%. One month does not make a bull market, but there is an opening for additional upside, if the USD softens more and the yield curve re-steepens.

July 15, 2022

How Did We Get Here?

Second Quarter Newsletter

Brutal Quarter Confirms Bear – The S&P 500 entered bear market territory during the quarter, falling 16.1%.  Mid-way through June, the benchmark was down as much as 24% from its peak. Persistently high inflation, leading to a hawkish (less accommodative) Federal Reserve combined with an economic slowdown were the drivers behind the weakness. The commodity-heavy S&P/TSX Composi...

Brutal Quarter Confirms Bear – The S&P 500 entered bear market territory during the quarter, falling 16.1%.  Mid-way through June, the benchmark was down as much as 24% from its peak. Persistently high inflation, leading to a hawkish (less accommodative) Federal Reserve combined with an economic slowdown were the drivers behind the weakness. The commodity-heavy S&P/TSX Composite fared much better. However, in the back-half of the quarter, the sectors that were supporting the Canadian index faltered as oil and gold prices lost momentum.

The performance of bonds has been perhaps the more concerning development over the quarter and really the last year. These typically “low risk” investments registered double-digit losses over the trailing 12-months. Late-cycle behavior continues to unfold with wider credit spreads and an inverted yield curve.

The Seven Sins of Inflation – Inflation is a rise in the average cost of goods and services over time. Financial markets measure inflation through the Bureau of Labor Statistics, which compiles data to determine the Consumer Price Index (CPI). The average rate since the Second World War is 3.76%. However, the 10-year moving average is just over 2%. In June, CPI touched a 40-year high of 9.1% year-over-year. Although we continue to believe that structural forces remain in place that make it difficult to maintain a level greater then 4%, it has been the combination of these seven forces listed below that lead us to where we are today. The first two are more long-term in nature and give us the most to think about while the others are supply side shocks, corporate greed, and geopolitical events.

– (1) Rising labour costs in China due to a shrinking working age population and increasing Gross Domestic Product per capita.

– (2) Political forces and capital allocation that favours Environmental, Social & Governance (ESG) have led to under-investment in conventional energy sources.

– The global pandemic of 2020 is responsible for three contributors to the rising inflation prints; (3) trillions of dollars spent in relief packages in the United States, (4) labour shortages as workers left the labour force and (5) supply chain disruptions.

– Public equity valuations are driven primarily by revenue growth and profit margins. Corporations have relied on (6) price increases to stabilize margins to offset rising labour costs and raw material expenditures.

– Finally, (7) the Russian invasion of Ukraine had a direct impact on energy and food prices. Sanctions against Russia removed oil and natural gas supply from the global market at the same time blockades have trapped corn and wheat in one of the world’s largest producing regions.

The factors combating these inflationary forces are mainly structural. The level of national debts, aging populations and a stronger U.S. dollar should alleviate some of the upward pressure on inflation over the long-term. However, it does not appear that we will quickly return to the often cited 2% level of inflation. National interests are now at the forefront of geopolitics. As such, the ESG, supply chain and rising cost concerns overseas have raised awareness of domestic dependence on globalization.

For today’s investors, inflation is vastly outpacing cash savings. Prices double every 19 years based on the post-WWII average inflation rate (3.76%). As a result, protection against the loss of purchasing power for long-term investors is paramount.

Fixed income investments were designed to provide real returns (returns after accounting for inflation) but over indebtedness and lower growth have suppressed long-term yields. Stocks have a mixed track-record when isolating inflationary periods, but in general have held up well. Public market sectors tied to natural resources and real assets have performed the strongest, along with real estate. GAVIN attempts to accumulate these assets during periods of below average inflation when the risk/reward is skewed in our favour. This includes our farmland participation, private and public real estate strategies and commodity investments.

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July 07, 2022

Retiring at 28

Smart Money

If the players who were drafted in 2012 started their NHL careers when the lockout ended in 2013 and continued to play in the league through the conclusion of last season, they would have maximized the NHL pension benefit. The top 5 picks in 2012 were Nail Yakupov, Ryan Murray, Alex Galchenyuk, Griffin Reinhart and Morgan Reilly. The age of these players is 28 years old. As we look fo...

If the players who were drafted in 2012 started their NHL careers when the lockout ended in 2013 and continued to play in the league through the conclusion of last season, they would have maximized the NHL pension benefit. The top 5 picks in 2012 were Nail Yakupov, Ryan Murray, Alex Galchenyuk, Griffin Reinhart and Morgan Reilly. The age of these players is 28 years old. As we look forward to this week’s NHL Entry Draft, we also want to celebrate the players who accumulated the maximum NHL pension credits with the completion of the 2021-22 campaign. Accordingly, we summarized the defined benefit pension program’s facts and features in the link below. Good luck to the players available in this week’s draft and congratulations to those who have achieved their maximum pension!

Pension Plan Summary

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