Fluctuating oil prices is nothing new. We’re no longer surprised to see crude move +/- 4% in a day depending on the news, whether it be a production accident, an OPEC meeting or rising case counts. Most recently, oil has been under pressure on rising concerns over the demand impact of the next wave of infections. The contagious delta variant is already triggering renewed lockdowns in parts of China and other Asian countries where vaccination rates are low. This is a global concern, but we continue to believe that this remains a passing demand headwind, which can be offset by existing supply tailwinds.
Category: Weekly Insights
Earnings season is nearing its conclusion for the U.S. and it has been a great season. With 442 S&P 500 companies having reported, 85% exceeded earnings forecasts and 83% beat on sales as well. Looking at data over two decades, these are historically elevated positive surprise rates. Even more impressive has been the magnitude of the surprises. On average, earnings beat by +17% and revenue by +5%. Wow.
Coming out of halftime, North American equity markets have witnessed a leadership reversal among the major indices. Canada has slowed, rising +0.8% in July, remaining higher this year by a healthy 18.2%. While Canada has paused, our North American counterpart south of the border has picked up the pace. The S&P 500 rose 2.4% in July, reaching fresh new highs. In fact, the S&P 500 has made a new record high in each of the last nine months. Too easy.
There is a large cohort of investors that loves gold, and a large cohort that dislikes gold; we are neither. Our opinion on the yellow metal and gold mining companies changes over time. This is evident in gold allocation in our fundamentally driven North American dividend-focused portfolio over the past five years, from less than 3% to over 9% and currently sitting at 7%.
2020 will certainly go down as one for the history books. From record highs that suddenly slammed into a pandemic-induced recession triggering the fastest bear market in history, immediately followed by perhaps the quickest market recovery in history. The difference between money made (or protected) or money lost, often came down to which week during the turmoil an investor traded.
Looking back six months ago, we noted in our report that the setup for 2021 appeared ‘challenging’. Well, ‘challenging’ it was not.
With the severity of the pandemic, vaccinations in early days and valuations at exorbitant levels, one would estimate that was a fair
statement. An unbelievable run on equities so far this year has the markets defying everything from rising inflation to COVID-19
variants, with valuations in the nosebleed levels. No one can predict the future, but looking at chart 1, wouldn’t you agree that this
looks a little ‘too easy’? However, if equities were a worry six months ago, we would say the paranoia of a pullback continues to
Growth has been the dominant style for the U.S. equity market for pretty much all of the 2010s. Based on the S&P 500 style indices, growth beat value in every year from 2007-2020 with the exception of 2012 and 2016. That is dominance, and the cherry on top was a trouncing of growth over value in 2020 of +32.0% vs -1.4%. But in late 2020 the tide turned, and value started outperforming. All the stars were aligned for value including a sizeable valuation discount, the re-opening of the economy that would benefit value
due to the constituents being more economically sensitive, rising yields and rising inflation. And it looked like the great value rotation had started… until the last few weeks cast some doubt.
Nothing lasts forever – thankfully this includes pandemics. And while the path out likely remains a hilly road with ups and downs, people’s behaviour appears to be inching back towards normal. This is clearly good news. With each jab in the arm, we move a small step closer towards the new normal. This pandemic has obviously triggered a great number of advancements across medicine, logistics, manufacturing, etc. One of the advancements in the world of economics has been the rising use and availability of higher frequency data.
We do expect this inflation spike to fade as bottlenecks are resolved. However, how long is transitory? This elevated inflationary period could last longer than the bond market currently expects. Yields have remain flat, whistling past two high inflationary readings. What happens if we have a 3rd, 4th, 8th month of elevated inflation? We would bet yields will begin to rise in response.