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Our Mid-Year Report Card

July 10 to 14, 2023


Our Mid-Year Report Card

July 10 to 14, 2023


Market Recap

  • Equity markets struggled this week as a solid run of economic data stoked the higher-for-longer interest rate narrative. After going back and forth, and back again, pricing in rate cuts later this year, markets now seem to be finally throwing in the towel that this cycle is going to take longer to play out.
  • The S&P 500 slipped 1.2%, with materials and health care lagging, while banks held firm. The index has still broken strongly out of the trading range that was in place for most of the past year, and is eying the all-time high set in January 2022 (less than 10% to go).
  • Meantime, the TSX fell 1.6%, with widespread declines across technology, materials, energy and banks. Canadian stocks are now falling well behind their U.S. counterparts on the year, up just 2.3% versus 14.6% south of the border.

2023 So Far

As we pass the midpoint of 2023, it’s worth taking stock of the past six months in markets. If you look only at the numbers, it’s been a good year so far—the Nasdaq is up north of 20%, the S&P 500 is up more than 10%, and the Emerging Markets (EM), International (EAFE), and Canada regions are all in the +3-4% range. If you extrapolate those numbers out across the rest of the year, it would be solid results. But a closer examination of the data tells a different story. Performance year-to-date has been driven by only a handful of names; if you remove the top seven companies in the S&P 500, for instance, then growth is only around 3% rather than 10%. That’s still a decent number, but it’s not nearly as impressive as the headline figures would suggest. This is all happening because the recession continues to be pushed out further and further, and it has raised a number of questions, including—will interest rate hikes resume, like we’ve already seen from the Bank of Canada and expect from the U.S. Federal Reserve (Fed), and will that add pressure to markets like we saw last year? Needless to say, there’s some uncertainty as we head into the second half of the year. At the beginning of the year, markets had expected interest rate cuts sometime in late 2023. That now appears to be off the table until well into 2024 or even 2025. In the fixed income space, bonds largely performed as we expected in the first half of the year, in line with cash returns and with lower-quality bonds somewhat outperforming their safer counterparts. We’d expect that to continue into the second half of the year.

Bottom Line: Headline stock market numbers for the first half of the year are somewhat misleading, and while bonds have largely performed as expected, recession-related uncertainties remain for the rest of 2023.

Equities Outlook

Looking ahead, if we expect a pullback—which we do—then which sectors and geographies can be expected to outperform in the second half of the year? With lower-quality names likely to underperform amid uncertainties around the timing of a recession, we’re maintaining a bias toward Quality companies in our portfolios. That said, we do expect something of a rotation as valuations begin to come off. The big Technology names are Quality companies, but they’ve also got higher multiples. We anticipate a bit of a retreat for those names, though some of them may be protected by the artificial intelligence (AI) theme, which is still very relevant. Looking at geographies, we see similar catch-up potential. Canada, in particular, may do better moving forward, given that inflation may remain hotter than analysts were expecting and well above central banks’ 2% target. In that environment, Energy could excel, and investors are likely to turn to gold for protection. Overall, Canada can be expected to hold up better than other markets.

Bottom Line: A rotation in equity markets is likely in the second half of 2023, while Canada can be expected to outperform.

Fixed Income Outlook

While some analysts have dubbed 2023 the “Year of the Bond,” we prefer to think of it as the years of the bond. In the event of a major slowdown, or if markets continue along like they are now, fixed income is likely to do well. But if the Fed and other central banks decide to cut interest rates, that’s when bonds are likely to really shine. We anticipate that recent losses will be made up for by gains over the next few years. Cash, for its part, won’t be nothing—it can still be expected to provide a solid return. But we do think that bonds have more upside. If and when a recession does arrive, Investment Grade (IG) credit can be expected to outperform High Yield and Emerging Market Debt (EMD), as it typically does in a downturn. That doesn’t necessarily mean that IG won’t have negative returns, but it should outperform. Likewise, government bonds are likely to outperform in a recessionary environment. For now, however, Investment Grade is where we want to be. When we’re emerging from a recession, that’s when it’ll be time to pick up some High Yield exposure, as it tends to perform better on the rebound.

Bottom Line: Looking ahead, bonds are likely to perform well in a downturn and outperform if interest rates are lowered.


Reflecting on the first half of the year, our portfolios have performed exceptionally well, which can be attributed to three factors. First, our strong strategic asset mix and focus on a well-diversified portfolio, which drives long-term results. Second, we analyze everything from a risk-reward perspective—for instance, we took off our Energy position earlier in the year after having a fantastic run over the previous 12+ months, and we’ve used options strategies to generate additional returns for our clients. And third, we didn’t go nearly as defensive as many other asset allocators in the first half of the year; we mostly stayed neutral, because we correctly deduced that a recession wasn’t likely until late 2023 or 2024. In terms of our positioning going forward, our Equity weight is remining relatively neutral. We still think that recession risks are further down the road, and we’re not seeing enough of a slowdown in the economy to get too worried at the moment. The one potential near-term risk we’re monitoring is if central banks do more tightening. Geographically, we’re leaning a bit more towards Canada rather than EM; EM performance hasn’t materialized as we’d hoped (in part because of China’s underwhelming reopening), and as previously mentioned, Canada could outperform in a downturn. We’re neutral on bonds versus cash for the time being, though in the longer run, we think there’s more upside in bonds. And within the fixed income sleeve, we remain overweight Investment Grade credit.


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