In the last week of May, the Organization for Economic Cooperation and Development (OECD) raised its December forecast for global economic output from 4.2% to 5.8%. Developed nations are thriving on stimulus and successful vaccination programs. However, the OECD warns that the improved outlook will be uneven as some countries continue to struggle with Covid-19. The OECD’s outlook for Canada is particularly bright, with growth estimated to hit 6.1% this year and 3.8% in 2022 when the OECD expects to see the Bank of Canada raise its benchmark interest rate.
Markets in a nutshell!
The S&P/TSX climbed in May, reaching near record highs on the second to last day of trading, mainly led by the energy sector, and moderating somewhat to end the month in a positive month-over-month position. Impacted by the end-of-month holiday closures, U.S. markets, as measured by the S&P 500 and the Dow Jones Industrial Average, were flat on the month. European markets, also impacted by the end-of-month holiday, ended the month up 2.4% as measured by STOXX Europe 600. Disappointing economic data from Japan and China caused Asian markets to lose ground in May.
Our general position
The last time we spoke, we were on the tail end of earnings season. Though our companies reported strong earnings, the share prices didn’t necessarily follow, reflecting a continuation of concerns in the marketplace around inflation, interest rates, reopening, and some issues around positioning.
While the core parts of the portfolio held up reasonably well, the higher multiple, “next-gen,” and ESG stocks suffered because these businesses are so forward-looking. We’ve started rebalancing the portfolios toward broader and lower multiple companies as we look forward. We believe that we’re in a bull market, the market is strong, and it’s really this positioning issue that we’ve now addressed.
As the world economy is making a comeback, we are hitting bottlenecks that increase commodity prices and create transitory price pressure. We may stay in a long protracted economic expansion for years, where rates get higher and cyclical stocks to continue to work.
Our expectations?
We expect the next couple of months to be similarly volatile. The inflation data is something that people will myopically focus on quite aggressively, probably over the next couple of months. As we move into the back half of the year, it’s important to stress that many of these valuation concerns or bubbles in the marketplace are effectively being popped, yet the market is not going down. This sets us up well for the second half of the year because the companies we’re invested in are actually reporting solid results. Fundamentally they look strong, their earnings will continue to grow, and we expect them to continue to grow in the months and years ahead. Eventually, the market will focus on the fact that earnings growth drives stock prices over the medium term.
We’ve been here before, and we’ll be here again, and that’s generally what’s held true for us in the last 15 years, and we think it will continue to hold true in the future.
Should you have any questions, please do not hesitate to contact your NPW Advisor.
