At the close of business last Friday, global equities declined on the week, with a sharp uptick in volatility. The yield on the US 10-year Treasury note increased to 3.26% from 3.15% as investors assessed the central banks’ increased hawkishness. The price of a barrel of West Texas Intermediate crude oil declined to $110.27 from 120.50 while volatility, as measured by the Cboe Volatility Index (VIX), rose to 33 from 27.8 a week earlier.
The month of June has continued the trend we have experienced year to date. The companies in your portfolio reporting are largely beating earnings estimates and yet we see the stock prices of these companies continuing to sell off. The ongoing battle between interest rates, inflation, and the economy is top of mind. These days, growth stocks are viewed as cyclical and inflation as secular. Over the past 7 months, the underperformance of growth stocks as a group relative to the market has now exceeded every period going back to 1952. On a price-to-sales basis, one has to go all the way back to 1960 to find growth stocks this cheap relative to the market. The most frustrating part of this has been a disconnect between the collapsing market and the continually rising outlooks for the companies in your portfolio. We are seeing portfolio companies deliver sales and earnings growth rates that are higher than many of these companies had pre-pandemic, and sometimes, are accelerating over 2021.
I understand people are questioning the growth and the estimates given recession fears. The stock market falling while earnings estimates continued to climb has happened only twice in the past 40 yrs: 2002 and 2011. In both cases, while earnings estimates eventually fell somewhat, the market recognised it as fleeting and, in both cases, it was a significant opportunity. During my nearly 42-year career, I have managed through these types of periods in the markets and several that were significantly worse. These types of bear markets are never easy and never fun. While the market is now embedding an 85% chance of a recession, I have yet to see the longer-term secular outlook change for the companies in your portfolio. In my opinion, this historic and severe dislocation has created a generational opportunity for growth stocks for those fund managers that are actual stock pickers.
Pressure on crypto intensifies
News early in the week that decentralised finance platform Celsius had frozen withdrawals sent cryptocurrencies skidding lower, with bitcoin falling close to $20,000. US Securities and Exchange Commission Chair Gary Gensler warned consumers on Tuesday to beware of the sky-high interest rates some decentralised finance platforms are offering. Since topping out at around $69,000 in November, bitcoin has slumped roughly 70%.
CANADIAN ECONOMIC NEWS
The Canadian market had its worst week in more than two years as investors faced the reality of higher interest rates to bring down stubbornly high inflation. The central bank of Canada has raised rates three times this year from 0.25 percent as recently as March to 1.5 percent now. The Bank of Canada is expected to raise rates again in July to a level not seen since before the financial crisis in 2009.
US ECONOMIC NEWS
Fed quickens rate hike pace
In reaction to last Friday’s stronger-than-expected Consumer Price Index and jumps in several measures of consumers’ inflation expectations, the US Federal Reserve hiked its federal funds target range by 0.75%, the largest rate hike in 28 years. Looking ahead, Fed Chair Jerome Powell said the committee is likely to raise rates either 0.50% or 0.75% at its July meeting, part of a series of further hikes designed to get the federal funds rate into restrictive territory by the end of the year.
EUROPEAN ECONOMIC NEWS
Switzerland raises rates for first time since 2007
In a sign of how hawkish central banks have become, the Swiss National Bank surprised markets on Thursday by raising rates by a half-per cent to -0.25%.
Bank of England hikes again
On Thursday, the Bank of England raised rates for the fifth straight meeting, bringing the bank rate up to 1.25%. Further hikes are expected despite a sharp slowdown in growth in the United Kingdom as consumers struggle amid surging food and energy costs. Taiwan and Hungary also hiked rates on Thursday.
JAPAN, CHINA and EMERGING MARKETS ECONOMIC NEWS
The Bank of Japan is often seen as having an exceptionally loose monetary policy. Unlike other central banks, which are tightening policy, the BOJ held rates steady and reaffirmed its commitment to cap 10-year Japanese government bond yields at 0.25%. With global interest rates surging, the BOJ has been the outlier, maintaining its super-loose monetary policy, which has led to a dramatic weakening of the yen. The BOJ said it is closely monitoring the yen’s movement.
Did you see our exciting news, either in an email announcement or on LinkedIn? Here it is: Nels Nelsen has joined the Dream Harbour team as a Financial Advisor. This is a very special moment for us because Nels is a superb advisor—and also because Nels’ dad Derek, who passed away in 2019, was a very close friend of mine.
Derek was himself an outstanding financial advisor for 30 years, and Nels decided some time ago to follow in his footsteps. Here at Dream Harbour, Nels will be working closely with both myself and Mike Tsuboi, learning our Total Package Planning™ proprietary financial planning system, and assisting in developing financial plans for our clients.
The story of Nels’ journey is a fascinating one, which you can read in his new bio, here on our website.
And once again: Welcome, Nels!