Markets Continue to Rebound

Our Recommendation: Stay the Course

At the close of business last Friday, global equities rose this past week as markets anticipated that slowing economic growth and rising recession risks will keep central banks from significantly tightening monetary policy much beyond year-end. The yield on the US 10-year Treasury note declined another 15 basis points to 2.75% this past week. The price of a barrel of West Texas Intermediate crude oil was little changed at $97. Volatility, as measured by the Cboe Volatility Index (VIX), fell to 21 from 24.7 a week ago.



Slowing growth in focus after soft PMIs
Developed economies continued to slow in July, flash purchasing managers’ indices showed on Friday. In the euro zone, the composite PMI dipped to a 17-month low of 49.4 in July from 52 in June while in the United Kingdom, it declined to 52.8 from 53.7. In Japan, the composite slipped to 50.6 from 53.0. The composite PMI in the United States slumped to 47.5 from 52.2 on the back of a large decline in the services component. Amid a stepped-up pace of monetary policy tightening, yield curves continued to flatten this past week.

Survey shows fund managers are avoiding risk
The Bank of America Global Fund Managers’ Survey showed that equity allocations have fallen to their lowest levels since the month following the collapse of Lehman Brothers in the fall of 2008, while managers maintained their largest cash cushion since 2001. Fifty-eight per cent of managers said they are taking smaller-than-normal risks, a lower level than that recorded at the depths of the global financial crisis. Contrarians would contend that such bearish readings could set the stage for a short-term oversold bounce in equities.

We believe we are in the early stages of a growth rebound and are continuing to work on our thesis. Numerous headlines over the past year have documented a long list of growth managers abandoning their discipline. It is eerily similar to the 1970s. Many of the founders of growth investing walked or were driven away from the business. But by the mid to late 1970s, growth investing was back with a vengeance. A few of the former leaders performed, but mostly a new group of companies, like Wal-Mart and Home Depot, led the great bull market of the late 1970s and 1980s.

This familiar signpost is encouraging, and it is clear that the best years are ahead for growth investing. But our real excitement comes from the fact that several growth managers are buying stocks regardless of whether they are growing or have any prospects for growth beyond the next quarter.

While the talking heads will debate whether we are in a cyclical or secular bull or bear for the next several years, we believe that the coming years will see new companies emerge and provide investors with substantial returns, even if the indexes fail to perform. History will be repeated. Profit growth is not continuous, it follows a life cycle. New companies are born while others fade away. New industries emerge and old ones get reinvented. Companies caught standing still are replaced by stronger competitors with new ideas and better management. Economists call this creative destruction, which causes old companies to disappear, merge or meander, while the next generation of winners emerge and deliver outstanding performance. We believe nimble and active fund managers have an enormous advantage over the next few years.

The list of new or reinvigorated growth companies abounds. Bear markets end. New leaders emerge. We remain disciplined and committed to our philosophy.



I think everyone in our client base is feeling the squeeze of an increased cost of living. Our central bank says our inflation rate is set to remain painfully high for the rest of the year. Currently, our inflation rate is 8.1 per cent. Having said this, we think inflation has peaked and will slowly come down in the months ahead, remaining above 4 per cent by year end and returning to the 2 per cent level by mid-2023. For now, higher interest rates are the norm. We have been asked this question often in the last few weeks. Should I consider locking in a fixed rate or staying variable? If your cash flow can support the higher variable rates, stay variable as the spread between a 5-year fixed and variable remains significant. In 2023, we expect to see rates coming back down, which means your variable rate will also come back down.



Earnings News

With about 21% of the constituents of the S&P 500 Index having reported for Q2 2022, blended earnings per share show that earnings growth is running at 5% compared with the same quarter a year ago, while sales rose 10.7%. Several financial services and technology companies announced hiring slowdowns or freezes on recent earnings calls.

US home sales continue to cool amid higher rates, prices
Sales of existing homes in the United States declined 5.4% in June from May. Despite the sales decline, prices continued to rise, with the median national home price going up to $416,000. High prices combined with higher borrowing costs have led to five consecutive months of falling sales. Housing starts fell in June too, by 2.2% as sentiment among US homebuilders declined to the lowest level since the start of the pandemic.



ECB surprises market with half-point hike

After all but pre-announcing a month ago that it would raise interest rates 0.25% in July and a further 0.5% in September, the European Central Bank surprised markets by raising the policy rate 0.5% to 0% on Thursday and communicating that further hikes will be considered on a meeting-by-meeting basis. The rise was the first since 2011. Like the US Federal Reserve last month, the ECB set the stage for a larger-than-promised hike, with leaks to the press on Tuesday. The central bank also unveiled its new transmission protection instrument (TPI). The tool will be used when unwarranted, disorderly market dynamics pose a serious threat to the transmission of monetary policy across the euro area.

Exit the Draghi
Italian Prime Minister Mario Draghi resigned his post as prime minister on Thursday after failing to secure the backing of three of Italy’s four largest parties, which declined to back his reform agenda. The collapse of the government comes at a difficult time for Italy as it deals with surging inflation, an energy shortage, and the need to implement structural economic reforms to secure recovery funding from the European Union. Elections are scheduled for 25 September.

Nord Stream back online
Russian President Vladimir Putin said that Russian energy company Gazprom plans to fulfil its contractual obligations to deliver gas to Germany, but that capacity may be reduced due to equipment repairs. The EU continues to prepare for a total shutdown of Russian gas shipments, asking member countries to cut gas demand by 10% to 15% while preparing to ration gas should Moscow turn off the tap. The European Commission estimates that a total gas cutoff by Russia would shave the EU’s GDP by 1.5%. On Thursday, the flow of gas resumed through the pipeline at 40% capacity, the level at which the pipeline was operating before being shut down earlier this month for maintenance.



The Bank of Japan held rates steady at -0.1%, with the central bank’s governor, Haruhiko Kuroda, saying he had absolutely no intention of raising rates or of raising the central bank’s 0.25% cap on the 10-year Japanese government bond yield. On Friday, data showed that consumer prices rose 2.4% in June from a year earlier but that core inflation went up just 1%.



Have you been working out? Maybe you have or maybe you haven’t—we won’t judge you either way—but there is one thing in your life that should definitely break a sweat: every dollar you make.

Every dollar should be working hard is such a strong belief among our Dream Harbour team that we included it in our list of brand values. To see all of those values, just click:








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