Financial planning | Stock markets: beware of mirages

A quick glance at the movements of the US stock indices S&P 500 and NASDAQ gives the impression that we are having a great year in the stock market. They show increases of almost 15% and 30% respectively. But this could be a mirage, warns Guy Côté, portfolio manager at National Bank Financial. Overview.

Looking more closely, we see that the Dow Jones indices in the United States and the S&P/TSX in Canada are both struggling to stay in positive territory. The reason is that a few big titles in the technology sector, Google, Meta, Microsoft and Apple among others, distort the situation. Given their weighting in the NASDAQ index first and, to a lesser extent, the S&P 500 index, their performance following the runaway for everything directly or indirectly related to artificial intelligence make these stock market giants the source of these results.

“If you ignore these few stocks, the stock markets are producing very little return this year,” concludes Guy Côté.

The likelihood of a rapid change in investor attitudes remains rather slim for now. Interest rate hikes over the past year have dampened their enthusiasm for just about anything other than technology.

Even Canadian banks, which want to be the anchor for Canadian investors looking for yield and security, have not held up since the summer and are posting significant declines for the year.

During the last meeting, on September 23, of the American Federal Reserve, the president, Jerome Powell, left no ambiguity regarding an imminent reversal of the trend in interest rates. There could even be a further increase before the end of the year. Based on interest rate futures markets, the probabilities are 38% in the United States and 56% in Canada, points out Guy Côté. “We don’t seem to have reached the pivot point in interest rates yet,” he said.

What to do then?

Savers and investors are certainly disappointed with their performance so far this year, but they must still understand that there is nothing catastrophic about it, underlines Daniel Chartier, portfolio manager at Desjardins Securities. “Looking back 10 or 15 years, we see that we have experienced much more unpredictable periods, such as the 2008-2009 financial crisis and the pandemic,” he says.

Despite a difficult context at the moment, the fundamental rules of good portfolio management do not change, according to him. “The allocation of assets according to their objectives remains for the investor the cornerstone of their investment strategy,” he says.

We must also avoid securities that have reached very high valuation multiples, especially those with high debt, according to him.

Furthermore, the situation is conducive to taking advantage of the high rates of return offered by fixed-income securities, namely certificates of deposit and bonds, he believes. As for the stock markets, banks and the telephone sector, thanks to the dividends they pay, are becoming more and more attractive, he emphasizes.

Room for caution

As we still do not know where the pivot point for interest rates is, the context lends itself to caution, believes Guy Côté. For him too, the banking and telephony sectors are interesting, as is cash which offers a good return without risk. It would also add the basic consumer sector, namely basic necessities and retail trade.

As for technology stocks, he needs them in his portfolio to ensure a good balance. “Artificial intelligence will continue to be a growing sector, but you have to be opportunistic and disciplined enough to buy these stocks during corrections,” he says.