The rout continued on stock markets on Monday, giving investors a terrible start to August.
“It’s not an easy market. We’ve been seeing a fairly rapid rout since Wednesday afternoon,” says Philippe Côté, vice-president and senior portfolio manager at Eterna Investment Management.
Major U.S. indexes fell 3 percent Monday to start the week where they ended Friday. Disappointing U.S. jobs data released that day had shaken investor confidence in the strength of the U.S. economy.
PHOTO PROVIDED BY PHILIPPE CÔTÉ
Philippe Côté, Vice President and Senior Portfolio Manager at Eterna Investment Management
“The Fed said on Wednesday that it will not lower rates before September. That’s a long way off. The Fed has often been too slow to react and now the markets are starting to worry that the Fed may have made a mistake. The risks of recession are increasing,” comments Philippe Côté.
The expert warns to be careful not to react in panic on Tuesday when Canadian markets reopen, as a short-term low may have been reached on Monday.
A rebound or normalization could be observed for a few days.
Philippe Côté, Vice President and Senior Portfolio Manager at Eterna Investment Management
Mr. Côté points out that the U.S. market volatility index VIX – a measure or indicator of perceived anxiety – rose to nearly 70 during Monday’s session. “Most of the time, when the VIX goes above 50, the market is approaching a short-term bottom.”
While the Toronto Stock Exchange was closed Monday to mark the civic holiday – a statutory holiday in most Canadian provinces on the first Monday in August – several Canadian stocks listed on exchanges on both sides of the border posted declines during the first day of the week.
PHOTO AVA PELLOR, THE NEW YORK TIMES
The rout continued on the stock markets on Monday.
The Canadian market will therefore be partly in catch-up mode this Tuesday morning, as the shares of the major Canadian banks as well as those of CGI and CAE lost an average of 2% of their value on Monday.
Are we witnessing a turnaround?
“We could be seeing a turnaround in the stock markets,” believes portfolio manager Philippe Le Blanc, chief investment officer of the firm Cote 100.
He notes that the S&P 500 index rose just 1% in July, while indices with fewer technology stocks performed better: Canada’s S&P/TSX rose 6%, the Dow Jones rose 4.5%, and the Russell 2000 (composed of 2,000 smaller-cap U.S. companies) rose 10%.
PHOTO EDOUARD PLANTE-FRÉCHETTE, LA PRESSE ARCHIVES
Philippe Le Blanc, head of investments at Cote 100
“Without wanting to focus excessively on the short term, the market turnaround began on July 11, when an economic report indicated a lower-than-expected inflation rate in the United States. Since then, it has been mainly the megacaps in the index that have suffered, particularly the 7 magnificent ” he notes in a monthly comment sent to his clients over the weekend.
Investors learned late this week that Warren Buffett cut his position in Apple in half during the second quarter. The recent rise in interest rates in Japan sent the Nikkei index tumbling on Monday and appears to be weighing on big-cap technology stocks.
It is certainly too early to confirm a market reversal, but I remain convinced that the performance of 7 magnificent (Nvidia, Amazon, Microsoft, Meta, Alphabet, Apple, Tesla) will be lower than the rest of the stock market in the coming years.
Philippe Le Blanc, head of investments at the firm Cote 100
Philippe Côté does not necessarily contradict his colleague Le Blanc, but he does add a caveat. In his opinion, there are much more attractive titles than the 7 magnificent at the moment. “It’s hard not to have some in your portfolio, though, because it represents a large portion of the global economy,” he says.
Advice to investors
Before repositioning your portfolio more defensively—if you haven’t already—Philippe Côté says you should ask yourself whether the U.S. economy is heading into recession and whether the market is about to really suffer. It may then be wise to take advantage of a potential short-term rebound to make adjustments.
If an investor’s portfolio doesn’t have a lot of exposure to tech companies, he says, there’s no need to panic. “We’re not moving,” he says.
“If someone doesn’t have a lot of fixed income or dividend-paying stocks, this might be a good time to add to their position. There’s potentially an opportunity there,” he said.
In his opinion, the valuations given to companies in the technology sector were “much too high”.
PHOTO RICHARD DREW, ASSOCIATED PRESS
The S&P 500 is down 10% since July 19.
Extreme concentration
“It’s really the technologies that are correcting and we don’t find the same kind of overvalued stocks in Canada as in the United States. We are in a different situation,” he says.
“Don’t lose your bearings,” said portfolio manager Jean-Paul Giacometti of Montreal firm Claret in a late-day comment Monday.
PHOTO IVANOH DEMERS, LA PRESSE ARCHIVES
Jean-Paul Giacometti, portfolio manager at Claret
Are you losing sleep over the possibility of a decline or would you just like to be more cautious? You can increase your cash to around 10-15% of your portfolio. That way, if the decline continues, you can buy at a better price.
Jean-Paul Giacometti, portfolio manager at Claret
Seeing markets decline 10% in a year is not at all abnormal, he says. And the S&P 500 is down 10% since July 19. More concerning, he says, is the concentration of the S&P 500.
“Do you really want to put almost all your eggs in one basket? The six largest companies in the 500 largest in the United States have a weight of almost 30% of the index. Holding these companies, yes, but in these proportions? It seems risky to us. Moreover, is it possible that these companies will continue to grow faster than all the others in the long term? Doubtful, because if that is what happens, they will end up swallowing everyone else. Unlikely, it seems unlikely to us.”