Market Watch: Aug. 28

In U.S. economic data, the Conference Board’s Consumer Confidence index hit a six-year low this month, while new home sales surged to a 13-year high in July.

U.S. stocks set records again Wednesday, buoyed by a rally in mega-cap tech shares and data showing that orders for durable goods in the U.S. surged 11 per cent in July. By Wednesday’s close, the Nasdaq was up nearly 200 points, while the TSX added 172, thanks in large part to the tech and financials sectors.

However, U.S. stocks wavered Thursday after Fed Chair Jerome Powell said the central bank would abandon its policy of pre-emptively raising rates to head off inflation. The takeaway for many is that it may be quite a while before the Fed even considers raising interest rates. The news sent 10-year Treasury yields up to 0.736 per cent, extending this week’s selloff in U.S. government bonds. By Thursday’s close the Dow and S&P finished in positive territory, while the Nasdaq and TSX were slightly down.

Finally, the number of Americans applying for jobless benefits fell a bit last week to 1 million, however, the number of unemployed remains historically high.

Another Strong Showing for N.A. Markets

For the four days covered in this report, the Dow rose 562 points to close at 28,492, the S&P 500 added 87 points to settle at 3,484, while the tech-heavy Nasdaq jumped 313 points to close at 11,625. In Canada, the TSX gained 213 points to end at 16,731.

Strategy

Equity market rally has benefitted from a promise of lower for longer interest rates, and a reversal could be painful.

The S&P 500 Index is up more than 7 per cent on a year-to-date basis, reaching new all-time highs, but the performance of its eleven underlying sectors has varied significantly.

The information technology and consumer discretionary sectors are up more than 30 per cent and 25 per cent this year, respectively, while the energy and financial sectors are down 20 per cent and 40 per cent respectively. The concern among investors is that the top-heavy rally may spell trouble for future returns.

Together, Apple, Amazon, Microsoft, Alphabet and Facebook constitute roughly 24 per cent of the S&P 500 Index. This is the highest concentration of top 5 companies by market capitalization since 1970 when the five largest names were in different sectors.

Technology companies have benefitted from the low interest rate environment as their future profits, which assume high growth rates, are discounted at lower rates, and result in higher present day valuations.

Any material increase in bond yields from improved recovery prospects, or more hawkish Federal Reserve monetary policy, could weaken valuations. Now, the Fed is not likely to shift its policy stance in the near future and while interest rates have room to inflate, we do not expect to see a meaningful reflation in the near-term.

Accordingly, we continue to believe that careful selection of individual securities, with a preference for quality holdings, will be essential drivers of portfolio performance.

Further, opportunistically deploying capital into core names should benefit long-term investors.

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Market Watch: Aug. 28

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