Market Commentary

Making Cents of the Markets

Listen to this week’s Making Cents of the Markets on CKNW where we gave an update on Canadian interest rates & inflation, the major pitfalls of mutual fund investing and how to invest in these types of funds for specific purposes! Listen here.

Be in the Know

North American markets continued to soften this week as US markets closed down 1% while Canadian markets finished relatively flat as cyclical sectors such as real estate and industrials offset weakness from technology. The latest pull back in markets continue to center around market leaders within the technology, consumer discretionary, and communication sectors. We believe the latest weakness to be technical in nature as these sectors moved too far too fast and are simply checking back as investors have started to re-allocate capital to economically sensitive sectors.

The rotation of capital into other areas of the market is generally positive and illustrate that investors remain optimistic on a potential vaccine and the global economic recovery. The main focus this week was on the Fed interest rate decision out of the US as they plan to maintain a zero-interest rate policy through 2023. Fed Chair Jerome Powell stated that they would have to see maximum employment, an average inflation rate of 2%, and core inflation to be on track to exceed 2% for some time. This backdrop is positive for financial assets moving forward, though the delay on the latest stimulus bill has started to weigh on markets in the near-term.

Regarding economic data this week, in Canada, retail sales advanced 0.6% in July from the previous month as manufacturing sales rose 7% in July. Government support programs and low interest rates continue to support the rebound in our economy. The core inflation rate remains low in Canada at 0.8% from the previous year as it is far off the highs of 2% prior to the pandemic. Inflation is higher in the US and has re-accelerated to 1.7% due to a rebound in prices in clothing, air fare, and car insurance which leads us to expect that our inflation rate will follow suit as our economy re-opened later.

Our Strategy

Our portfolios continue to remain resilient in the face of the latest pullback as we started to add minor equity exposures across our mandates. We are still below our target equity allocations as we realize that markets can continue lower ahead of the US election in November. For this reason, we continue to focus on quality companies that have grown their profits through the pandemic which highlight the strength of their business models that we expect to strengthen further as the global economy recovers.

Managing downside risk has been the key to our success over many years which is why we are disciplined with rules in place to protect portfolios from excess downside and volatility. Though we are optimistic on market conditions, we are always open to unforeseen events which is why we have plans in place if conditions change. 2020 has been quite the eventful year which has strengthened our approach and portfolios for years to come.

Chart of the Week

To better illustrate the force behind the latest pullback in markets, we have provided a chart below which shows how the gap between mega caps (the top 10 stocks in the S&P) and the rest of the market is narrowing again. One can see that the top 10 stocks are down 12% off the recent highs while the bottom 490 stocks are only down 4%:

These top 10 mega caps include Apple, Microsoft, Amazon, Facebook, and Google which make up over 25% of the S&P 500’s market cap and have been responsible for driving the market higher since the lows in April and ultimately lower over the last few weeks. Given this large impact on the market, it is important to track these holdings closely to assist us with positioning which is why we are awaiting these names to turn higher before becoming more bullish with our positioning in equities.

Beyond the Markets

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The comments and opinions expressed in this newsletter are solely the work of Pinkowski Wealth Management, not an official publication of Canaccord Genuity Corp., and may differ from the opinion of Canaccord Genuity Corp’s. Research Department. Accordingly, they should not be considered as representative of Canaccord Genuity Corp’s. beliefs, opinions or recommendations. All information is given as of the date appearing in this newsletter, is for general information only, does not constitute legal or tax advice, and the author Pinkowski Wealth Management does not assume any obligation to update it or to advise on further developments related. All information included herein has been compiled from sources believed to be reliable, but its accuracy and completeness is not guaranteed, nor in providing it do the author or Canaccord Genuity Corp. assume any liability.