Market & Economic Environment

Elvis Picardo

July 13, 2021

Equities continued to power ahead in June, as the TSX Composite traded over 20,000 for the first time and the S&P 500 capped its second-best performance in the first half of a year since 1998.

The TSX advanced 2.2% last month, led by outsized gains in the technology sector (+18.2%); the energy sector rose 5.8% as crude oil prices surged 11%, while real estate gained 3.9%. The materials sector slumped 6.4% as commodity prices retraced some of their recent gains.

In the first half of 2021, the TSX rose 15.7% thanks to solid, broad-based gains of over 7% in Q1 and Q2. As many as seven sectors in the index rose at least 15% in the first half, led by energy (+33.7%) and gains of over 20% in health care, technology and financials. The materials group was the only sector to finish marginally lower (-1.2%) over this period.

U.S. indices turned in a mixed performance in June, with the S&P 500 up 2.2% as it notched its longest streak of quarterly gains (5) since 2017; the Nasdaq Composite surged 5.5% while the Dow Jones was little changed. All three indices posted solid performances in the first half, with the S&P 500 up 14.4%, and the DJIA and Nasdaq gaining 12.7% and 12.5% respectively. Year-to-date, small-cap companies outperformed large-cap stocks by almost three percentage points, with the Russell 2000 +17.0% and the Russell 1000 +14.2%.

In international markets, most major European indices recorded gains in the mid-teens in the first half of the year, while gains were most restrained in Asian markets and the largest emerging economies (China, Brazil, India).

(Data Sources: FactSet and Bloomberg)

Our Strategy

After such a stellar performance by global equities in the first half of 2021, a repeat in the second half is quite unlikely. In recent weeks, renewed concern about the threat posed by the delta variant of Covid-19 has led to a stalling of the reopening trade, and a pickup in market volatility.

With risk appetite moderating, bond yields have climbed down and “risk on” currencies like the Canadian dollar have retreated. This means that two undesirable consequences of robust global growth – steep Canadian dollar appreciation and the possibility of inflation (as highlighted in our previous Updates) – pose less of a challenge to Canadian investors than they did earlier this year.

Our view continues to be that the fundamental economic backdrop is reassuring. Corporate earnings are forecast to reach record levels this year and consumer spending is growing at a healthy clip as pent-up demand during the pandemic is unleashed (as evidenced by the hordes of people traveling, vacationing and attending sporting events like the Euro Cup).

The rapid spread of the delta variant – especially among the unvaccinated population – is worrisome but is somewhat offset by the fact that most of the North American population has received at least one vaccine dose. Nevertheless, we will continue to monitor this situation closely.

The Portfolio Management Team (PMT) remains comfortable with the current asset allocation of client portfolios. We rebalanced all client portfolios in the last week of June, replacing most fixed income holdings with our proprietary Steadfast Income Fund. Although the PMT expects equities to retain most of the substantial gains made in the first half, we will continue to be vigilant about seasonal volatility and the heightened prospects for a pullback in the summer months.

Please contact any member of the PMT if you have any questions or concerns regarding your accounts.