Always be wary of predictions

As we mentioned last quarter, economists' and stock market strategists' predictions are not to be trusted. While, according to them, a recession and stock market decline were imminent, quite the opposite has occurred. The economy is resilient despite successive interest rate hikes by central banks, and there is much less talk of recession.

No recession means more profit for companies, which explains why investors who were selling in the first quarter are now buying in droves, pushing their share prices higher. The US stock market appreciated by 8.7% over the quarter and 16.9% in 2023. As is usually the case, the stocks that suffered most during the downturn - technology and growth - are leading the way. Recently, the rise has spread to other sectors of the stock market, including small-cap stocks.

Unfortunately for first-time buyers, house prices have risen again, along with borrowing costs.

A sign that there is less fear of a recession, bond prices fell over the quarter. If you have too little in your wallet, now might be time to buy some! Don't take this as a prediction, just as sound risk management advice.

Have a nice summer!

Market Review

Canadian equities: rescued by tech

Canadian equities closed the second quarter up 1.1% (+5.7% for the year to date).

Although the technology sector accounts for just 8% of the Canadian index, its 16.5% return enabled Canadian stocks to close in the green for the third consecutive quarter. Shopify - which alone accounts for over 45% of the sector - saw its share price appreciate by 32% over the quarter.

It was a more difficult quarter for the materials and energy sectors, which closed down 7.4% and 1.3% respectively. Fears of the impact of an economic slowdown on demand for building materials and commodities were the main factors.

US equities: driven by tech

As in the previous quarter, technology and growth stocks accounted for much of the S&P 500's 6.2% performance.

After being battered in 2022, the Nasdaq index had its best first half in 40 years, up 32%. There are two major reasons for the recent performance of growth stocks.

On the one hand, they benefit more from signs of slowing inflation, while their valuation is much more sensitive to changes in interest rates.

On the other hand, there has been an upsurge in investor interest in artificial intelligence. This has mainly benefited the biggest technology companies - likely to lead the parade in this next era of computing.

At one point, nearly 85% of the S&P 500's performance was attributable to 7 technology companies, including Apple, Microsoft and NVIDIA. However, the recent performance of small-cap stocks and cyclical industries such as aviation and automakers shows that optimism seems to be spreading throughout the market.

International equities: Japan up sharply

Japanese equities were the best performers worldwide, both for the quarter (+14.5%) and for the first half of the year (+22.1%). However, given the yen's 10% depreciation against the CAD, the Japanese stock market's return for Canadian investors was 3.1% for the quarter and 8.9% for the year to date.

This wave of enthusiasm for the Japanese market comes shortly after the Tokyo Stock Exchange implored companies to focus more on growth and value. At the same time, the country is enjoying solid economic growth, with low interest rates and a weak currency, which explains the excellent returns of recent months.

It was a quiet summer on the European markets. The STOXX 600 index of European equities rose by 1.5% over the quarter, led by the technology and financial sectors.

The MSCI index of international stock markets rose by 0.3% (in CAD) over the quarter.

Emerging markets: China plays spoilsport

The downturn in Chinese equities continued in^Q2 , dragging down the emerging markets index as a whole (-0.6% in CAD over the quarter).

China's economic recovery following the reopening of its borders is already showing signs of slowing as their shares closed the quarter down 9.2%.

In contrast to the Chinese stock market, an encouraging economic outlook resulted in excellent quarters for India (+13.2%) and Brazil (+16.0%).

The Taiwanese and South Korean stock exchanges also stood out, benefiting from investor interest in technology stocks likely to incorporate artificial intelligence.

Bonds: be wary of predictions

The economy is surprisingly resilient, and it looks like central banks will have to raise rates a little further to bring inflation back to target. This was all it took for the bond market - which is still trying to anticipate future inflation - to take pause. Bond portfolios fell by 0.7% over the quarter, while yields on 10-year bonds rose by almost 0.35% in the US and Canada.

The decline in bonds was more than offset by the rise in share prices over the quarter. Sooner or later, the opposite will happen and bonds will do the work. That's what portfolio balance is all about.