The Market

In Q2 2024, global stock markets experienced mixed results amid varied economic conditions across regions. The S&P 500 achieved a gain of 4.3% during the second quarter, largely driven by significant increases in the technology sector, particularly semiconductor stocks and tech mega-caps. For instance, Nvidia’s stock surged by 36% during this period, reflecting the broader market enthusiasm for AI-related investments.

The Canadian stock market showed signs of resilience and potential for future growth despite facing some economic challenges. The S&P/TSX60 Index lost 1.3% this quarter, primarily due to disappointing performance by interest-rate sensitive sectors such as financials, utilities, telecoms, and energy.

The table below shows the market performance as of June 30, 2024, in Canadian dollar terms:

Performance

The table below compares the YouFirst portfolio composites with their respective FPX Benchmarks:

This quarter saw relatively flat performance, with both the YouFirst Growth and YouFirst Conservative Growth composites nearly matching the returns of their respective FPX benchmarks.

Year-to-date, the YouFirst Growth composite lagged behind the FPX Growth benchmark, primarily due to the difficulty in keeping pace with hot US markets, which are being driven by a few high-flying tech stocks.

For balanced investors, the YouFirst Conservative Growth composite continued to outperform the FPX Balanced benchmark for the year. Positive returns for bonds and money market securities offset the slight decline in equities within the portfolios. At quarter end, we remained underweight in bonds.

Portfolio Activity

Continuing from the previous quarter, we have increased our holdings in established Canadian dividend stocks, and created a new position in Bell Canada (BCE:TSX) for income-focused investors. We also added to shares of Canadian Pacific Kansas City Limited (CP:TSX) on a recent pullback, which has since recovered. Finally, we continued to top up allocations to global growth by adding to either the Manulife (Mawer) Global Equity Class (MMF4606) or the Manulife (Mawer) Global Equity Private Pool (MMF4027).

In Q2 2024, the Canadian fixed income market began to stabilize after a period of sharply rising interest rates. Despite inflation remaining slightly above the Bank of Canada’s target, softening economic momentum has allowed the central bank to begin tapering policy rates, starting in June with a 25 basis point (0.25%) rate reduction. This has led to a more balanced outlook for interest rates which benefits mid to longer-duration bonds. As a result, we have increased our allocation to BMO Aggregate Bond Index ETF (ZAG:TSX) for balanced and conservative growth clients. ZAG is invested in a diverse range of debt securities with an average term of 10 years and an approximate yield to maturity of 4%. It encompasses a broad spectrum of the Canadian investment-grade fixed income market, including Federal, Provincial, and corporate bonds.

Outlook

Equity markets this year have presented a paradox. Despite a challenging macroeconomic environment and unstable geopolitical landscape, many global equity markets are hovering near all-time highs. The market-cap-weighted S&P 500 performed well this quarter, but beyond the headline numbers, the equal-weight index fell by 3.1%, indicating that gains were concentrated in a few large-cap stocks rather than being broadly based across all sectors. Notably, consumer-related stocks and traditional industrial bellwethers suggest potential underlying weakness. This concentration has raised concerns among analysts about the low market breadth and the sustainability of the rally.

Economic growth is expected to decelerate through the remainder of 2024, potentially affecting corporate earnings and market sentiment, leading to a more cautious investment environment. Persistent concerns about inflation could prompt the Federal Reserve to hike rates again, which may negatively impact rate-sensitive sectors and the broader market. Additionally, companies might lower their earnings guidance due to the economic slowdown, resulting in negative market sentiment and increasing volatility.

Market valuations pose another risk, particularly in sectors that have seen significant gains, as overvalued sectors could experience sharp corrections if earnings do not meet expectations. Ongoing geopolitical tensions, such as those related to trade policies and international conflicts, can create uncertainty and volatility in the markets.

On a positive note, stock market growth is anticipated to broaden beyond tech giants, with potential gains in undervalued sectors such as small to mid-cap stocks, traditional higher dividend payers and value stocks. The market is expected to see more balanced returns as these sectors catch up which should also benefit YouFirst portfolios.

Despite a generally positive market outlook overall, the above risks highlight the importance of cautious and diversified investment strategies, focusing on purchasing high-quality companies at good valuations without succumbing to chasing the next market fad.

Yours Sincerely,

Simon Chun, P.Eng., CFA
President, Portfolio Manager

Doug Garner, P.Eng., CFA
Chairman, Senior Portfolio Manager

Jane Garner, BA, EPC
Client Experience

¹ BENCHMARK DISCLOSURE

Monitoring your portfolio’s performance by comparing it to a relevant benchmark is essential. A benchmark is an independent standard for evaluating performance, often represented by indices like the S&P/TSX for Canadian stocks, DEX Universe for Canadian bonds, or S&P 500 for U.S. stocks. To ensure meaningful comparisons, the benchmark should closely reflect the asset classes and allocation in your portfolio since most investors don’t have 100% of their portfolio in bonds or stocks alone.

Given that most investors have diversified portfolios, a percentage return alone doesn’t indicate true value. Comparing your portfolio against a passive benchmark provides a clearer picture of its performance. For example, if the benchmark returned 7% and your portfolio 8%, your portfolio performed well.

At YouFirst Financial, we use the Financial Post Index Benchmarks publicized by the Croft Group, specifically the FPX Balanced and FPX Growth. These benchmarks reflect commonly accepted asset mixes: 10% cash, 40% fixed income, and 50% equity for balanced investors, and 10% cash, 20% fixed income, and 70% equity for growth investors. They are rebalanced at least annually and exclude management fees and other charges.  Both benchmarks are presented in Canadian Dollars and on a total return basis.

For more information about comparing your portfolio’s return to a benchmark, please contact us.