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June Market Perspectives

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June 7, 2023

Since the beginning of the year, U.S. economic data pointing to “stickier” inflation environment has resulted in markets pricing in more interest rate hikes than expected, which would normally lead to a risk-off sell-off. However, this dynamic has been ignored as of late. Over the past couple of weeks, core Personal Consumption Expenditures (PCE), ISM Manufacturing Prices Paid Index, and average hourly earnings have highlighted that despite the lower trend in inflation, the path forward, although likely lower, won’t be linear and that the final few per cent to reach the target will be difficult.

As a result of the current inflation dynamic, the odds of interest rate hikes in July have increased to 55%, while the odds of cuts in November and December have all fallen to approximately 50% and 65% respectively.  Despite the increased odds of more rate hikes ahead, the S&P 500 and Nasdaq have rallied 9.6% and 24% year-to-date and a whopping 5.9% during the month of May for the Nasdaq.

When 2023 commenced, I believed markets would produce average-like returns with risk to the upside for U.S. equities. I mean statistically after a year like we had in 2022 it’s very common. Yet less than halfway through the year, markets have already reached those levels. In saying that, the drivers of returns don’t breed that much confidence. The rally has been very top heavy and the companies leading the way have largely been associated with the artificial intelligence (AI) euphoria that has captured the hearts of investors.

See attached and enjoy the read as we discuss and recap the month of May in financial markets, discuss the breadth of the rally in the S&P 500 thus far in 2023 and what this means for investors. While there are several reasons to think stocks can end the year higher than where they are now, we recognize and keep a close eye on the risks in the short-term.

In Summary;

·      The U.S. stock market continued to display resilience in May, although a closer look shows this was mainly due to the outperformance of the few tech giants against a backdrop of optimism about advances in artificial intelligence, AI.

·      One thing is for certain: big tech companies deserve the label of ‘giants’ with Apple, Microsoft, Alphabet, Amazon, Tesla, Meta, and Nvidia being bigger than the major Canadian and Emerging Market stock indexes combined. That said, the bigger question is how far and for how long will these stocks be able to support the entire stock market?

·      Broadly speaking, while markets have cheered the slowdown in inflation alongside a better-than-expected global economy up to now, the rest of 2023 is looking trickier as signs of employment weakness begin to emerge and core inflation remains uncomfortably high.

Regardless of what’s in store for us as investors next, one thing you can count on is that you have a partner in your corner that is prepared and ready to navigate you. I am here for you every step along the way in your investment journey.

-Aaron Pedlar

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