Lexicon Financial Group Weekly Update — July 10, 2024
“Yesterday’s the past, tomorrow’s the future, but today is a gift. That’s why it’s called the present.”
From the desk of Craig Swistun, CIM, MFA-P, Portfolio Manager, Raymond James Investment Counsel, and Wayne Hendry, Client Relationship Manager, Raymond James Investment Counsel
Looking Around
Some scientists would suggest that time is an arrow, moving forward in a single direction. This negates the possibility of travelling back through time, which would be disappointing because so many great books and movies are based on that premise. HG Wells wrote about time travel famously in his 1895 novel, The Time Machine, for example. It also means the likelihood of encountering the Terminator or Marty McFly are slim.
In the 2000 film, Frequency, starring Dennis Quaid, a man from the present provides someone from the past with a wealth-changing stock tip. If only investing were as easy as talking to time travellers.
Without calls from the future, portfolio managers rely on data to make decisions. Prudently, it’s not sufficient to rely on data from any single source, especially since we focus on building well-diversified investment portfolios. And we all know that past performance is not an accurate predictor of future returns. Want proof? The stock that was quoted in the film Frequency was Yahoo. In January 2000, shares for the company closed at an all-time-high of $465.00, making it, at the time, the most valuable company in the world with a market capitalization of over $125 billion. Yahoo was sold to a private company in 2016 for $4.6 billion. The stock tip from the future should have come with a sell order.
We don’t need a time traveller to remind us how 2024 has unfolded. The first half of 2024 has been positive for global equity markets. In fact, the Morgan Stanley Capital International (MSCI) All Country World Index (ACWI), which tracks broad global equity-market performance, has gained 11 per cent since January. This despite the fact that the predicted global interest-rate-cutting frenzy has not yet materialized. Forecasts of a flood of interest rate cuts in 2024 have amounted to little more than a trickle in Europe, Canada and emerging markets. And the U.S. has stubbornly held interest rates high, in part because of robust job growth and an already “booming” stock market. At the end of 2023, investment analysts were expecting up to seven interest rate cuts in the U.S. but the expectation now is one or two cuts at most. How quickly things change.
That said, this market has been driven by technology. Nvidia and the rest of the Magnificent Seven (the label used to describe a group of high-valued technology stocks) continue to push markets higher. (1)
Right now, nobody is predicting any of these companies to experience a fall-from-the-top as spectacular as Yahoo, but it’s a point of data that needs to be taken into consideration when building portfolios. That’s because, against most traditional methods of valuing companies, technology remains a riskier investment than ever before.
One metric many analysts use when evaluating a company is known as the price-to-earnings ratio (PE). Basically, you take the stock price of the company and divide it by its total earnings. For reference, the media PE ratio for the S&P 500 historically has been 16.07 – the norm has been 15. Currently, the PE ratio of the S&P 500 is 29.06. The PE ratio for the S&P 500 Information Technology sector, as of this week, is 37.38.
The strength of tech and large cap stocks has been a boon for the markets. Technology and communications services are the two sectors that, led by Google-parent Alphabet (GOOGL) and Facebook parent Meta Platforms (META), are the S&P's biggest drivers. The Dow Jones, often considered to be home to more traditional blue chip stocks, has not performed as well, although it is considerably less risky as its current PE ratio is 23.23. (2)
On the economic front, the economies of the U.S. and Canada appear to be weakening from a period of outsized strength in the years since the pandemic. Unemployment in the U.S. and Canada has been rising since June last year.
Source: Bloomberg
Inflation also looks poised to resume a gradual path of cooling which should enable the U.S. Federal Reserve (Fed) to follow central banks in Canada, Europe and elsewhere and begin interest rate cuts. (3)
Forecasts are a prediction or estimate of future events, not a certainty. And until we have a time portal or a connection with a time traveller that connects us directly to future stock prices, we’ll maintain our investment discipline and diversified approach.
Looking Back
Expectations for interest rate cuts as early as September grew after last Friday’s nonfarm payrolls report showed U.S. job growth slowed in June - the latest data to point to weakness in labour market conditions. The S&P 500 and Nasdaq notched record-high closes last Monday as investors awaited fresh inflation data, commentary from Federal Reserve Chair Jerome Powell and the start of quarterly earnings season. The TSX also modestly advanced. (4)
Weekly North American Market Statistics
| Index | Week's Change | Year to Date |
| S&P 500 | 2.0% | 16.7% |
| Nasdaq Composite | 3.5% | 22.3% |
| Dow Jones Industrial Average | 0.7% | 4.5% |
| S&P/TSX Composite Index | 0.8% | 5.3% |
Source: Associated Press and Morningstar Direct 07/05/2024
Read and Watch
Want deeper insight into topics in your Weekly Update? Then, read and/or right click:
Video: 2024 Global Market Outlook – Q3 update – Russell Investments
Eurozone inflation eases but ECB likely to keep interest rates on hold
Complexities Dog Beijing’s Latest ‘Remedy’ For China’s Property Crisis
On Monday, the Institute for Supply Management (ISM) posted its lowest reading of manufacturing activity (48.5 - levels below 50 indicate a contraction) since February. The sharp downturn in the ISM’s gauge of current services sector activity, reported on Wednesday, saw it plunge from 53.8 in May to 48.8 in June—its lowest level since soon after the start of the pandemic lockdowns in early 2020. Respondents to the survey noted that high gas prices and worries over elevated restaurant menu prices seemed to be weighing on consumers, but the survey’s chief researcher and some other observers expressed hope that the drop would prove to be an anomaly.
Last week’s important jobs data provided a mixed bag of evidence on the health of the economy. On Tuesday, the Labour Department’s so-called JOLTS report revealed that job openings rose slightly to 8.14 million in May, but from a downwardly revised 7.9 million in April—the lowest level in over three years. Similarly, payroll processor ADP’s count of private sector job growth fell more than expected, from 160,000 in May to 150,000 in June.
The U.S. labour market cooling, however, should not be seen as weakness because unemployment is increasing in part because of higher labour supply and increased migrant flows. Fed policymakers could become concerned about the unemployment rate continuing to rise and this could tip the balance toward a September cut if it were to increase further in the next two reports and monthly core inflation prints remain in the 0.1 per cent to 0.2 per cent range.
In local currency terms, the pan-European STOXX Europe 600 Index ended last week 1.01 per cent higher. Political jitters eased as the far right in France failed to win an outright majority in the first round of legislative elections on June 30. Meanwhile, the Labour Party won the U.K. general election last week with a large majority. Major European stock indexes rose last week: France’s CAC 40 Index climbed 2.62 per cent, Germany’s DAX gained 1.32 per cent, and Italy’s FTSE MIB rose 2.51 per cent. The U.K.’s FTSE 100 Index added 0.49 per cent.
Chinese markets fell last week, as underwhelming manufacturing data reinforced concerns about China’s slowing economy. The Shanghai Composite Index and the blue chip CSI 300 both registered modest losses for the week.
The value of new home sales by the country’s top 100 developers fell 17 per cent in June from the prior year, easing from a 34 per cent decline in May, according to the China Real Estate Information Corp. This has raised hopes that China’s housing market may finally start to gain traction going forward. (5) Given the turmoil that has taken place in that country’s real estate sector over the last few years, this is move in the right direction.
The opinions expressed are those of Craig Swistun and not necessarily those of Raymond James Investment Counsel which is a subsidiary of Raymond James Ltd. Statistics and factual data and other information presented are from sources believed to be reliable, but their accuracy cannot be guaranteed. It is furnished on the basis and understanding that Raymond James is to be under no liability whatsoever in respect thereof. It is for information purposes only and is not to be construed as an offer or solicitation for the sale or purchase of securities. Raymond James advisors are not tax advisors, and we recommend that clients seek independent advice from a professional advisor on tax-related matters.
Tech Boom Leads Global Markets in First Semester of 2024, Vision Times News, July 2, 2024
First-half market gains come with a dash of investor unease, Charley Blaine, The Street, June 30, 2024
Weekly Market Wrap, Mona Mahajan, Edward Jones, July 5, 2024
The close: S&P 500 and Nasdaq notch record highs; TSX also advances, The Globe and Mail, July 8, 2024
Global Markets Weekly Update, T. Rowe Price, July 5, 2024
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Looking to Learn?
If you want to know more about some of the topics we wrote about this week, just click on the links below:
MSCI: What Does It Stand For and Its Importance
Can AI Enthusiasm Sustain the Magnificent 7's Momentum?
Price-to-Earnings (P/E) Ratio: Definition, Formula, and Examples