Lexicon Financial Group Weekly Update — July 31, 2024
“The biggest risk of all is not taking one.”
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
Athletic performance is an interesting thing. As viewers, we’re amazed at what can be accomplished through dedication and training.
It is difficult to qualify for the Olympics. And even then, only a small number of the thousands of athletes participating will win a medal.
At the Paris 2024 Olympic Games, there are 32 sports and a total of 329 events. As a result, almost 1000 medals will be awarded. If past Olympics are any indicator, several athletes may win more than one medal. So, it could be that only 400 or so athletes out of 11,040 total will actually win a bronze, silver, or gold. However, it appears that for the vast majority of Olympians making the team and representing their country means they are already winners. (1)
A quick aside. The Olympics only began honouring the top three with gold, silver and bronze medals at the St Louis Olympics in 1904. The modern Olympics began in 1896, and in those days only the top two were awarded. The winner received a silver medal and the second place finisher, copper. In 1900 in Paris, winners of events won trophies, cups and even works of art.
But we digress.
All of that said, finishing just off the podium is agonizing and emotional for the athletes. Investors who “just miss out” often take an emotional journey of their own. Each individual is different, of course, but collectively their behaviours and emotions have been studied. It’s a branch of study called “behavioural finance”. And, just as fourth place finishers wonder what they might have done differently, so do investors. If they had only bought sooner or sold later. Fear and regret are driving emotions in investing. “Could have. Would have. Should have.”
This feeling comes from an “opportunity lost” or the “opportunity cost”. The opportunity cost in investing can be expressed in terms of a return (or profit) on investment by the following mathematical formula:
Opportunity Cost = Return on the most profitable investment choice – return earned from the choice made.
In simpler terms, it’s the difference between the “best possible” investment and the one you actually invested in.
For people who practice behavioural finance, thinking about opportunity cost is fraught with problems. Specifically, you can only identify the best possible investment in hindsight. And the principles of diversification mean that you intentionally spread your investments out over multiple investments to avoid concentration in any one area. By definition, some of these will not be the “most profitable choice.” But you are not putting all of your eggs in one basket, which we know is risky.
No one knows exactly how a different course of action will play out financially over time. Analysts and portfolio managers might use the historic returns on various types of investments in an attempt to forecast the likely returns of their investment decisions. However, as the famous disclaimer goes, "Past performance is no guarantee of future results.” (2)
The chart below, which shows the annual performance of the S&P 500 sectors from 2009 to 2023, illustrates why.
Source: novelinvestor.com
Read and Watch
Want deeper insight into topics in your Weekly Update? Then, read and/or right click:
Why Magnificent Seven Stocks Just Had Their Worst Day on Record
China Is Moving Too Slowly to Stop Deflation. Just ask Japan.
Over the last 15 calendar year period energy has been the absolute worst performing sector five times. Except in 2016, 2021, and 2022, when it was the gold medal winner, racking up the best overall performance. How did energy fare in 2023? It was the second-worst performing subindex. It wasn’t about narrowly missing the podium… the energy sector false started getting out of the blocks and was not even in the running.
Building diversified portfolios helps remove emotion from the investment process and avoid the risk attached to having all your investment eggs in one basket. To do this effectively requires a strong commitment to adhering to risk management techniques and an investment hypothesis that works over long periods of time. After all, investing is not a sport.
Looking Back
Canada’s main stock index, the S&P/TSX Composite Index (TSX), notched broad-based gains last week to extend its weekly winning streak.
All 10 major TSX sectors gained ground, led by technology, which climbed 1.6 per cent. Industrials rose one per cent and heavily weighted financials added nearly one per cent. Canadian National Railway Co., one of Canada’s two largest rail companies, resumed the movement of goods through Jasper National Park after a major wildfire forced it to suspend operations. Shares of CN Rail were up 1.8 per cent. (3)
Weekly North American Market Statistics
| Index | Week's Change | Year to Date |
| S&P 500 | -0.8% | 14.5% |
| Nasdaq Composite | -2.1% | 15.6% |
| Dow Jones Industrial Average | 0.7% | 7.7% |
| S&P/TSX Composite Index | 0.5% | 8.9% |
Source: Associated Press and Morningstar Direct 07/26/2024
Last week the major markets in the United States (U.S.) recorded mixed returns for the second consecutive week, with small-cap and value shares continuing to outpace the large-cap growth stocks that have led the market for much of 2024. At the close of trading on Thursday, the technology-heavy Nasdaq Composite 100 Index was lagging the broader S&P 500 Index, before large-cap growth shares rebounded to close the week. Last Wednesday was also notable for the S&P 500 Index selling off by more than two per cent for the first time since February 2023, while the Nasdaq suffered its worst loss since October 2022.
A 12.33 per cent decline in Tesla and a 5.03 per cent decline in Class C shares of Google parent Alphabet following earnings reports contributed heavily to Wednesday’s declines. Nevertheless, as of Friday last week, analysts polled by FactSet were predicting that overall earnings for the S&P 500 had risen by 9.8 per cent compared with the same quarter a year ago—up slightly from the 9.7 per cent estimated the previous week.
Last week’s economic calendar arguably also painted a particularly mixed picture of how well consumers and businesses are doing. On Wednesday, the Commerce Department reported that only 617,000 new homes were sold in June, well below expectations of around 640,000 and the lowest monthly number since November 2023. The average selling price also fell roughly four per cent from the year before. On the same day, S&P Global reported that its gauge of manufacturing activity unexpectedly fell back into contraction territory, to 49.5 (with readings above 50.0 indicating expansion) for the first time since December.
Thursday last week also brought several upsides in the data, which may have contributed to a morning rally off the benchmarks’ midweek lows. The Commerce Department reported that durable goods orders, excluding those for defence and aircraft—a common proxy for business investment—rose 1.0 per cent in June. This is the most since March 2022. On the consumer front, weekly and continuing jobless claims fell more than expected, while real (inflation-adjusted) consumer spending rose at an annualized pace of 2.3 per cent in the second quarter, more than expected and up from the 1.5 per cent gain in the previous quarter. The Commerce Department also reported that the U.S. economy grew at an annualized rate of 2.8 per cent in the second quarter, which is well above expectations and double the first-quarter pace.
Another factor in last Thursday’s rebound appeared to be the Commerce Department’s release of its core (less food and energy) personal consumption expenditures (PCE) price index, which rose a bit more than expected (0.2 per cent) in June but stayed steady at an annual rate of 2.6 per cent. This is not too far above the 2.0 per cent target for the Federal Reserve’s (Fed) preferred inflation gauge and has further supported expectations of Fed rate cut in September.
In local currency terms, the pan-European STOXX Europe 600 Index ended 0.55 per cent higher, mainly due to a rally last Friday as investors focused on a better day of quarterly earnings reports. Among major Continental indexes, Germany’s DAX gained 1.35 per cent, France’s CAC 40 Index lost 0.22 per cent, and Italy’s FTSE MIB gave back 1.27 per cent. The UK’s FTSE 100 Index rose 1.59 per cent.
Last week Japan’s stock markets registered sharp weekly losses, with the Nikkei 225 Index falling 6.0 per cent and the broader TOPIX Index down 5.6 per cent. Japanese technology stocks remained under pressure as the shares of U.S. mega-cap technology companies continued to sell off. The Japanese yen strengthened for the third successive week against the U.S. dollar thereby continuing to hurt the profit outlook for Japanese exporters.
Chinese markets fell last week after unexpected rate cuts by the central bank did not succeed in instilling confidence in China’s economic outlook. The Shanghai Composite Index declined 3.07 per cent while the blue chip CSI 300 was down 3.67 per cent. In Hong Kong, the benchmark Hang Seng Index retreated 2.28 per cent.
The People’s Bank of China cut its medium-term lending facility (MLF) by 20 basis points to 2.3 per cent, its first reduction in a year, after holding the rate steady in mid July. The move came on Monday, after the central bank reduced its seven-day reverse repo rate, a key short-term policy rate, by 10 basis points to 1.7 per cent. Shortly afterward, Chinese banks cut their one- and five-year loan prime rates by 10 basis points to 3.35 per cent and 3.85 per cent, respectively, making it cheaper for consumers to take out mortgages and other loans. The string of rate cuts pointed to Beijing’s growing concern to support growth after China’s gross domestic product undershot expectations in the second quarter. (4)
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.
Paris 2024 Olympics: Bronze Medalists Need Not Apply, Tim Genske, Forbes, July 231, 2024
Opportunity Cost: Definition, Formula, and Examples, Jason Fernando, Investopedia, June 27, 2024
The close: Stocks rebound, supported by U.S. inflation data, tech stocks, The Globe and Mail, July 26, 2024.
Global Markets Weekly Update, T. Rowe Price, July 26, 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:
Olympic Prizes: How did we get to the 3 medals?
What Is the Opportunity Cost of an Investment?
Risk: What It Means in Investing, How to Measure and Manage It.