Lexicon Financial Group Weekly Update — June 12, 2024
“Trust is the glue of life. It’s the most essential ingredient in effective communication. It’s the foundational principle that holds all relationships.”
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
We understand and appreciate the trust that clients place in us. After all, in many instances, we are managing assets gathered over their entire working careers. For our charity clients, we know that the assets have been donated. In both cases, we take our fiduciary responsibility quite seriously.
But what is a fiduciary, anyway. It's a fancy word that essentially means that we have an obligation to always put the needs of our clients first. And that's a much higher standard of care than working with someone who, for example, might earn a commission on the sale of a specific investment product or service. For us, avoiding real and even perceived conflicts of interest is critical to how we operate our business.
It means we have a duty to report to clients, beyond the statements that appear in your mailbox or inbox at the end of each month. We write a Weekly Market update (you're reading one now) that tries to educate everyone on topics related to the market and provides background on what we see and how we're thinking about it. It's also why we contact you as often as we do. Because in order for us to do our job most effectively, we need to understand how your goals and objectives might be changing over time.
We don't talk about it enough, but we do spend a great deal of time thinking, studying and researching markets before we make investment decisions. In his book “The 7 Habits of Highly Effective People”, the late Stephen Covey wrote about the importance of keeping your tools sharp.
In April, I attended a two-day conference with other discretionary portfolio managers from across the Raymond James network to speak with and hear from experts from across the securities industry. We heard from economists, market researchers and our colleagues on their view of the markets and how they were adjusting client portfolios in the current global situation.
Just this past week I have spent a few days abroad meeting with business leaders and finance executives from other countries to hear directly from them their thoughts and perspective on global capital markets and industry trends. I have had personal interactions with financial experts and business leaders from Belgium, Germany, India, Japan, the United Kingdom and many more countries.
So how does this impact your investment portfolio? I take all of these learnings and observations back to our extended team, which includes my fellow portfolio managers Antoine Natale, Louis Gervais and the recently added Adam Rivers. We compare notes. We discuss. We often run analysis to determine if changes to investment models are required. And we do this every week. Of course, we don't always make changes every week—sometimes we don't have enough compelling information to act, but we're always watching, always monitoring and looking for opportunities.
We have also just added two more experts to our group—Dawn Carey and Lila Khosla. We work with them on providing the appropriate investment management and customer service to our clients who are located outside of Canada and in the United States. Talking about customer service, Wayne Hendry participates in weekly and long-standing customer service chat on X
(formerly Twitter) and is always looking at how to improve the customer service you receive.
It's important that we continuously push for knowledge and strive to improve our processes to deliver the best possible experience we can for each and every one of our clients. And we are committed to doing this today and into the future.
In your day-to-day interactions, you may only have contact with me or Wayne Hendry, but you should rest assured that there is a very strong team supporting each and every investment decision that gets made on your behalf. We choose this method not because it is easy, but because it is the right thing to do for you, our clients. And we're darned proud of what we've been able to accomplish, especially in the last few years.
As always, we are more than happy to be of service as our relationship with you is very much appreciated.
Looking Back
Inflation cooled down slightly in the United States (U.S.) last month just as consumer frustration over higher prices continued to become a larger shadow of the November presidential elections. The consumer price index (CPI) rose at annual pace of 3.3 per cent in May which is lower than 3.4 per cent in April. Growth in prices has fallen dramatically since surging above 9 per cent two years ago – the highest level in a generation.
However, many Americans are still feeling the pinch and CPI has yet to fall in line with what policymakers want. Although fuel prices and airline fares fell in May, rising shelter costs (especially rent) helped prop up the headline rate of inflation. That said, on a month-to-month basis, however, prices were flat overall, which is bolstering hopes that inflation is heading back towards normal levels. (1)
This has added impetus to the close monitoring of the U.S. Federal Reserve (Fed) and, in particular, it’s Federal Open Market Committee (FOMC) meeting this week. As a division of the Federal Reserve, the FOMC is responsible for setting interest rates as it determines the direction of monetary policy via open market operations. Its decisions impact how the U.S. economy functions and everyday consumers as they influence rates on savings accounts, credit cards, mortgages, and more. The 12 members of the FOMC meet eight times a year to discuss whether there should be any changes to near-term monetary policy. A vote to change policy would result in either buying or selling U.S. government securities on the open market to promote the healthy growth of the national economy. Committee members are typically categorized either as hawks who favour tighter monetary policies or as doves who favour stimulus, or looser monetary policies. The FOMC chair is also the chair of the Board of Governors. The chair is Jerome Powell, who was sworn in for a second four-year term on May 23, 2022, and is considered a moderate. (2)
Source: Weekly Headings, Raymond James, June 7, 2024
Weekly North American Market Statistics
| Index | Week's Change | Year to Date |
| S&P 500 | 1.3% | 12.1% |
| Nasdaq Composite | 2.4% | 14.1% |
| Dow Jones Industrial Average | 0.3% | 2.6% |
| S&P/TSX Composite Index | -1.2% | 5.0% |
Source: Associated Press and Morningstar Direct 06/07/2024
Nearly one year after the Fed last raised rates in July 2023, the markets and investors are on alert for when the Fed begins its easing cycle. However, as expected, the FOMC held interest rates steady in the 5 to 5.5 per cent range.
Last week’s jump in the U.S. dollar following the release of stronger-than-expected U.S. jobs data contributed to a down week for Toronto Stock Exchange’s S&P/TSX composite index (TSX). The jump pressured metal mining stocks and caused investors to brace for increased volatility in the coming months. Energy also lost ground, falling 0.9 per cent, as the price of oil gave back its earlier gains to settle two cents lower at $73.53 a barrel. Real estate and utilities, two sectors particularly sensitive to bond yields, were down 1.6 per cent and one per cent, respectively. (3)
Read and Watch
Want deeper insight into topics in your Weekly Update? Then, read and/or right click:
Video: Interest Rate Cuts: Market Influence and Investor Psychology Impact Of Fed Decisions
Although the S&P 500 Index and technology-heavy Nasdaq Composite reached record highs last week, smaller-cap indexes pulled back. Growth stocks also outpaced value shares by the widest amount since early in the year, as falling longer-term interest rates increased the notional value of future earnings. Some of the steam appeared to come out of the fast-growing artificial intelligence (AI) sector last week. News showed that U.S. officials have slowed the issuing of licences to chipmakers for AI chip sales to the Middle East and were opening antitrust investigations into Microsoft and NVIDIA over their dominance of AI.
Last week started with some downbeat economic readings, which appeared to lead to a return of worries about slowing growth alongside high inflation or stagflation among some investors and analysts. Particularly worrying was the report by the Institute for Supply Management (ISM) that its gauge of manufacturing activity had fallen further into contraction territory to 48.7—levels below 50.0 are considered to indicate contraction. On Tuesday, the Labor Department reported that job openings in April had fallen to 8.059 million - the lowest level since February 2022. Conversely, the number of Americans leaving their jobs voluntarily or the so-called quit rate—considered by many as a more reliable indicator of the strength of the labour market—surprised on the upside.
The services sector in the U.S. remains strong, however. The ISM’s services jumped to 53.8 in May—the highest level in nine months—which was well above consensus expectations. At the same time, payroll processor ADP reported its tally of private sector job gains, which fell to 152,000—its lowest level in four months. These twin reports seemed to point away from a stagflation scenario and point more towards the much spoken about “Goldilocks” scenario of growth that was neither too hot nor too cold. Moreover, according to the Labor Department’s official jobs report on Friday, its broader tally of both private sector and government nonfarm jobs, employers added 272,000 jobs in May. This is well above consensus expectations and the most since the start of 2024. Equity market's reaction to the news may have been tempered by an unexpected rise in the unemployment rate to 4.0 per cent—the highest level since January 2022.
In local currency terms, the pan-European STOXX Europe 600 Index ended 1.04 per cent higher after the European Central Bank (ECB) cut interest rates for the first time in five years. Major stock indexes recorded gains. Italy’s FTSE MIB rose 0.49 per cent, Germany’s DAX tacked on 0.32 per cent, and France’s CAC 40 Index added 0.11 per cent. The UK’s FTSE 100 Index slipped 0.36 per cent. Worth noting here is that the ECB has stopped short of indicating that more cuts are coming. Inflation, according to the ECB, is expected to be 2.5 per cent in 2024, which is an upward revision from the previous estimate of 2.3 per cent. The ECB also revised its estimate of average inflation for 2025 to 2.2 per cent in 2025 from 2.0 per cent but held its forecast for 2026 at 1.9 per cent. Despite this, the expectation is that the ECB will cut rates at least twice more this year.
Japan’s stock markets generated mixed weekly returns, with the Nikkei 225 Index up 0.5 per cent and the broader TOPIX Index falling 0.6 per cent. The latest purchasing managers’ index data showed that the Japan’s services sector continued to expand sharply in May and there were also some signs that private consumption could stop being a drag on growth–household spending increased year on year in April for the first time in 14 months. Japan’s Finance Minister Shunichi Suzuki confirmed that his ministry had intervened in the foreign exchange market from April 29 to May 29 to counter excessive currency moves. The effectiveness of such interventions in propping up the historically weak yen is however limited by the wide U.S.-Japan interest rate differential. This is likely to keep weighing on the yen.
Stock markets in China fell last week despite data showing that the property sector may be gaining traction. The Shanghai Composite Index declined 1.15 per cent, while the blue chip CSI 300 Index gave up 0.16 per cent. However, in Hong Kong, the benchmark Hang Seng Index rose 1.59 per cent. According to the China Real Estate Information Corp, the value of new home sales by the country’s top 100 developers rose 11.5 per cent in May, up from April’s 3.4 per cent increase. New home sales, however, slumped 33.6 per cent in May from a year ago, but this was less than April’s 45 per cent decline. This data boosted hopes that China’s property market downturn, now in its fourth year, may start to recover after Beijing announced a rescue package in May to stabilize the struggling sector. Some analysts are still skeptical about whether the measures undertaken by the Chinese government will result in a sustainable housing recovery amid weak domestic demand.
In economic news, the private Caixin/S&P Global survey of manufacturing activity edged up to 51.7 in May from April’s 51.4—its seventh monthly expansion. Readings above 50 indicate an expansion from the prior month. The Caixin services purchasing managers’ index reached an above-consensus 54 in May, up from 52.5 in April. The private Caixin survey, which focuses on smaller and export-oriented firms, contrasted with official data the prior week showing that manufacturing activity unexpectedly contracted in May.
China’s exports rose a better-than-expected 7.6 per cent in May from a year earlier and up from 1.5 per cent growth in April. Imports increased a weaker-than-expected 1.8 per cent in May, slowing from April’s 8.4 per cent rise. The overall trade surplus increased to USD 82.62 billion, up from USD 72.35 billion in April. Strong overseas demand has driven China’s exports despite the threat of new tariffs but, as analysts have noted, the disappointing imports growth indicated weak consumer spending locally.
(4)
As you can see, inflation and interest rates continue to be a major factor globally. While we have already seen some countries (Canada, the European Union, etc.) begin to cut interest rates, the focus will still be on the world’s largest economy, namely, the U.S.
Almost no one expects the Fed to lower interest rates when its officials conclude their two-day meeting today. This will not stop economists and investors looking for clues about when the Fed might finally begin cutting its key rate and how many times it might do so in the remainder of 2024. If you remember, at the end of 2023, more than a few economists predicted interest rates would already be falling by now. They anticipated as many as six or seven rate cuts this year. Well, that has not happened as inflation continues to endure. Most economists have scaled back their rate cut predictions to two, one or none in 2024. (5)
These cuts, if they do happen, will be the insurance against a recession in the U.S. economy.
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.
US inflation eases slightly as economic anxiety looms over presidential election, Callum Jones, The Guardian, June 12, 2024
Federal Open Market Committee (FOMC): What It Is and Does, Troy Segal, Investopedia, April15, 2024
The close: TSX falls as bond yields climb after strong U.S. jobs report, The Globe and Mail, June 7, 2024
Global Markets Weekly Update, T. Rowe Price, June 7, 2024
Fed meeting live updates: Inflation lingers, but is an interest rate cut coming today? Medora Lee, USA TODAY, June 12, 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:
Fiduciary Duty: What is it and what it means for your portfolio.