Q2-2023 (Published July 4, 2023)
In an unexpected turn of events, the positive sentiment took over the market resulting in S&P500 index rising to slightly short of 4,500. The momentum started with a fresh outlook on AI and the impact it could potentially have on productivity. Low productivity has plagued the job market and it seems logical that introduction a tool that can address this problem can a breakthrough. Share prices of the Microsoft and Nvidia rose substantially, and given their size, a handful of large cap companies lifted the overall index, but the impact was mostly evident in NASDAQ 100 (where most of the tech companies were concentrated), which reported the best first-half-of-the-year results in history. From this positive event, the optimism permeated to other parts of the market and eventually other sectors we lifted.
The rise in the markets brought back the question of “soft-landing” vs. “hard-landing” vs. “no-landing”. (Side note: soft landing refers to having a mild recession as a result of increase in interest rates. Historically, when interest rates are increased at such a rapid pace, it is usually followed by a recession. In fact, the logical way of reducing inflation through rise in interest rate is causing economic slow down, which usually goes further than expected and results in recession. The question is, is the Fed able to manage lowering economic activities without causing a recession (hence the term soft landing), or will they go overboard or cause panic in the market and cause a recession). It seems that the dominant narrative is either soft landing or no landing.
When market is trending down, occasional rises (aka, bear market rallies) are expected, as we noted in our economic outlook published in Aug 2022. But we did not expect such a strong rebound, specifically this late and right when we expected a slowdown. Even though the increase is prices is concentrated mostly in tech sector, as of today, it really feels like it will last and the rest of the sectors will follow. However, there are some who think that the rally has lost steam and the market will soon see a correction. The results remains to be seen.
At GGC, we are cautious, because we still believe the Fed has more work to do to reduce the inflation. Looking at other countries who battled with inflation and even at the US during 70’s, the inflation does not just go away within 12 months. It subsides, but emerges right after a short period of a break. The recent CPI readings that showed lower inflation are encouraging, but it doesn’t mean there is a persistent downward trend. Inflation might just rise. The origin is unknown. At GGC, we think the reason for a rebound might be those who were left behind in either demanding higher wages or increasing the prices of what they offer, will do it eventually, which will create uptick in inflation in the areas that we don’t expect.
With all that said, what is the investment strategy moving forward. In this post, we identified the followings:
BASE (TSX) - Evolve Global Materials & Mining Enhanced Yield Index ETF
BXP (NYSE) - Boston Properties, Inc.
UBER (NYSE) - Uber Technologies, Inc.
QAT (Nasdaq) - iShares MSCI Qatar ETF
UAE (Nasdaq) - iShares MSCI UAE ETF
EWW (NYSE) - iShares MSCI Mexico ETF
