Friday Market Insights – Investor & consumer confidence causing all time highs – taking some profits

Grant Conroy: [00:00:04] Welcome, everybody, to this version of Friday Market Insights. Today, I myself, Grant Conroy, portfolio manager and partner at Genus, and Justin Hunt, who is our macro guru at Genus. And jump in right in Justin the traditional question, what happened in the markets this week?

Justin Hahn : [00:00:23] Yeah. So this week we saw the S&P 500 start off to continue its momentum from last week, up about two percent for this week. The week started off and the macro data wise, with the IMF increasing global GDP estimates up to about six percent from five point five percent that they estimated in January. During the middle of the week, a lot of the focus was on the US Federal Reserve’s minutes. But that became more of a non-event because it just reiterated the same things that they were saying during the press conference, such as they’re going to be patient during the next first rate hike as well as more patients in terms of tapering their balance sheet. The biggest thing on investors minds for this week was also the infrastructure plan and more about what’s going to be in the bill and more details about it. But there’s still a lot of uncertainty around that.

Grant Conroy: [00:01:14] Right yeah, it seems every week there’s something out there to focus on or something, and every time I do this video, it seems that the markets are all time highs. So either I’m a lucky charm or the markets just continue to get new highs every week. But having said that, with them hitting all time highs today, again, I think what are the tailwinds and what are the headwinds that are out there that we should focus on?

Justin Hahn : [00:01:38] So the biggest tailwinds we see for the market is the upcoming stimulus bill for infrastructure spending, which is going to help continue to stimulate the economy as well as the global vaccinations that’s going to happen throughout the year. Some of the headwinds, though, are more of the inflation numbers as well as market valuations. Last night we saw China’s inflation numbers a bit ahead of the estimates. And overnight we saw futures fall on that news. Chinese inflation does have an impact on US inflation as well, because a lot of the parts were still made in China. In addition to this, we also expect some of the corporate tax rates to increase with the upcoming infrastructure plan, the proposed tax increases from twenty one percent to twenty eight percent. But we believe there is going to be some kind of compromise around the twenty five percent mark.

Grant Conroy: [00:02:25] Right. And I guess that probably takes a while to kick in. But the market looks forward, I presume. So how do we view the outlook given all of those points you just mentioned and and have we changed and have we made any changes in the portfolios as a result?

Justin Hahn : [00:02:42] In terms of our portfolio, we recently actually moved our equity weightings down in order to favour cash. This was a move due to our signal the world equities versus cash signal turning negative due to some of the things I mentioned, such as the higher inflow valuation measures in the equity markets, as well as different inflation indicators ticking up. We saw the Canadian CPI signal increase as well as the German PPI signal also increased there.

Grant Conroy: [00:03:11] Right, and as we as we’ve made those changes and seen through the week some of the changes we’ve made and we move into a bit more cash. Is cash and an asset class? Can we consider it an asset class? Do you think?

Justin Hahn : [00:03:25] Yeah, we believe that cash is an asset class, but and is very important during the times when bonds and equities are looking very toppy as they are now. It also gives us the ability to hold something in order to use it going forward. If there is a big market pullback, we’ll have some cash that we’re able to spend and put it into either bonds or equities. We’ve also been overweight on equities quite a bit throughout last year and this year during the recovery and the bounce back to the market. So this is some of the profit taking and we’re just taking a little bit of a less aggressive stance, right.

Grant Conroy: [00:04:01] That’s great. Thank you. And and hopefully for many of the clients that are watching that notice the way actually in terms of the performance, because as well, through the last 12 months or so. There seems to be still though a lot of crowding in those large stocks in the market, the sort of big tech names that led the way last year. And is that a risk overall as well?

Justin Hahn : [00:04:25] Start crowding still remains a big risk, indeed, as we saw during last month, we saw the technology sector crash almost 10 percent and correct, but it did come back quite a bit. But it’s still behind the broad market. A lot of the other sectors in the market have gone to new highs while the technology stocks still remain a bit lower. A lot of these companies have also done really well during the pandemic and have fared or have all have been actually increasing labor force and increasing profits during these more digital times, as well as people working from home and people schooling from home, as well as the economy opens up. We expect a lot of these companies to miss some of their projections due to an overestimation and those estimates come down. So there’s a big risk there still in the technology side.

Grant Conroy: [00:05:17] And I guess it’s a little bit of a prisoner’s dilemma. If nobody sells, they all carry on moving higher and it’s all good. But as soon as somebody sells and everybody runs for the exit, I guess you could see some abrupt moves and some of those larger names at some point. And finally, I notice the AAII Investor Sentiment was released this week and the bullishness level was the highest since twenty eighteen. So just to put some context, I guess it’s a survey where they ask people, do you think the market’s going up? Are you bullish? You think it’s going down or are you bearish or is it neutral? And the amount of bullish responses was a very high level. Is that a good sign?

Justin Hahn : [00:05:57] Investor confidence is always good for the market as people continue to buy, but we’ve seen that these sentiment indicators can drop quite quickly and sharply. In addition to this, however, we’ve also seen consumer confidence at all time highs as well as PMI is at all time highs. So all three kind of reinforce the story of more confidence in the economy and in the markets for investors.

Grant Conroy: [00:06:20] Right, I do know sometimes people are more bullish once, and so sometimes the argument is when it gets too high, that means that everybody is finished buying and then that bullish and who’s left to buy from here. But anyway. Well well, thank you for that, Justin. That’s that’s great. And for those who are watching, I hope you took something from this. And as ever, if you have any questions or suggestions, please feel free to contact your PM and give that. Have a great weekend. Thank you

Justin Hahn : [00:06:47] Thanks everyone.