As we continue to look for continual improvement, I am happy to announce that we will soon be launching a monthly update video available shortly after each month end. The video will cover a variety of topics and in whole or part segments on our website, X and YouTube. Further details will follow with the initial video.

If you have any questions about the Quarterly Compass Newsletter or anything else in your financial life, please use the Calendly link below to set up a time to talk or reach out to Jordan or Scarlett, and they will be happy to set up a time!

https://calendly.com/klugewealthadvisorygroup/general-meeting-30min

For those that believe “brevity is the soul of wit”, here is the Quarterly Compass Newsletter in four key points:

• Q2 2024 saw continued positive returns in the U.S. with negatived returns in Canada and internationally.
• Our outlook remains positive for the next 12 months. This is supported by qualitative and quantitative factors. Examples are below.
• Our positive view has evolved to acknowledge potential risks as we look out 18 to 24 months.
• Inflation continues to appear to be on a lower glide path despite a few higher-than-expected data points earlier in the year.

Quarterly Compass Newsletter – June 30, 2024

Q2 2024 saw mixed performance from major indices. The NASDAQ-100 and S&P 500 gained 8.07% and 4.38% respectively (in U.S. dollars) while the Canadian S&P/TSX Composite fell 0.55% and international markets, as measured by the MSCI EAFE Index, fell 0.06% (in U.S. dollars). Q2 started on a weak note with fears around the potential for inflation to reaccelerate causing a broad pull back in stocks in April. These fears eased during May and June leading to a recovery led by the NASDAQ-100. Sector performance was very mixed in Q2. In the U.S., leading sectors included the technology, utilities, and communications services sectors. Lagging sectors included the materials, energy, and industrial sectors. All figures are per Refinitiv.

Per Refinitiv, key global fixed income benchmarks, such as the Bloomberg U.S. Aggregate Bond Index posted flat slightly negative returns during Q2. Interest earned offset fluctuations in price caused by the inflation fears discussed above. In its June meeting, the U.S Federal Reserve (the Fed) maintained its key overnight interest rate and was very direct in indicating that rate hikes are now at an end and that cuts are a matter of time. In Canada, the Bank of Canada (BoC) changed policy and cut its key overnight rate by 0.25%. The markets are currently pricing in further cuts this year from both the BoC and the Fed.

During Q1, commodity prices rose slightly per the Bloomberg Commodity Index. Furthermore, as per Refinitiv—market-based expectations of inflation remain well-contained with longer-term inflation “break-even” rates ranging from 5 to 30 years, all remaining near 2.30% at the time of writing.

Based on questions from clients I have collected a few thoughts:

First and foremost—there have been a lot of questions about the outlook over coming quarters. Our Q1 note stated that I am optimistic about the next 12 months but that there would be several corrections along the way. That assessment has not changed and as it turns out, April was a “correction” month—the correction was short, it was sharp, and, for the most part, it was entirely reversed in May. Bottom line is that in the context of a positive market, it would be normal that we experience other corrections like we saw in April—especially as we come into the traditionally volatile August/September period.

Examples of data points that are contributing to my belief that a positive 2024 is highly likely include:

1. From a qualitative perspective—as was the case through all of 2022 and 2023, it seems that investors remain biased towards buying money market securities. There is now over US$6 trillion “parked” in money market funds. Based on data compiled by Fundstrat, margin balances also remain well under levels where historical market peaks have occurred. Also, the market continues to go up on good news and go down on bad news—this is normal and healthy. Finally, we have only recently started to see speculative behaviour re-emerging. The best example of this was the mid-quarter frenzy in Game Stop (GME-US) as the stock influencer Roaring Kitty re-emerged on the X platform (formerly Twitter) with a positive thesis on the future of GME-US, causing his followers to run the stock up. This type of speculative behaviour does not become worrisome until it becomes routine—we are a long way from that now.
2. From a quantitative perspective: on March 1, 2024, we experienced 4 positive months in a row for the S&P 500. Based on data from the Stock Traders Almanac, this pattern has occurred 14 times since 1950, and has been positive 100% of the time 12 months later with a median gain of 21.2%. Interestingly, this dovetails very closely with the signal that I highlighted in my Q4 2023 note where Ned Davis Research did a look back and found that as of December 14, >40% of the S&P 500 stocks were “overbought.” Although this has only happened 4 other times in history, the average return 1 year later was +27.5%. In addition, historically, there has been a strong tendency for “the year to play out in January.” A positive/negative January usually leads to a positive/negative year. Again, based on data compiled by the Stock Traders Almanac, when the S&P500 is up >3% in May, the median full year return is 25.8% 88.2% of the time. This implies double digit potential upside into year end 2024.

“Investors” also continue to be very anxious about the path forward which, all else equal, is usually a positive sign because it indicates that they are still not fully allocated to equities thus creating “buying power”. This anxiety is even apparent in the professional strategist community with several market strategists at major financial institutions clearly stating in media interviews that they are “reluctant bulls”. This atmosphere of anxiety has led to a certain amount of “twitchiness” as “investors” have tended to react strongly to every nuanced data point. There is an old Wall Street saying that “bull” or up trending markets “climb a wall of worry”—that is what we seem to be doing right now.

I have also fielded a few questions about how my view on the path forward has evolved as time has gone by. A key part of my process is using historical patterns and cycles to understand what the road ahead may look like—not to predict but to be prepared for a wide range of outcomes. Because of this, my positive view is becoming more nuanced when looking out into 2026. Past cycles indicate that we could see higher than usual volatility in 2026. For example, the well-known U.S. Presidential year cycle typically has its most volatile year in the mid term election year. Furthermore, the number of months that will have elapsed in late 2025/early 2026 corresponds closely to the number of months that have passed from the first Fed rate hike to the onset of recession in the last two cycles. Finally, the late 2025- and 2026-time frame also corresponds to the exhaustion of a number of quantitative “risk on” signals.  It is important to remember that these examples are observations and not predictions. The fact that historical precedents exist is not a reason to act emotionally and “head for the hills” or “go all in”—even if one were inclined to try to time the market (this has never been a good idea).

To be clear—new signals/indicators can quickly invalidate any examples I have highlighted above, and you never want to “anchor” yourself on any single data point. Understanding historical patterns and cycles helps to form a composite picture and give us “reasonable working assumptions” to gauge the evolution of circumstances.

There also continued to be a lot of questions around Nvidia (NVDA-US) which has become the “poster child” for the current bull market. In terms of strategy on this name, barring any deterioration in fundamentals or valuation moving to unsustainable levels, we want to treat it like any other successful holding: continue to hold it and continue to trim it back as it appreciates. The old saw of “riding your winners and selling your losers” is a well-established way to maximize the benefit you earn from successful decisions. It is also important to manage risk in higher volatility names like NVDA by trimming them back on a regular basis.

Finally, I saw a lot a of questions earlier in the quarter about the possibility/probability of a re-acceleration of inflation like we saw in the early 1980s when inflation peaked, fell, and then reaccelerated. Based on the data I have seen I believe that this is a remote probability for two reasons:

1. Per our Chief Market Strategist Dr. James Thorne, inflation follows a seasonal pattern where it is higher than the annual average early in the year and lower than the annual average later in the year. This pattern appears to have repeated itself again in Q1 of 2024 with the latest U.S. inflation numbers coming in well below expectations.
2. Per analysis from Fundstrat, most of the inflation we saw into April was narrowly concentrated in two areas—housing and car insurance. Both categories are being impacted by data lags and there is no evidence that the pace of price increases is accelerating in general. This can be seen from the fact that there is an unusually wide gap between the median item in the CPI basket and the headline number reported. Usually, these two figures are almost identical, and the gap shows that there is no broadening out of price pressure.

We have taken several actions in the portfolio entrusted to us since our last update. First, as a part of our routine quarterly portfolio review, we have removed several underperforming equity names and replaced them. Also, given the sharp appreciation of NVIDIA this quarter, we trimmed the position to be in line with targets. We also trimmed our energy sector exposure as the sector’s period of seasonal strength ends. We also simplified the model we use for Tax-Free Savings Accounts (TFSA) and other smaller accounts by removing several equity exchange-traded funds (ETFs) and replacing them with a single “all in one” equity ETF that has outperformed the multiple ETF solutions we were using previously.

As always, the focus of the Kluge Wealth Advisory Group is on preparation and not prediction. Irrespective of any views, we always acknowledge and prepare for a wide range of events and outcomes. As we move through 2024 and look towards the first parts of 2025, the picture painted by my Risk Dashboard remains optimistic about the path forward. As a result, we recommend that investors consider reducing cash and investing in both high-quality equity and fixed income, to the extent that risk tolerance and objectives allow.

The information contained herein has been provided for information purposes only.  The information has been drawn from sources believed to be reliable.  The information does not provide financial, legal, tax or investment advice.  Particular investment, tax, or trading strategies should be evaluated relative to each individual’s objectives and risk tolerance.  This does not constitute a recommendation or solicitation to buy or sell securities of any kind.  Wellington-Altus Private Wealth Inc. (WAPW) does not guarantee the accuracy or completeness of the information contained herein, nor does WAPW assume any liability for any loss that may result from the reliance by any person upon any such information or opinions.  Before acting on any of the above, please contact your financial advisor

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