Doherty Market Commentary Q2 2024

Stock markets got off to a slow start in the second quarter. Concerns around stubborn inflation and high valuations had investors nervous about further gains. However, animal spirts once again overwhelmed these worries. We saw a return to risk taking last seen in 2021 with the likes of Gamestop soaring on posts from “Roaring Kitty”. Company earnings calls sounded more like infomercials about artificial intelligence (AI) potential. The herd mentality emerged yet again as momentum and greed took hold.

In Canada, the TSX was actually down slightly in the quarter. Without any major exposure to the AI theme, there was little for investors to cheer about. Economic growth is looking tepid, and productivity is a concern. A long-awaited rate cut cheered markets; however, this was quickly followed by a stubbornly high inflation report, which cast further rate cuts in doubt. Real estate and cannabis stocks were particular drags on the Canadian index along with continued weakness in telecom stocks. BCE, Rogers and Telus are facing increased competition from the entrance of Videotron to the national stage with their acquisition of Freedom mobile. The current price war will likely prove temporary, and so current valuations look attractive from a long-term standpoint.

South of the border, stocks continued to climb, rising 4% on ever greater concentration. Just seven technology stocks contributed 98% of the S&P500 return in Q2 as investors piled into mega-cap stocks like Nvidia. In fact, if you were to disregard market capitalization and calculate returns on an “equal weighted basis,” the index actually declined 1.6% in the quarter. Increasing concentration in these stocks with stretched valuations creates a dangerous cocktail for the US index. That said, so long as buyers chase fast money, this can persist in the near term (increasing the potential downside risk).

Overseas, international stocks were basically flat. Novo-Nordisk carried health care higher as the demand for its weight loss treatment, Wegovy, continued to outpace all expectations. Real estate and consumer discretionary stocks disappointed, indicating the broader economy may not be as strong as some would hope.

Looking out to the second half of the year, uncertainty and potential for volatility are high. Valuations and market concentration in the US could lead to a large drawdown if momentum stalls and turns. Stubborn inflation and higher rates for longer is looking more possible. And of course, the political situation is more unstable than it has been in recent memory. Domestically, Prime Minister Trudeau is facing calls to step down after a by-election loss in Toronto. In Europe, Marine Le Pen’s populist party has re-emerged as a threat to President Macron’s centrist government. The UK is seeing a major shift to the Labour party. And in the US, the first presidential debate was a fiasco to say the least.

With all this uncertainty, it is more important than ever to stay grounded and disciplined. Rest assured, our team continuously monitors your portfolio for exposure to near and long-term risks. At times like this, we may be out of step with the herd, and that is just fine with us. Far too often, the investing masses run collectively towards a steep cliff, only realizing their error once it is too late.