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July Market Minute

Updated: Jul 9, 2023

The S&P 500 wrapped up the first half of 2023 16% higher and the NASDAQ 100 index surged 39% higher. Three sectors led the S&P 500 gains: Information Technology (+42%), Communication Services (+36%), and Consumer Discretionary (32%). The top 9 best performing companies are members of these three sectors and 17 of the top 20 best performers are members of these three sectors. The rally in equities this year-to date gained steam after the Federal reserve announced its Bank Term Funding Program on March 13, created after the failure of Silicon Valley Bank. And although 300 of the 503 companies included in the S&P 500 where positive 2023-H1, the gains are, as discussed above, concentrated in three sectors, which include most of the largest companies. The top 10 companies included in the S&P 500 index account of 30% of the market cap weighted index.

The chart shows two different weightings of the S&P 500 index: Market cap weighted, (orange line) and equal weighted (blue line). The divergence of the market cap weighted index vs the equal weight index can clearly be seen starting in March. The equal weighted index gain of 6.0% year-to-date is more in line with the TSX Composite index gain of 4% for 2023-H1.

Inflation and Central Banks

The fight on inflation is not over ... more interest rate increases to come was the message from the panel of Fed Chair Powell, ECB president Lagarde, and BoE Governor Bailey in Portugal at the end of June. Persistently high inflation readings, especially core inflation, has central banks still on the defensive. In his testimony to Congress on June 21

Chair Powell reiterated that “My colleagues and I understand the hardship that high inflation is causing, and we remain strongly committed to bringing inflation back down to our two percent goal.” Canadians are feeling the squeeze according to a survey by Nanos Research Group conducted for Bloomberg News: two-thirds of Canadians say higher borrowing costs are squeezing their pocketbooks, a result that is at odds with a recent rebound in household consumption ... “Interest rates are increasingly a factor in deferring major purchases. This is especially so among younger and working-aged consumers in Canada,” Nik Nanos, founder of the firm, said by email. “Upward movement on interest rates will likely have a material impact on spending.” The current environment is also challenging for investors as the uncertainty surrounding central banks moves before each meeting is particularly opaque. The central bankers are unsure themselves. Turning again to Chair Powell’s testimony: “We will continue to make our decisions meeting by meeting, based on the totality of incoming data and their implications for the outlook for economic activity and inflation, as well as the balance of risks.”

Canada – Outlook Dashboard

The gauges above provide a snapshot of our outlook for the Canadian economy over the next 3 to 6 months. Central banks are in a tug-of-war between inflation still well above their two percent target and emerging economic/ financing sector problems. Central bank policy works with a lag and we do not think that the full effect of the higher rates have fully worked through the economy. The objective of higher rates it to stifle demand to meet limited supply, which will then lower price pressures. Hence, we expect economic activity to weaken over the course of this year. Business investment is expected to weaken somewhat further (the probability of recession taking hold the end of 2023/first half of 2024 has risen significantly). Equity markets are likely to stay on edge as central banks continue to battle above target inflation and problems in the financial sector. The housing market will likely continue to struggle throughout 2023 as higher rates limit affordability.


Gold averaged $1975.47 in 2023-Q2, its highest quarterly average ever in nominal dollars. The previous high was $1909.30 for 2020- Q3 (in response to the Covid pandemic and massively stimulative fiscal and monetary policies). The Russian invasion of Ukraine saw gold rise to a quarterly average of $1870.58 in 2022-Q2. We’re convinced that central bank buying (spurred on by the war in Ukraine) is the key development behind this latest, 2023-Q2, high! Our base view is that the CBs will continue to be very large buyers of gold in the coming years. But there could be lulls in CB demand. For example, the World Gold Council, using IMF data, highlighted in recent days that CB demand for gold in 2023-Q2 is negative through May! (The main reason is a decline in Turkey’s gold reserves; but Turkey’s gold reserves are extremely volatile.) Our near-term outlook for the gold price is cautiously flat, whereas our longer-term outlook is bullish.

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