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Monthly Overview

Stocks rose in June, wrapping up a quarter marked by an AI-sparked tech rally, surprises from hawkish central banks, and signs of weakening economies. The S&P/TSX Composite Index and S&P 500 Index posted gains for the third consecutive quarter, while U.S. small caps underperformed large caps due to lower earnings and exposure to cyclical sectors. In fixed income, global high yield outperformed Canadian and global investment grade bonds.

Canada’s benchmark S&P/TSX Composite Index was up 3.0% in June and posted a 0.3% gain for the second quarter of 2023. Four of the benchmark’s underlying sectors were positive during the quarter, led by information technology with a 16.5% return. The materials sector was the largest detractor for Q2, with a decline of 7.4%. Small-cap stocks, as measured by the S&P/TSX SmallCap Index, fell 5.2% for the quarter.

The U.S. dollar depreciated by 2.0% versus the loonie during the quarter, slightly dampening the returns of foreign markets from a Canadian investor’s standpoint. Note that all returns in this paragraph are in CAD terms. U.S.-based stocks, as measured by the S&P 500 Index, rose 3.5% in June, and finished the quarter higher by 5.9%. The benchmark’s quarterly gain was led by information technology and consumer discretionary, with respective returns of 14.4% and 11.8%. Utilities and energy were the main detractors for the quarter, declining by 5.4% and 3.9%, respectively. International stocks, as measured by the FTSE Developed ex US Index, fell 0.1% during the quarter, while emerging markets declined 2.6%.

The investment grade fixed income indices we follow posted mixed returns in Q2. Canadian investment grade bonds, as measured by the FTSE Canada Universe Bond Index, were down 0.7% during the quarter. The key global investment grade bond benchmark was down 1.5%, while global high-yield issues rose 1.6%.

Turning to commodities, natural gas rose 26.3% in the quarter, while the price of a barrel of crude oil shed 6.6% in the same period. Gold, copper and silver all had a negative quarter with respective losses of 2.0%, 8.6% and 5.6%.

Inflation in Canada was 3.4% year-over-year in May, from 4.4% year-over-year in April – the lowest level since 2021. On a monthly basis, the index rose 0.4%, on par with expectations. The Canadian economy lost over 17,000 jobs in May, as the nation’s unemployment rate rose to 5.2%. The Bank of Canada raised its key interest rate to 4.75% in June, ending the conditional pause that started in January.

U.S. nonfarm payrolls rose by 339,000 in May and the unemployment rate climbed to 3.7%. The consumer price index increased 4.0% year-over-year in May. Shelter, used cars and motor vehicle insurance all contributed to the monthly advance. Meanwhile, airfares and household furnishings declined. The Federal Reserve held the federal funds rate to a range of 5.0–5.25% in June, following 10 consecutive increases since March 2022.

Chart of the Month

Most investors view large, established companies as a sound investment choice, as they’re generally considered less risky than small- or mid-cap names and they often pay dividends. However, the top 10 largest companies in the U.S. tend to underperform the overall market for the five-year period after entering this elite group. In the three-, five-, and 10-year periods prior to joining the top 10, the performance of these companies has been exceptionally strong, which makes sense given that in order to reach this pinnacle, they would have to be growing faster than the current set of top 10 companies. From 1927 to 2021, the average annualized outperformance for top 10 companies three years before joining the list was 26%. However, after three years in the top 10, outperformance against the market was less than 1%. After 5 years, the mega-cap stocks start falling behind the market by 0.60%, with the gap widening to 1.5% after 10 years. For investors, this shows the diminishing returns associated with investing only in the largest companies in the U.S., despite their historically lower risk and volatility. It also suggests investors would do well to gain exposure to companies that are on a clear path towards becoming a top 10 name.

This document was prepared by the Investment Products & Platforms Team. The opinions expressed in this document do not necessarily reflect the opinions of iA Private Wealth Inc. Although the information contained in this document comes from sources, we believe to be reliable, we cannot guarantee its accuracy or completeness. The opinions expressed herein are based on an analysis and interpretation dating from the date of publication and are subject to change without notice. Nothing contained herein constitutes an offer or solicitation to buy or sell any of the securities mentioned. Specific securities discussed are for illustrative purposes only. The information contained herein does not apply to all types of investors. The information provided herein does not constitute financial, tax or legal advice. Always consult with a qualified advisor prior to making any investment decisions. Commissions, trailing commissions, management fees and expenses all may be associated with mutual fund investments. The indicated rates of return include changes in unit value and reinvestment of all distributions and do not take into account sales, redemption, distribution or optional charges or income taxes payable by any security holder that would have reduced returns. Returns for time periods of more than one year are historical annual compounded returns while returns for time periods of one year or less are cumulative figures and are not annualized. Where applicable, compound growth charts are used only to illustrate the effects of a compound growth rate and are not intended to reflect future values or returns of a fund. A mutual fund’s “yield” refers to income generated by securities held in the fund’s portfolio and does not represent the return of or level of income paid out by the fund. Mutual funds are not guaranteed, their values change frequently, and past performance may not be repeated. The information presented herein may not encompass all risks associated with mutual funds. Important information regarding mutual funds may be found in the simplified prospectus. Please read the simplified prospectus for a more detailed discussion on specific risks of investing in mutual funds. To obtain a copy, please contact your Investment Advisor. iA Clarington Funds are managed by IA Clarington Investments Inc. a wholly owned subsidiary of Industrial Alliance Insurance and Financial Services Inc., a life and health insurance company which operates under the trade name iA Financial Group. iA Private Wealth Inc. is also a wholly owned subsidiary of Industrial Alliance Insurance and Financial Services Inc. iA Private Wealth Inc. is a member of the Canadian Investor Protection Fund and the Investment Industry Regulatory Organization of Canada. iA Private Wealth is a trademark and business name under which iA Private Wealth Inc. operates.