Global markets had mixed results in September and volatility seems to be on the rise as we head into the Q3 earnings season. The Canadian market lost -0.89% during the month and has returned 1.36% YTD. The US market managed a slight gain of 0.57% in domestic terms and is up 10.56% YTD. The US dollar lost ground to the Canadian dollar (-0.42% in CAD terms) but remains up 13.42% YTD.
The style rotation which started in July continued in September with FAANG stocks flatlining. South of the border, growth and momentum stocks slumped while high-yielding dividend stocks led the way. Meanwhile in Canada, investors dumped high-quality value stocks in favour of high-beta growth and cannabis stocks. Globally, investors who had been selling Emerging Market and European equities for a good part of the year, added to positions in markets that have been under pressure. Japan led the charge, up over 5% for the month.
As we enter the Q3 reporting season, US economic news has been positive, with reports of low unemployment, strong job growth and low inflation. As a result, the yield curve has steepened. The shape of the yield curve is often looked to as an indicator of future economic growth and a steepening curve suggests continued economic expansion.
Despite the positive economic news, further Fed tightening is weighing on investor sentiment and higher short-term rates which strengthen the US dollar, could put more pressure on equities. According to the latest FactSet data, 74 of the 98 companies that are offering Q3 earnings guidance have provided a negative outlook when compared with Wall Street earnings estimates. However, markets are forward looking and as we are late in the cycle, investor nervousness and market volatility should be expected as we head into the fall and early winter seasons.
This month, we would like to highlight two new managers who were added to the Smart Money Portfolios this past quarter; a merger arbitrage manager and a Healthcare sector bet.
The merger arbitrage manager has been around for over 5 years with the consistent track record of averaging 8%-10% returns with low correlation to equity markets. With higher market volatility expected, we added this manager to produce uncorrelated returns and improve consistency. This strategy specializes in the North American small and mid-cap market and utilizes strategies including Traditional Merger Arbitrage, Subscription Receipts and Special Purpose Acquisition Corporations.
We also added a position in the Healthcare sector. We typically do not make sector bets except in cases where we think the argument for doing so is compelling. The Healthcare sector is an area we’ve allocated to in the past and we have re-entered the sector with the same fund manager we used previously. With political attention focused elsewhere (the primary reason for selling the sector a couple years ago), we feel re-entry at this time is appropriate. The cost structure of healthcare companies has improved over the last couple years, balance sheets remain strong, valuations appear to be slightly lower than historic levels and of course, demand for healthcare services remains strong with the aging Canadian population.
Sightline Wealth’s Smart Money Portfolios launched in September 2014. The Smart Money program uses an institutional process for asset allocation and monitoring. The portfolios provide exposure to uncorrelated and alternative asset classes to ensure diversification and to increase long-term risk adjusted returns. Year-to-date, all portfolios are outperforming their benchmarks by significant margins. Should you have any questions about our September market commentary or wish to discuss the changes to the Smart Money Portfolios further, please contact your Sightline Wealth advisor.