Stan in BNNBloomberg.ca – February 14, 2023

Market Outlook

Global equity markets continue to rally in 2023 with the MSCI World Index up over 18 per cent since the October 2022 lows. At The Stan Wong Group, we take a constructive view for 2023 as many market concerns appear to be ebbing. The market’s primary worry, inflation, is quickly diminishing. Prices for many commodities including oil, natural gas, gasoline, aluminum, lumber and wheat have retreated sharply from their highs last year. Indeed, the Bloomberg Commodity Index is now down over 20 per cent from last year’s highs. As well, housing and used car prices appear to have peaked. Cooling inflation pressures should allow central banks around the world to pause their rate hiking cycle later this year and pivot to a more dovish tone. Since 1950, we note that in instances where inflation is lower than the previous year, the S&P 500 Index has returned an average of 12.6 per cent with a win (positive return) ratio of nearly 75 per cent.

From a macroeconomic perspective, China’s recent withdrawal from it’s zero-COVID policy should allow for a meaningful recovery in the world’s second largest economy and a catalyst for many industries globally. Moreover, the increasing odds of a soft landing in the U.S. bodes well for equities, as does the avoidance of an energy crisis in Europe. From a technical view, market breadth has been progressively improving with 70 per cent of the constituents in the S&P 500 Index now trading above their respective 200-day moving averages (from a 12 per cent low last September). We further observe that back-to-back down years for equity markets are historically rare. Since 1950, the S&P 500 Index has only seen consecutive calendar years of negative returns three times. Adding to this, the third year of the presidential cycle has historically been the most robust, with an average return of 16.8 per cent for the S&P 500 Index since 1950 and a win (positive return) ratio of nearly 90 per cent.

In Stan Wong managed portfolios, we continue to prefer value stocks above growth stocks. Global value equity indices have been outpacing global growth indices since late 2021. The energy, financial and health-care sectors represent our highest sector weightings. Select names in the consumer discretionary area also look attractive, particularly with inflation cooling and the anticipated resurgence of the Chinese consumer. While we are currently overweight on U.S. and Canadian equity markets, we see a path for international equities to build momentum ahead. Generally, valuations in European and Asian equity markets look more attractive relative to North American equity markets. In our fixed income allocation, we most favour investment grade corporate bonds.

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