SCHNEIDER INSURANCE UPDATE

Despite a concerning U.S. jobs report in July, markets have recovered from worries over a recession and mixed earnings from tech stocks during earnings season.

Economic news has been decidedly mixed with some indicators pointing to a weakening economy while others have shown resiliency.

Without question there is concern over valuations.  Market veterans such as Warren Buffett continued to point to excesses and the likelihood of a correction. But despite the July pullback, as of this writing, the S&P 500 and the NASDAQ are still up in excess of 15% year to date.

As we saw most recently here in Canada, U.S. investors are looking for signs of a coming rate cut, but the Federal Reserve has provided little clarity at this point.

Clearly, economic indicators are mixed. Housing starts are declining in the U.S., along with other big-ticket items such as luxury car sales, yet retail and general auto sales have rebounded.

Many experts continue to suggest that the U.S. consumer has simply run out of money. Credit card giant Visa echoes that sentiment, with its latest commentary indicating that consumer indebtedness was slowly worsening.

U.S. Banking Sector Remains Concerning

The elephant in the room, which few are talking about lately, continues to be the U.S. small—to midsized banking sector. The sector as a whole is deeply vested in mortgages for commercial buildings, which in the U.S. are doing about as well as commercial real estate is fairing here in Canada.

With vacancy rates remaining between 30-40% in many major centers there is little hope for many buildings once the payments skyrocket upon mortgage renewal.  Accoringly, as these mortgages rollover (or in many cases fail to), banks will become the new owners of many an empty office tower.

Other factors, such as consumers moving savings accounts into short-term money market-type instruments, are compounding the problem.   Consumers moving accounts, either to safer institutions or to market based investments is increasingly forcing institutions to liquidate long-term bonds (often issued at the bottom of the interest rate curve) at a steep loss.

While the U.S. government set a precedent by fully paying out most account holders during the last banking crisis, doing so again on a large scale basis is becoming more and more difficult as global investors continue to move away from the U.S. dollar.

Sectors Starting to Rotate

We’ve also noted that the market leaderboard appears to be rotating, with the heaviest selling going on in the tech sector, which has consistently led markets for the last couple of years.

Companies such as Nvidia and Tesla have pulled back recently after years of outperformance. That money seems to be rolling towards a combination of U.S. small caps and safer larger cap stocks, which have underperformed the S&P but offer greater downside protection should the economy deteriorate.

Periods of sector rotation, whereby one sector fades and another takes prominence, are a normal course of business and represent an opportunity for your professional portfolio managers.

They have extensive expertise and resources, enabling them to see deep into market trends to utilize cash holdings and profit from sectors that have overperformed by moving capital towards areas which have underperformed but indicate growth.

Overall, the combination of expertise, active management, and access to proprietary information offers professional money managers the opportunity to navigate sector rotations effectively and ideally outperform broader market indexes over the longer term.

So, to summarize, while we appear overdue for a correction, it would appear that investors have enough faith in the economy to stick with the market as long as there is continued U.S. economic growth.  As long as we don’t see another major banking crisis, we will likely remain in this Goldilocks-like pattern, whereby investors continue to buy into market weakness into the fall.  Currently, it seems as if investors are content to largely sit tight, buy the dips and wait for direction from the Federal Reserve while watching the political circus unfold.

As always, if you’ve got any questions or concerns, we’re always available.

Mark, Sean, Cass, Simone and Nancy