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Posted by Greg Taylor on Sep 7th, 2021

The Danger Months Are Upon Us, Stay Defensive

Equity markets marched higher in August, closing at or near record highs on many indices. The S&P 500 finished higher for the seventh straight month as equity markets continue to climb the proverbial wall of worry.

Entering the month of August, investors were concerned about the dramatic uptick in virus numbers, whether the FOMC would begin the taper too soon, and if we had reached the peak of everything. A month later, while concerns remain around the pace of the economic expansion continuing, worries about the FOMC and virus appear to have faded away in the eyes of investors.

The narrative around the virus has evolved from a widespread fear to a pandemic of the unvaccinated. As such, industries that had been more susceptible to lockdowns and restrictions have been better able to withstand the headlines. The re-opening of the global economy, which was never going to be smooth or quick, appears to remain on track, which should be a longer-term positive for the cyclical sectors.

The FOMC was able to calm markets with near-perfect messaging from Chair Powell during the Jackson Hole meetings. Concerns around the timing of stimulus removal have weighed on investors concerned about a repeat of the 2013 Taper Tantrum. Although the employment and inflation conditions necessary for the FOMC to begin the removal of stimulus have been met, the FOMC has signalled that they are in no rush and will not do anything drastic to affect the market.

As long as the FOMC doesn’t take away the punch bowl too soon, conditions remain in place for the bull market to continue. It’s also important to remember that tapering isn’t tightening. Reducing bond buying may increase bond yields to some degree, but it is very different from an actual rate increase, which continues to appear years away.

Mega cap technology stocks, which had spent most of the year lagging the market as rates increased, joined the party in August. Whether this is a case of cautious investors viewing them as the ‘new defensive’ sector given their pristine balance sheets, as long as bond yields don’t spike higher, technology should be a core part of investor portfolios.

By the numbers August 2021 total return

The real concern investors will face for the next few months will be if we have hit “peak everything.”  As much as the market cheered on the peak in the fourth wave and the dovish words from the FOMC, the fact remains that the times of easy money and free flowing stimulus are coming closer to an end. Once these programs end, we will see if the economy is strong enough to stand on its own or if economic indicators begin to roll over.

The most recent corporate earnings season gave investors a taste of this fear, as while most companies reported strong quarters and beats, in many cases, the stocks responded with a shrug. If markets don’t appreciate strong numbers now, what will happen once the earnings growth begins to slow in the face of more difficult year-over-year comparisons? Could this be the fear that hurts markets as we enter the seasonally weak September and October period?

With markets at all-time highs, many investors complacent, and valuations near historic levels, the risk/reward trade-off may not be ideal. Sector rotation has helped to keep the market at all-time highs and it may continue to do, but markets are becoming increasingly narrow and many sectors have had their runs.

By no means does this mean the bull market is ending and a bear market is upon us, but, it could mean that investors should prepare for a change in tone. As we enter the danger months of September and October, the virus peaking could coincide with the peak in economic growth.

There hasn’t been a 5% correction in the S&P 500 in almost a year. Any pullback should be looked at as a buying opportunity as conditions remain favourable for equities and risk assets into year end, but, at this time, being defensive and having some risk-managed solutions may allow for a more comfortable ride through the volatility.

— Greg Taylor, CFA is the Chief Investment Officer of Purpose Investments

All data sourced from Bloomberg unless otherwise noted.

By the numbers displays total returns for the month of August 2021. The content of this document is for informational purposes only, and is not being provided in the context of an offering of any securities described herein, nor is it a recommendation or solicitation to buy, hold or sell any security. The information is not investment advice, nor is it tailored to the needs or circumstances of any investor. Information contained in this document is not, and under no circumstances is it to be construed as, an offering memorandum, prospectus, advertisement or public offering of securities. No securities commission or similar regulatory authority has reviewed this document and any representation to the contrary is an offence. Information contained in this document is believed to be accurate and reliable, however, we cannot guarantee that it is complete or current at all times. The information provided is subject to change without notice.

Commissions, trailing commissions, management fees and expenses all may be associated with investment funds. Please read the prospectus before investing. If the securities are purchased or sold on a stock exchange, you may pay more or receive less than the current net asset value. Investment funds are not guaranteed, their values change frequently and past performance may not be repeated. Certain statements in this document are forward-looking. Forward-looking statements (“FLS”) are statements that are predictive in nature, depend on or refer to future events or conditions, or that include words such as “may,” “will,” “should,” “could,” “expect,” “anticipate,” intend,” “plan,” “believe,” “estimate” or other similar expressions. Statements that look forward in time or include anything other than historical information are subject to risks and uncertainties, and actual results, actions or events could differ materially from those set forth in the FLS. FLS are not guarantees of future performance and are by their nature based on numerous assumptions. Although the FLS contained in this document are based upon what Purpose Investments and the portfolio manager believe to be reasonable assumptions, Purpose Investments and the portfolio manager cannot assure that actual results will be consistent with these FLS. The reader is cautioned to consider the FLS carefully and not to place undue reliance on the FLS. Unless required by applicable law, it is not undertaken, and specifically disclaimed, that there is any intention or obligation to update or revise FLS, whether as a result of new information, future events or otherwise.

Greg Taylor, CFA

Greg Taylor is the Chief Investment Officer of Purpose Investments. A data-driven manager with a focus on managing risk through active-trading strategies, Greg specializes in finding and exploiting pockets of volatility in the market to drive returns. He spent more than 15 years managing pension and mutual fund assets at Aurion Capital Management. He also held a role of senior portfolio manager at Front Street Capital and LOGiQ Asset Management before coming to Purpose Investments.

Greg serves on the investment committee for the MS Society of Canada and advises the finance program’s portfolio management course at Bishop’s University. He has won numerous Brendan Wood International “TopGun” awards and is a regular host and guest on BNN Bloomberg and Toronto’s all-news radio station, 680News. Greg is a CFA Charterholder and has a BBA in Finance from Bishop’s University.