Investment Commentary September 2021
US Yield Curve
The ten minus two- year US Treasury yield curve rose very modestly to 1.12%. As the yield curve remains positive and is still considerably above December 31st level of 0.80%, this is not something to be concerned about in regards to the domestic US economy.
US Corporate Debt Spreads
As of September 2, 2021, Baa rated US corporate bond spreads relative to 10-year US Treasuries actually narrowed very modestly to 1.92%, compared to the same time last month This modest decline is clearly an indication that there is no upcoming recession.
Covid – 19 Health Stats
The delta variant continues rearing its ugly head resulting in more lockdowns both globally and in hot spots in North America. Both daily new cases and deaths in the US continue to rise. Globally both daily new cases and deaths remain stubbornly high. These recent trends are expected to slow global economic growth once again, but not enough to put the world into another recession.
Equity Market Valuations
Taking into consideration the strong earnings growth with many companies exceeding expectations, the forward PE multiple of the S&P 500 index is currently at 21.20 times, very similar to last month’s 21.5 times. This compares to the long -term median of 19.6 times.
Central Bank Monetary Policy
US central bank policy remains expansionary. However, there is mounting pressure on the Federal Reserve Bank to stop its ongoing tapering efforts with inflationary expectations continuing to escalate. At some point the Federal Reserve may be forced to raise rates and it may be sooner than many expect at this time.
I am maintaining my high cash content at this time. More specifically the recommended high cash position would normally be allocated to the fixed income area. However, the probability of interest rate increases makes me very hesitant to advise a full allocation to fixed income at this time. Higher interest rates and higher inflation do not bode well for nominal bonds.
Equity Sector Weights
I remain overweight my North American benchmark Financials, Energy, Materials, Industrials, Consumer Discretionary and Real Estate. I remain underweight Consumer Staples, Healthcare, Technology and Communications. I remain market weight Utilities.
Individual Equity Changes
In a portfolio blog dated September 2nd, I deleted Abbvie from both portfolios in the Healthcare sector. The FDA’s recent warning on one of Abbvie’s new arthritis drugs, Rinvoq, will not help the company’s objective of replacing Humira, their main drug that will be going off patent in 2023.
In a portfolio blog on August 11th, I deleted CNR in the Industrials sector from both portfolios. At that time there was a high probability that the US regulatory body would not allow the formation of a voting trust for the proposed acquisition of Kansas City Southern. This is exactly what happened. There is also some additional news that one of CN’s largest shareholders wants to gain a Board seat and have both CN’s current CEO and Chairman removed from their positions as a result of their reckless takeover offer for Kansas City.
In a portfolio blog dated August 24th, I added First Quantum to the Growth portfolio in the Materials sector. This Canadian copper producer is trading at a reasonable valuation and has a strong balance sheet. Also in the Materials sector, I am deleting Air Products from both portfolios. The industrial gas producer continues to experience inconsistent financial results relative to its peers. I already have Linde, its competitor, in both portfolios. Differing from Air Products, Linde has reported 4 out of 5 earnings surprises over consensus estimates over the last 5 quarters. For commodity producers like Linde and Air Products, consistency of earnings and cash flows is especially important.
Peter McMurtry, B.Com, CFA
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