Equity markets have split into two camps: stocks investors love, and stocks investors love to hate. The ‘love camp’ comprises of technology companies, weed stocks, and high-growth U.S. businesses. The ‘hate camp’ comprises of companies that are susceptible to rising interest rates, stocks exposed to foreign markets, and the vast majority of the Canadian equity exchange. Upon further analysis it is clear that the love camp are widely-owned and are very expensive, whereas the hate camp continues to become less loved as they have been underperforming for so long. If this persists, we will all be owning Netflix and Canopy Growth in no time.
My concern with equity markets is the dispersions in valuations and how the growing popularity of passive investing may be distorting valuations further. The impact of near-zero interest rates has artificially inflated stock multiples and passive investing has created a scenario where money is being invested without regard for valuations. Exchange traded funds with the best performance attract large amounts of capital, resulting in further buying. We are in a market where the stocks that have risen continue to rise, and the stocks that have lagged continue to lag. This occurred with tech stocks in the early 2000’s.
It is human nature to want to sell underperforming assets and chase those assets that have done well. The challenge is to stay disciplined and avoid the seductive siren calls. Our strategy and investment discipline remains the same: maintain an asset allocation strategy that reflects your appetite for risk and return objectives; stay invested and take advantage of any opportunity that market volatility may provide. By taking our time to assess market and economic effects properly, this allows us to reposition portfolios and protect our assets in a more measured fashion.
Cattelan Private Wealth Counsel Team