Mike Philbrick, chief executive officer, ReSolve Asset Management

FOCUS: Exchange-Traded Funds 

MARKET OUTLOOK:

The stock market continues to rally despite the ongoing banking turmoil and the potential for an economic recession. This seems to be due to the market anticipating a U.S. Federal Reserve pivot, which would pause the current monetary policy tightening cycle. The economy is weakening and inflation rates are beginning to decrease, leading investors to believe that the Fed could ease policy despite its communications.

Meanwhile, bank liquidity ratios have contracted substantially, as depositors withdraw their money from the banking system to pursue higher rates on government-guaranteed instruments. This leads to tighter lending standards as banks have fewer deposits to lend. Recent data shows that the number of loans and leases being made by banks is beginning to decline, indicating that the tightening of lending standards is starting to have an impact on the economy.

This seems to align with the phases that have typically led to recessions in previous cycles. First, the Fed tightens monetary policy by raising its federal funds rate. Next, domestic banks tighten lending standards. Finally, the number of loans and leases decreases as people and businesses struggle to obtain loans, slowing economic growth and leading to the onset of a recession. This suggests that the economy may be entering a dangerous phase of the credit cycle while the stock market is currently rallying in anticipation of a Fed pivot. This optimism may be short lived if recessionary signals begin to materialize in the coming months.

In conclusion, the stock market's disregard seems primarily driven by anticipation of a Fed’s policy change that could stimulate economic recovery. However, the tightening of lending standards and decline in loan growth suggest that a recession may be on the horizon, and this possibility could impact the market's rally.

• Sign up for the Market Call Top Picks newsletter at bnnbloomberg.ca/subscribe
• Listen to the Market Call podcast on iHeart, or wherever you get your podcasts

TOP PICKS

SPDR S&P Semiconductor ETF (XSD NYSEARCA)

It aims to replicate the performance of the S&P Semiconductor Select Industry Index. This index tracks the semiconductors segment of the S&P Total Market Index, which represents the broader U.S. equity market. The ETF tracks a modified equal-weighted index, which reduces the concentration of exposure in the very large-cap companies in the sectors and offers the potential for diversified industry exposure across large, mid, and small-cap stocks.

Artificial intelligence (AI) has had a significant impact on the semiconductor business. As AI becomes more prevalent in various industries, the demand for high-performance processors that can handle complex algorithms and data sets has increased. According to data shared by the World of Statistics, the chatbot ChatGPT reached 100 million users just in two months by way of comparison mobile phones took at least 16 years to reach 100 million users across the globe.

Purpose Gold Bullion Fund ETF (KILO TSX)

It seeks to replicate the performance of the price of physical gold bullion via buying and holding substantially all of its assets in gold bullion held at the Royal Canadian Mint. The ETF is not actively managed. It can be bought in Canadian dollars, Canadian dollar hedged and U.S. dollar units. Exposure to gold provides diversification benefits and acts as a hedge against inflation, currency devaluation, and uncertainty. I would add, currently, the price of gold is an indication of the market’s perceived credibility of global central banks’ commitment and ability to manage inflation. Lastly, gold also has a low correlation with other assets, is seen as a store of value, and tends to rise during times of uncertainty.

WisdomTree Japan Hedged Equity ETF (DXJ NYSEARCA)

It aims to track the price and yield performance of the WisdomTree Japan Hedged Equity Index. This index includes Japanese dividend-paying companies that have an exporter tilt. The ETF also includes a currency hedge that mitigates exposure to fluctuations in the Japanese yen. This means that investors can maintain exposure to Japanese equities while neutralizing the impact of currency fluctuations between the Japanese yen and the U.S. dollar. The WisdomTree Japan Hedged Equity Fund is a suitable investment for those seeking broad equity exposure to Japanese markets with a focus on dividend-paying companies and an exporter tilt, while minimizing the impact of currency fluctuations.

PAST PICKS: August 15, 2022

BMO Equal Weight Utilities ETF (ZUT TSX)

• Then: $27.43
• Now: $22.84
• Return: -17%
• Total Return: -15%

iShares Gold Bullion ETF (CGL.C TSX)

• Then: $19.58
• Now: $22.70
• Return: 16%
• Total Return: 16%

Horizons TSX Capped Energy ETF (HXE TSX)

• Then: $27.98
• Now: $30.29
• Return: 8%
• Total Return: 8%

Total Return Average: 3%