Monthly portfolio brief

Timely pivots for portfolios

What you need to know

• Markets displayed signs of optimism and broadening leadership in March as recent laggards demonstrated their catch-up potential by jumping into the lead.
• We expect this theme to continue this year as central banks begin to ease policies and economic trends remain supportive.
• We recommend overweighting equity investments by reallocating from international bonds toward U.S. small- and mid-cap stocks, which helps balance quality with catch-up potential within equities.
• We also favour the potential of U.S. large-cap stocks over the risks we see within Canadian large-cap and emerging-market equity, particularly as U.S. markets broaden.
• Within bonds, consider pivoting toward longer maturity high-quality bonds as central banks consider lower interest rates.

Portfolio tip

Use your strategic allocations as the starting point for constructing your portfolio. This helps you stay aligned with your goal as you incorporate timely market opportunities.

Where have we been?

Markets displayed signs of optimism in March, though a breather would not be surprising. The market rally continued last month, and all asset classes participated in the gains. Multiple major central banks reiterated their expectation to cut rates as inflation trends lower, which could help support a reacceleration in economic and earnings growth later in 2024.

Market gains in recent months have been impressive and relatively smooth. All our recommended asset classes have generated positive returns over the past year, and more than half have produced gains greater than 10%, supporting well-diversified portfolios.

It wouldn't be surprising for volatility to pick up following such strong performance. We recommend investors diversify and view pullbacks opportunistically.

Recent equity laggards gained momentum last month, broadening markets. Large-cap stocks, especially in the U.S., have benefited portfolios the most over the past 12 months. They outperformed smaller-company stocks across domestic and international markets. Performance in the U.S., however, has largely been driven by a narrow segment of the market, specifically tech-oriented mega-cap stocks and the enthusiasm around artificial intelligence.

As economic optimism increased this year, relatively cyclical investments began to outperform, broadening markets. While some large-cap stock indexes have continued to reach new highs, small- and mid-cap stocks generated larger gains in March. Canadian equities rose to the top, driven by leadership from energy and materials – two large Canadian sectors. Additionally, value-style equities, which have lagged so far in 2024, outperformed growth-oriented equities last month, demonstrating the value of portfolio diversification.

Bonds have begun to bounce back, benefiting from higher income potential. Historically aggressive central bank rate hikes sent interest rates significantly higher over the past three years. While this helped battle elevated inflation, it also created a challenging bond market that has weighed on portfolios, and three-year bond returns have been disappointing.

More recently, however, as interest rates have drifted lower from their peak and bonds benefit from today's higher income potential, fixed-income investments have begun to bounce back. International high-yield bonds, which tend to be more economically sensitive, have performed especially well, given their higher-interest-rate premiums and tightening credit spreads.

What do we recommend going forward?

1. Tilt toward equities by reallocating from international bonds to U.S. small- and mid-cap stocks. We believe the U.S. economy is likely to soften as the lagging effects of tight monetary policy more fully impact economic activity, which may cause a bit of volatility.

However, our forward-looking indicators suggest growth is likely to firm later this year, particularly as inflation falls further and central banks become less restrictive. We expect this environment to be supportive for stocks and bonds, with U.S. stocks likely outperforming higher-quality bonds over our outlook period.

U.S. small- and mid-cap stocks look particularly attractive. They've historically performed strongly in similar environments but have lagged recently, which has improved relative valuations. Offsetting an underweight to international bonds by reallocating toward U.S. small- and mid-cap stocks can help balance quality with cyclical catch-up potential within an equity overweight.

2. Favour the potential of U.S. large-cap stocks over the risks within Canadian large-cap and emerging-market equity. The relative quality, stronger earnings growth potential and ongoing momentum increase the attractiveness of U.S. large-cap stocks, despite their higher valuations following an impressive run.

We expect U.S. growth concerns to further ease as we progress through 2024 and the Federal Reserve pivots lower. We believe this could help release catch-up potential from laggards, broaden markets and support momentum for the asset class.

We've also grown increasingly concerned about the ability for China to support emerging-market equity, given the country's underwhelming and uncertain fiscal and monetary policy support amid slowing growth, as well as a challenging regulatory landscape. In Canada, we expect the impact of high rates to weigh on the housing market and consumption in the near term, causing a greater headwind for Canadian large-cap stocks than U.S. large-cap stocks. While we recognize some uncertainty has already been priced in, we believe risks remain elevated for Canadian large-cap and emerging-market equity.

3. Place a greater focus on longer maturity, higher-quality bonds. We expect inflation to fall further, the Bank of Canada to pivot lower, and soft economic growth in the near term, which we believe will likely cause interest rates to drift lower. Increasing the interest rate risk of a bond portfolio helps provide a greater potential for bond price appreciation as interest rates drop. Longer-term bonds have higher interest rate sensitivity – we expect their prices to move more than the prices of shorter-term bonds for any given change in interest rates.

We also believe longer-term higher-quality bonds appear attractive, given the price declines in recent years. Therefore, within Canadian investment-grade bond allocations, we recommend slightly favouring long-term higher-quality bonds over short-term bonds.

Long-term bond investments also help investors lock in today's higher rates for longer. Short-term bond and cash-like investments, on the other hand, carry more reinvestment risk. We recommend managing this risk by reducing overweight positions to these types of investments.

4. Reposition your equity sector exposure to benefit from catch-up potential. We have raised our recommendation for industrials and utilities, which have lagged over the past year. Industrials are likely to benefit from economic and earnings strength as we progress through 2024. Utilities appear attractively priced, particularly given their favourable dividend yields and interest rate sensitivity.

We continue to recommend a focus on the consumer discretionary sector. The sector has performed well recently, and we expect supportive inflation and economic trends to provide a tailwind.

We now recommend underweighting communication services, which has run up substantially this past year, as well as financials and materials. These sectors may underperform if the economy stalls.

We’re here for you

As you manage your portfolio, it is important to align your investments with your comfort with risk and financial goal. We also recommend considering the current market environment and our global outlook to help determine if some timely positioning could supplement the strategic design of your portfolio. Talk with your financial advisor about how you might align your portfolio’s allocation with your investment objectives while also staying positioned for what may lie ahead.

If you don’t have a financial advisor and would like help reviewing the timely positioning and strategic alignment of your portfolio, we invite you to meet with an Edward Jones financial advisor to discuss your goals and investment objectives.

Strategic portfolio guidance

Defining your strategic investment allocations helps to keep your portfolio aligned with your risk and return objectives, and we recommend taking a diversified approach. Our long-term strategic asset allocation guidance represents our view of balanced diversification for the fixed-income and equity portions of a well-diversified portfolio, based on our outlook for the economy and markets over the next 30 years. The exact weightings (neutral weights) to each asset class will depend on the broad allocation to equity and fixed-income investments that most closely aligns with your comfort with risk and financial goals.

Diversification does not ensure a profit or protect against loss in a declining market.

Opportunistic portfolio guidance

Our opportunistic portfolio guidance represents our timely investment advice based on current market conditions and a shorter-term outlook. We believe incorporating this guidance into a well-diversified portfolio may enhance your potential for greater returns without taking on unintentional risks, helping to keep your portfolio aligned with your risk and return objectives. We recommend first considering our opportunistic asset allocation guidance to capture opportunities across asset classes. We then recommend considering opportunistic equity sector and Canadian investment-grade bond guidance for more supplemental portfolio positioning, if appropriate.