Monthly portfolio brief

Post-election Portfolio Positioning

What you need to know

• North American equity markets finished higher in October, with U.S. stocks outperforming. However, a softer Canadian dollar masked underlying weakness in U.S. stock performance.
• With the U.S. presidential election concluding, and recent data suggesting the U.S. economy remains on strong footing, we believe opportunities are more attractive in U.S. equities relative to fixed-income and overseas stocks. We also recommend favouring U.S. large-cap stocks over Canadian large-cap stocks.
• Healthy economic growth and a potential rebound in manufacturing could support the industrials sector. Consider overweighting industrials while underweighting materials as part of a well-diversified equity portfolio.
• With central banks easing monetary policy, the yield on cash will likely continue to decline in the months ahead. Consider reducing overweight cash positions and adding to intermediate and longer-term bonds.

Portfolio tip

The trajectory of the Canadian and U.S. economies and markets doesn’t change with U.S. election outcomes and neither should your investment strategy. While markets have thus far taken election news in stride, we’d view any future volatility as a compelling opportunity to add to quality investments in line with your long-term goals.

Where have we been?

Despite uncertainty in markets, the U.S. economic growth engine continues to hum along. After brief growth scares in early August and September, recent data suggests the U.S. economy remains on strong footing. Third-quarter real GDP expanded at a healthy 2.8% annualized rate while recent labour-market data point to cooling, but still healthy conditions. Strong economic activity has translated into healthy corporate profit growth as well with U.S. large-cap stocks on pace to post their fifth consecutive quarter of positive earnings growth. In Canada, economic growth has lagged, with the most recent monthly GDP reading suggesting economic growth was flat in August.

North American equities finished higher in October, with a softer Canadian dollar masking underlying weakness in U.S. stocks. Canadian stocks saw strong returns in October with Canadian large-caps posting their fourth consecutive month of positive returns. U.S. stocks saw positive returns as well, with both of our recommended U.S. equity asset classes gaining over 2%. However, a softer Canadian dollar over the course of the month masked underlying weakness in U.S. stocks.

While expectations are for the Federal Reserve to continue lowering interest rates, strong U.S. economic growth has led markets to expect fewer interest rate cuts over the coming year. Meanwhile, the Bank of Canada lowered its target rate by 0.5% at it's October meeting, as inflation has moderated while economic growth has been sluggish.

The divergent path of the U.S. and Canadian economies combined with differing expectations for the pace of future central bank rate cuts led to a softer Canadian dollar in October. Excluding the impact of currency, both U.S. equity asset classes were lower for the month as U.S. election uncertainty and weakness in mega-cap tech in the final week of October weighed on sentiment.

In overseas markets, lackluster economic growth in Europe combined with a lack of direction from China's policymakers on future stimulus weighed on sentiment last month. Despite divergent trends across regions in October, it's worth acknowledging that each of our recommended equity asset classes has gained more than 20% over the past year. Strength across multiple regions has helped lift well-diversified portfolio's higher over this time and highlights the benefits of diversification across multiple asset classes and regions.

Despite easing monetary policy, bond yields rose weighing on fixed-income returns. Despite a larger-than-typical 0.5% interest-rate cut from the Bank of Canada in October, interest rates climbed higher in October, weighing on fixed-income returns. Stronger U.S. economic data and reduced expectations for Fed rate cuts were contributing factors to the rise in yields in the U.S. and Canada. International high-yield bonds and cash were the only fixed-income asset classes to see positive returns for the month.

What do we recommend going forward?

Revisit what matters most, your goals. The resilience of the U.S. and Canadian economies and markets doesn’t change with each U.S. election and neither should your investment strategy. Your goals and investment objectives should drive the design of your portfolio. We recommend using our strategic asset allocation guidance as a starting point when building a well-diversified portfolio.

First, define your portfolio's strategic asset allocation based on your financial goals and comfort with risk. From there, consider incorporating the following opportunistic guidance to take advantage of more timely portfolio opportunities as appropriate with your financial goals.

We continue to recommend favouring equities, specifically U.S. stocks. In our view, easier monetary policy creates a supportive backdrop for both stocks and bonds. However, based on our view for an ongoing U.S. economic expansion and healthy corporate profit growth, we believe the greater opportunity lies within equities, particularly U.S. large-, mid- and small-cap stocks.

U.S. stocks have outperformed overseas and Canadian stocks over the past 12 months. Healthy economic growth and moderating inflation has translated into strong corporate profit growth for U.S. large- and mid-cap stocks. This contrasts with Canada and overseas regions which have seen lackluster economic and corporate profit growth.

Within overseas markets, we believe the balance of risk and opportunities has improved for emerging-market equities. Policymakers in China announced several stimulus measures to support the country’s slumping economy and stock market. In response, emerging-market stocks rallied more than 6% in September.

While September's momentum wasn't sustained last month and uncertainty remains about the size and timing of future stimulus from China, we believe further policy support will follow. This should provide support to emerging-market stocks in the months ahead.

Therefore, we’ve recently raised our recommended target for emerging-market stocks to neutral and lowered developed overseas stocks to underweight.

Consider tilting Canadian investment-grade bond allocations toward intermediate and longer-term bonds. We expect the Bank of Canada to continue to lower interest rates over the coming year. In our view, this will lead to limited upward pressure on bond yields from current levels and creates an attractive opportunity for intermediate and longer-term Canadian investment-grade bonds relative to short-term bonds and cash.

While short-term bonds and cash serve a valuable role in a portfolio, over allocating to them can lead to underperformance over the long-term. Cash has been the worst performing fixed-income asset class over the past 12 months.

With the Bank of Canada lowering rates, the yield on cash is likely to fall over the coming months, reducing return potential. We recommend investors consider trimming overweight allocations to cash and short-term bonds and reposition to intermediate- and longer-term bonds.

Position equity portfolios to benefit from broadening leadership.  While equity market performance in 2023 was best characterized as narrowly led, with U.S. mega-cap technology stocks outperforming, performance this year has been balanced across sectors. With the Bank of Canada and Fed easing monetary policy and economic conditions supportive, particularly in the U.S., we expect a continued broadening of leadership in the months ahead, which will benefit investors with diversified equity sector allocations.

Opportunistically, we recommend overweighting industrials while underweighting materials. The industrials sector has posted strong returns year to date in the U.S. but has lagged in Canada. We believe the sector should benefit from global central bank rate cuts and the potential for a global growth recovery over the coming quarters.

The materials sector has lagged in the U.S., and valuations remain elevated compared to history. Additionally, materials is one of just a handful of sectors of the S&P 500 expected to see negative earnings growth in 2024. While a rally in precious metals prices has supported the materials sector in Canada more recently, we believe opportunities are more attractive in other sectors and recommend an underweight to materials.

We’ve also recently reduced our recommended target for utilities from overweight to neutral and raised our recommended target for financials from underweight to neutral. Utilities is an interest rate-sensitive sector, and the combination of easing central bank policy and moderating inflation has led to strong returns in 2024 in both the U.S. and Canada. However, the sector has had a strong run already and we’d expect the pace of gains to slow from here.

In financials, we believe central bank interest rate cuts, economic resiliency and healthy consumer balance sheets, particularly in the U.S., have improved the outlook for this sector.

We’re here for you

Talk with your financial advisor about how our strategic asset allocation guidance can provide a solid foundation for constructing a portfolio aligned to your long-term goals. Then, consider incorporating our opportunistic portfolio guidance to take advantage of current opportunities in markets.

If you don’t have a financial advisor and would like to build an investment strategy aligned to your financial goals, we invite you to meet with an Edward Jones financial advisor.

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.