Be Selective When Choosing Stocks
The Morningstar US Market Index rose 3.4% last week, marking the first time in months that it exceeded fair value estimates. As larger growth stocks continue to drive market gains, there are still opportunities for investors who are selective and patient. For tips on how to use ratings effectively when investing, you might want to check out an article by Ricky Williamson, the head of investment at Morningstar Wealth.
Canada Abolishes Technology Tax
The communications sector experienced a significant 6.1% increase last week, bolstered by Canada’s decision to repeal a tax on large U.S. tech companies shortly before it was set to take effect. This decision followed a halt in trade negotiations between the U.S. and Canada, prompted by a planned retroactive 3% tax on tech giants. Originally announced last year, the Canadian Digital Services Tax would have been backdated to January 2022, with a proposed payment deadline of June 30. However, Canada withdrew the tax over the weekend, aiming to reignite talks for a permanent trade agreement. Major players like Alphabet and Meta saw substantial gains of 7.1% and 7.5%, respectively, while Amazon also benefited with a 6.4% increase in its stock, contributing to the consumer circulation sector’s growth.
Energy Stocks Below Fair Value
On the flip side, energy stocks saw a decline of 3.3% following the announcement of a ceasefire between Israel and Iran, which contributed to a 14.8% drop in crude oil prices. While this effectively returned prices to where they started at the beginning of the month, energy stocks remained 4.3% higher for June but are now just below their fair value.
Foreign Stocks Still Present Opportunities
The U.S. dollar fell by 1%, enhancing returns for foreign assets. The Morningstar developed U.S. index rose by 2.9%, while the Morningstar Emerging Market Index increased by 3.4%, measured in dollars. Even with strong performance this year, many international markets are still below the fair value estimates provided by Morningstar analysts. Philip Stral, Chief Investment Officer at Morningstar Wells, along with Dominique Pappard, Chief Strategist at Multi-Asset, discussed these opportunities at Morningstar’s investment meeting last week.
Doubts About Bond Diversification
Long-term Treasury bond yields have continued to drop, with the 10-year yield now at 4.3%. Typically, when investors are nervous, they flock to safer investments, causing Treasury yields to fall. This trend suggests that U.S. government bonds may be losing their status as risk-free assets for global capital. While it’s too soon to be completely certain about this shift, it emphasizes the importance of clarity when choosing assets. Treasury bonds may still offer good value for low-risk investors, but their historical diversification benefits might not apply as before.
Fed Should Avoid Rate Cuts This July
The Personal Consumption Expenditures Price Index for May slightly exceeded expectations at 2.7% over the past year, especially after excluding volatile food and energy prices. This suggests that the Federal Reserve may choose to keep interest rates steady when it meets at the end of July. Expectations indicate that there might be two more quarter-point cuts by the end of the year, with the first potentially happening in September, according to Preston Caldwell, a senior U.S. economist at Morningstar.
Attention on Non-Farm Payrolls
In the midst of a shortened trading week, all eyes may be on the upcoming U.S. Employment Report. The unemployment rate is projected to rise slightly to 4.3%. Any significant deviation from this forecast could trigger market volatility leading up to the July 4th holiday. If you’re looking for some investment insights over the long weekend, you might find the “Semi-Liquid Fund Status” report to be a worthwhile read, as it provides a solid overview of these new investment vehicles.
