A few comments for you today on recent market moves in the United States to support why we have become more defensive in our positioning in the equity portion of your portfolio:

The stock market has rebounded in July, but fewer companies are leading the charge.

Below is a graph showing the S&P500® from April 2015 to now.

The Nasdaq 100 index – comprised of the 100 largest stocks listed on the Nasdaq – is up 10.3% this year. In July alone, it has gained 6.7%.

However, we are concerned about the growing lack of “breadth” of stocks participating in these positive returns.

• More than half of the index’s gain this year is due to three stocks that also happen to be among the largest by market capitalization: Apple Inc., Google Inc. and Amazon Inc.
• Add in Gilead Sciences Inc., Facebook Inc. and Netflix Inc., and the figure rises to 80%. That’s 80% of the markets return, YTD, due to 6 stocks.

The fact that fewer stocks are joining the rally is a sign of investor concern and cautiousness. Prior market peaks – including the 2000 top – were accompanied by a similar pattern of a shrinking handful of large-cap stocks pulling ahead. It’s a flight to perceived “quality” and is usually short-term in duration. When investors want to stay in equities but they get nervous about a correction, they sell the small caps and other riskier positions and buy the large and mega-caps.

The rally in large-cap stocks marks a reversal from the first half of the year, when small-cap shares led the market. The Russell 2000 index of small-cap stocks is up a paltry 0.1% so far in July, left behind by the 2.7% jump in the S&P 500.

Furthermore, while these companies just mentioned are quite common and all offer exciting stories, they are not our favourite companies to own – great stories don’t make great tried-and-true long-term investments. Also, there is a certain sector bias here we think anyone can point out, so diversity is lacking.

While we remain invested and generally positive on equity markets over the long-run, I feel it’s important to pay attention to downside protection strategies to help us endure the volatility ahead and to “stay the course”.

As such, I’m happy with our moves recently to add more downside protection to the portfolios and I hope you feel reassured with these moves and the direction the portfolios are taking overall. Feel free to read more on these two new investments on our website.

As always, do not hesitate to contact me should you have any questions.