Harvest ETFs Monthly Insights (August 2024 Summary)
Harvest ETFs
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Macro Snapshot: The Carry Trade, the Fed Changes its Tune, and Election Effects
The S&P 500 was up 2% month-over-month and had climbed just shy of 20% for the year-to-date period to close out August 2024.
The first week of August had three days of aggressive declines, resulting in a three-day intraday move of over 8% to the downside. Moreover, volatility gauges spiked to levels that were last seen during the heart of the COVID-19 pandemic and the 2007-2008 financial crisis.
As always, there are a multitude of factors that contributed to a decline. However, the August declines were significantly due to some “market internals”.
One significant event was the execution of carry trades. A carry trade is when investors borrow in equities or a currency with low interest rates and reinvest those proceeds into higher-yielding assets. The unwinding of leveraged trades in equity and currency markets amplified the impact of less-than-stellar macroeconomic news at the end of August.
Markets soon stabilized following the brief bout of volatility. Meanwhile, rotational trends were still present and benefitted several Harvest Equity Income ETFs. These rotations have been driven, in part, by the shifting expectations for earnings growth.
Positive trends in their respective sectors bolstered the Harvest Healthcare Leaders Income ETF (HHL:TSX), the Harvest Global REIT Leaders Income ETF (HGR:TSX), the Harvest Equal Weight Global Utilities Income ETF (HUTL:TSX), and the Harvest Brand Leaders Plus Income ETF (HBF:TSX) that all hit 52 week highs during the month of August.
Strong returns in this summer have once again flown in the face of the “sell in May and go away” adage. Indeed, there have been positive returns after the month of May in 13 out of the past 15 years.
As we look forward, it is worth noting that, historically, September has been the worst performing month by a wide margin compared to any other month over the past 25 years. It has delivered a negative performance in four out of the past five years. However, over the past 25 years, there is no specific pattern with negative returns occurring in just over half of the years, implying that directionality of the market is driven by far more variables than the changing of the leaves. Also, an uptick in volatility should not be unexpected.
Federal Reserve Chairman Jerome Powell delivered remarks in late August that showed he had been spurred to commit to lower rates in the face of ongoing macro trends. Those trends included cooler inflation, relatively weak jobs data, and decelerating economic indicators. The market now expects the US Fed to begin cutting at the September 2024 meeting.
Would a Fed cut equal big moves in the Fixed Income space? Possibly.
A yield curve inversion occurs when long-term interest rates decline below short-term interest rates. This is often viewed as a negative economic indicator, as markets expect the economy will contract. The yield curve has only been inverted for around five times in the past 50 years. Meanwhile, the most recent inversion is one of the longest stretches in history. In early September, this metric was finally reversed, albeit marginally. This could be a prelude to the coming pivot in the economic and interest rate cycle.
A market in transition means that the one constant to expect is continued volatility to shorter term economic data in bond prices. That, in turn, translates to high income from option premiums in our covered call fixed income suite – the Harvest Premium Yield Treasury ETF (HPYT:TSX) and the Harvest Premium Yield 7-10 Years Treasury ETF (HPYM:TSX), now the largest covered call fixed income ETF suite in Canada.
The market has started to allocate toward more interest rate sensitive areas in preparation for cuts, such as Utilities, the best performing sub-sector in the US through early September and REITs that have started to perform relatively very strongly since July. However, the state of the economic backdrop and ongoing structural drivers for areas within these segments are key elements to watch. For example, see our recent piece on AI power demand and data warehousing trends driving the utilities sector shows important factors beyond interest rate movements.
Finally, we took another look at market performance in election years ahead of the Trump-Harris showdown in November. Recent history shows us that, under both Trump and Biden administrations, the windfalls and policy driven tactical allocations faded very quickly and often failed to materialize.
So, election outcomes and their impact on markets make for great content. But that analysis is not necessarily actionable. We take the view that tactical allocations should be more focused on our macro viewpoints and expanding market breadth and the interest rate cycle.
If politics triggers volatility to the downside, that presents an opportunity. This is especially true as we enter seasonally volatile periods starting in September.
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ABOUT HARVEST ETFS:
Founded in 2009, Harvest Portfolios Group Inc. is an independent Canadian Investment Fund Manager. At Harvest, our guiding principles are premised on building wealth for our clients through ownership of strong businesses that have the potential to grow & generate income over the long term. Harvest has an established track record with its stable of Equity ETFs and Fixed Income ETFs. Now, in 2024, Harvest has expanded its income philosophy to introduce Balanced Income ETFs to our innovative lineup. These portfolios are invested in ETFs listed on a recognized North American stock exchange that provide exposure towards large capitalization equity securities, investment grade bonds or money market instruments issued by corporations or governments and will include ETFs that engage in covered call strategies. Read More
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