Market Commentary

Making Cents of the Markets

Listen now to the most recent Making Cents of the Markets on CKNW. We talked about the markets finally having a green streak as a result of better-than-expected earnings and positive investor sentiment. Central banks are also beginning to soften their stance, which we saw with the Bank of Canada’s unexpected 50 basis point rate increase this week.

Retirement planning is important for everyone, especially business owners. We discussed what questions business owners should ask themselves to prepare for retirement.

Click to listen here.

This week, Lori was invited to be a guest on the Business In Vancouver’s Women in Business podcast series alongside Cindy David, president and estate planning advisor with Cindy David Financial Group. The “dream team” are leading female experts in the industry and are passionate to share their wisdom about investing and financial planning.

Women in business often wonder how to plan for their financial future. Lori and Cindy provide great advice and share their insight about selling your business, planning for retirement, or even receiving an inheritance. It is vital that you surround yourself with a group of professional advisors that can give you the advice you need.

Click here to listen!

Beyond the Markets

HowlOver Canada

FlyOver Canada presents the Halloween feature film, HowlOver Canada until October 31st.

Don’t miss out on your chance to see the adventures of the Witch Biker Mama and her loyal cat Tiger Moon with start times every 15 minutes every day. This experience is a crowd-pleaser for all the family!

Click here to book your tickets.

Be in the Know

“Be as you wish to seem.” – Socrates

Stocks wish to be higher

Fear in the stock and bond markets continued to ease. This week the CNN Fear & Greed Index improved to “neutral” and later “greed”, it’s most optimistic reading in weeks.

The Bank of Canada hiked rates by 50 basis points, but it was less than the 75 basis points expected. Australia recently hiked less than expected as well, and some investors took this as an indication that the Fed will also soon ease its rate-hike intensity. Investors are eager for the hikes to ease.

The biggest technology names reported varying degrees of operational slowdown. Worse, their stocks took some big hits.

Take Microsoft. Their net income fell 14% but it still beat what analysts expected. Their Windows operations system sales were down 15% due to lower global PC sales and the adversely strong USD as currency translation back to USD makes those sales look smaller than they would be if the USD were not so strong. Both FX and slower computer and tablet sales are out of their hands. Yet, their cloud business grew a still awesome 35% but slightly cooler than expected. The company’s forecasts for next quarter fell short of expectations again, much of the pressure is due to the abnormally strong dollar. The inevitable decline of the USD one day will become a tailwind for Microsoft. In the meantime, the stock’s valuation seems modest, trading at 25 times trailing earnings (toward a historic low) and was down 2.6% this week and 30% on the year.

The tech segment that is doing really poorly is digital advertising. Economic slowdowns mean less advertising spending.

The most exposed company is Facebook’s parent company Meta, which fell 22% on Thursday morning on subscribership losses, more money burned on their speculative metaverse foray, and lower advertising demand. Finance textbooks teach that growth companies eventually mature and later decline. Facebook is no longer a growth company and may or may not be in decline. Its valuation as a growth company is being adjusted rapidly, the stock is down 70% this year while its founder is down $100 billion personally. (To be fair, Facebook’s metaverse bet could still pay off. As Edward Snowden tweeted: “Sure laugh at Zuckerberg’s stock crash but remember that in five years he’s gonna own your eyeballs and pause the ads every time you blink.”)

Apple, which derives no revenues from digital advertising, posted record quarterly revenues amounting to 8% growth. Earnings per share grew 4% to $1.29. The stock was up almost 6% on the week, narrowing its year-to-date loss to 12%.

Despite some of the big tech firms reporting a weaker quarter than expected as they face a challenging economic backdrop of rising rates and inflation, the tech-heavy NASDAQ stock index was barely changed on the week.

It’s a reminder that markets are forward-looking, and investors continue to look beyond the near-term challenges.

Yes, the greenback will eventually come back

We mentioned the effects of a strong USD on currency translation. Goldman Sachs points out that the average American corporation derives 30% of its revenues from overseas customers. Among technology companies, it’s more like 60%.

Therefore, tech stocks are extra exposed to this historically strong USD. Below is a chart of the US Dollar Index (DXY) going back to 1986. It’s the value of the USD against a basket of major international currencies:

But housing’s woes look more dire

“I think it’s going to get worse before it gets better,” said a home-building analyst at U.S. financial-services firm BTIG.

U.S. homebuilders are reporting perhaps the most remarkable downturn in demand they’ve seen, but it isn’t comparable to the 2007 housing crisis. The nothing-down, ‘liar’ loans are a thing of the past. What’s changed are mortgage rates. According to one builder, “they still had the good credit, they still had the good job” but rising prices and rates “just squeezed them out of the market.”

This Las Vegas-based builder isn’t nearly as extended as he was when the last downturn hit. “I’ve learned my lesson”. He also reports that he’s “never seen it change this fast” to the downside.

Our Strategy

We are now in the heart of the earnings season and Legacy portfolios continue to get the nod from markets, proving that our companies are the leaders of the bunch.

We have now had about 45% of our companies report their Q3 earnings results. Despite this year’s headwinds that include the Russian Invasion, inflation, and higher interest rates, 82% of them have had strong results and a positive outlook into 2023.

At the same time, out of the 500 companies within the Standard & Poor’s index (S&P 500), approximately 45% of the companies have also reported Q3 earnings results and 74% of them beat estimates.

Accordingly, our portfolios were up considerably over this past week, as markets look beyond the near-term challenges to greener days.

Over the past week, we continued to make changes that will position the portfolios for success in the current environment.

When doing so, we often talk about remaining more sector neutral during times of economic uncertainty. Industrials, for example, is a sector that is usually labeled as unfavorable during an “economic slowdown”, which is dominating headlines. This is because when the economy is cooling, these industrial companies should see a decline in demand for their businesses. However, this is not what we are seeing this time around. As shown below, the industrials sector has outperformed many of its peer sectors in the U.S. market this year. It is important to stay well diversified and use conscious decisions, as the news out there can miss some important facts that should be considered when making investment decisions.

Source: Y Charts

As an example of that, our Legacy portfolio held Caterpillar, the industrial equipment manufacturer, which beat analysts’ expectations by a long shot this week with their Q3 earnings results. The stock saw a solid move after the results and we decided to take profits and look for new opportunities with similar growth in other sectors as we feel industrials may not lead in 2023. Again, this is what active management is all about!

Looking forward to next week, we will be keeping a close eye on the Fed and their interest rate decision, set to be released on Wednesday. As noted above, many countries including Canada have already started to ease on their aggressive rate hike rhetoric, and we think that this could be a sign that we are closer to seeing the same from the Fed. In either case, we are always ready with a plan of action.

Visual of the Week

The comments and opinions expressed in this newsletter are solely the work of Pinkowski Wealth Management, not an official publication of Canaccord Genuity Corp., and may differ from the opinion of Canaccord Genuity Corp’s. Research Department. Accordingly, they should not be considered as representative of Canaccord Genuity Corp’s. beliefs, opinions, or recommendations. All information is given as of the date appearing in this newsletter, is for general information only, does not constitute legal or tax advice, and the author Pinkowski Wealth Management does not assume any obligation to update it or to advise on further developments related. All information included herein has been compiled from sources believed to be reliable, but its accuracy and completeness is not guaranteed, nor in providing it do the author or Canaccord Genuity Corp. assume any liability.