Market Commentary

Making Cents of the Markets

On this week’s Ready.Set.Retire! We shared one of our favourite interviews with the other half of the “Financial Dream Team” Cindy David, Senior Estate Planning Advisor and CFP.

Whether it’s selling a business, planning for retirement, providing early gifts, or simply minimizing tax – Cindy shares strategies that you can implement now to improve your financial health.

Listen here or subscribe on Spotify, Apple podcasts, and Acast.

Listen now to the most recent Making Cents of the Markets on CKNW. We talked about the markets taking a quick dip as we anticipated the Fed’s interest rate decision. Overall, October was a good month for investors and it has given us confidence for a year end-rally!

As November is Financial Literacy Month in Canada, we busted some common myths surrounding retirement: Can you retire with debt? Do you need to max out your RRSPs? Do you need to have a conservative portfolio in retirement?

Click here to listen and find out the answers!

Last week Canaccord held its Annual National Advisor awards to recognize the efforts and achievements of the top advisors.

The Pinkowski Wealth Management team was thrilled to accept the Western Canadian Client Dedication Award! This award recognizes the team who consistently shows a commitment to providing a holistic and above-and-beyond approach to wealth management and financial planning.

It is an honour for our team to win this award as we pride ourselves on providing the “uber” service our clients deserve. Lori has also been asked to sit on a committee of advisors to discuss opportunities, address challenges and share ideas on how we can continue to enhance the Canaccord Genuity client experience and how the firm can continue to excel in all aspects of true wealth management.

Beyond the Markets

Bear Creek Lights

The City of Surrey invites you to visit the Light Festival that is transforming Bear Creek Park this fall! From November 4 to November 18, experience the dazzling lights on the one-kilometer walking loop. The event is free admission but tickets are required.

Click here to find out more!

Be in the Know

Still bouncing around the bottom

On the one hand, markets had a tough week due to the Fed’s guidance that rate hikes aren’t going to end anytime soon (more on this below).

On the other hand, stocks took some solace in the strong jobs numbers today, which is bad from an inflationary perspective but positive in that the single most important part of any economy remains healthy.

Canada posted a job growth gain that was an eye rubbing 10 times larger than expected in October, as an estimated 108,000 jobs were added last month. Unemployment remains at 5.2%.

Bond prices dropped (which means interest rates rose) and the Loonie jumped.

America added an estimated 261,000 net new jobs in October, also way above estimates.

This bear market isn’t over, but the bulk of its damage is in the rear-view mirror. The recovery is a matter of “when” and not “if”. And that day is closer than it’s been all year.

Still playing catch-up

Unfortunately, the Fed appears poised to do what it always does: show up late and stay too long.

As expected, the Fed hiked 75 basis points again this week. In its written statement, it added this key, momentarily optimistic change to its standard message, suggesting that a slow-down in rate hikes is finally in sight:

“The committee will take into account the cumulative tightening of monetary policy, the lags with which monetary policy affects economic activity and inflation, and economic and financial developments.” 

The Fed knows that most of its previous hikes have yet to take hold of the economy and they don’t want to overdo it like they pretty much always do. The stock and bond markets rallied at first.

But after the formal announcement, the Fed Chairman spoke to reporters as is custom. He sounded much more hawkish (aggressive) than previously saying that “we are a ways away” from the Fed taking a pause. So much for taking ‘into account the cumulative tightening’ so far.

He did say a U.S. recession is not a certainty, especially with the jobs market still very strong. He also said the Fed is not seeing inflation turning down yet, though he pointed out that CPI components such as rent hikes will inevitably fall. Just not yet.

So, while the Fed may slow the intensity of their hikes, they are by no means done raising rates. The stock market did not like this message, however, it seemed to have digested the news as we are still closer to the end of this rate tightening cycle than the beginning and markets have always been forward-looking.
Less buying, but some companies are taking advantage of the situation

Global rate hikes have taken a toll on PMI (purchasing manager index) readings globally, with many falling below the critical 50 growth-decline line last month. A reading below 50 implies a shrinking economy and that might explain why some key bond yields have come down from record highs.

The Fed’s favourite metric suggests a recession is likely, as illustrated by this Bloomberg chart:

 

Some companies are taking advantage of this abnormal inflation by hiking prices and profits more than the cost increases they’ve faced. PepsiCo said it hiked prices for its chips and pop by 17% but reaped a 20% increase in net profits, as Coke did similarly. Chipotle Mexican Grill hiked prices by 15% yet its quarterly profit jumped by 26% from a year ago. And then there are airlines, which we all know are charging way more, as are the banks, which enjoyed higher net margin income.

All of these companies were able to pivot their strategy to overcome the challenges of our current environment, proving analysts wrong by beating earnings estimates and enjoying a nice stock boost along the way.

On the other hand, it’s no wonder that according to Nanos Research, 47% of Canadians polled said their finances have grown worse in the past year. It was the highest reading since this poll began in 2008. Many Canadians feel worse today than in the Great Recession of 2008-2009, perhaps because inflation at the grocery store and pump are worse now.

Inducing lower demand via a recession may be the best way to clip these inflationary pressures. Shorter-term pain for longer-term pain.

But there is reason for optimism

This week, we met with RBC’s chief economist who explained that inflation has likely peaked. It’s very rare for both stocks and bond markets to be down at the same time and only happens when inflation gets ugly. While it is important to fix inflation, he believes stocks and bonds are both “on sale” now, with stocks holding a brighter future.

The positives he is seeing? Pandemic restrictions are mostly over, household finances are stronger than normal, and stocks are still higher than a couple of years ago. Supply chain problems are almost over and inflation is off its high.

As for negatives, he pointed to fiscal drag (governments spending less), Russia, and China’s problems (They used to represent a third of global growth). And, of course, confidence amongst business leaders, consumers, and investors are low.

RBC sees a 60% probability of recession where inflation gets solved. There is a 20% chance that said recession doesn’t fix inflation, otherwise known as stagflation (stagnant growth, high inflation). Most optimistically, the economist sees a 15% chance of inflation getting solved without going into recession.

Canada’s economic prospects look a little darker than the U.S., as we have a maximum of 5-year mortgages to their 30-year max. Rate resets will hurt more people in Canada sooner than in the U.S.

He also made the interesting point that this time inflation has caused the consumer to spend less, which will help solve the inflation problem. Contrast this to the 1970s when inflation prompted people to buy more today for fear of having to pay more tomorrow. This is a vicious cycle that pushes inflation higher and higher. Again, we are seeing the opposite today, as well as central banks that are acting much faster than in the 1970s. Back then, there was also a Baby boomer spending surge, a cohort that has sobered up and toned down its spending today.

In all, RBC is optimistic that the worst of the market sell-offs are behind us.

The fix to high oil prices?  Drill more.

Ottawa is set to copy Washington by implementing some sort of excise tax on corporate share buybacks. America’s Inflation Reduction Act, signed into law in the summer, implanted a 1% tax on share buybacks. It’s enough to annoy companies but isn’t enough of a disincentive to curb the practice.

Share buybacks these days are mainly concentrated in the oil & gas sector. They are flooded with cash, a stark improvement from 2020 when they were at the brink of bankruptcy. The lesson was clear: if you survive, make sure you pay down debt and pay back the investors – either through share buybacks, dividends, or both. And don’t flood the market with too much supply, which will only kill the cycle.

Global drilling activity is about half of what it would normally be with oil at these levels. “Drill baby, drill!” is deemed way too risky.

Some blame politics, but that’s not the cause. Oil & gas companies would have cut back on drilling after their near-death experience regardless of who controls Washington or Ottawa.

The irony of these excise taxes on share buybacks is it promotes drilling, which is what left-leading politicians are desperate for but don’t want to admit to their supporters.

If China re-opens its economy (as it is being reported), oil prices will go higher, and companies will care even less about a 1% tax.

Our Strategy

Despite the Halloween festivities, October wasn’t so scary after all

Legacy portfolios ran, not walked in October, as they were up over 4% on average with some advancing as much as 7% for the month.

The strong monthly performance defied the weaker average returns in markets typical for October. As shown below, the S&P 500 averaged 1% in October dating back to 1964.

Knowing to be at the right place, at the right time definitely played a role in our outperformance as we continue to fine-tune our roster of companies, identifying leaders in sectors that are favoured according to the changing environment.

Our leaders continue to prove themselves as the strongest of the bunch, as more of them continue to report third-quarter earnings results that beat expectations. Thus far, 65% of our companies reported their previous quarter’s earnings results and 81% of them have surprised analysts that seem to have underestimated them. At the same time, so far 70% of the companies within the S&P 500 index have beaten analysts’ earnings estimates.

One area that received traction this week has been gold. As it had been on a decline for seven months, investors may now find gold a bargain. One of the reasons behind gold’s decline this year has been the strong US dollar. Gold often moves inversely to USD and can be used as a hedge against a falling dollar. It may be a bit early but eventually, the USD will reverse and gold could benefit. This week, we chose to add exposure to the sector in our portfolios to participate in any of this upside potential. We also continue to add to some of our leaders in other sectors that have had a great earnings report and a positive outlook.

Visual of the Week

Fall is finally here!

 

 

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. Investing in equities is not guaranteed, values change frequently, and past performance is not necessarily an indicator of future performance. Investors cannot invest directly in an index. Index returns do not reflect any fees, expenses, or sales charges. 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.

CANACCORD GENUITY WEALTH MANAGEMENT IS A DIVISION OF CANACCORD GENUITY CORP., MEMBER-CANADIAN INVESTOR PROTECTION FUND AND THE INVESTMENT INDUSTRY REGULATORY ORGANIZATION OF CANADA