July 15, 2022
Making Cents of the Markets
Listen to our latest episode of Ready.Set.Retire! Lori and Jon talk about why you should be talking to your family about your estate planning in order to prepare for a healthy and wealthy future!
Together, they discuss how to start the conversation, and how a financial advisor can help with the transition of wealth.
Listen now to the most recent Making Cents of the Markets on CKNW, where we discussed the Bank of Canada’s hiking interest rates by 1% and the US June inflation rate report.
We also talked about the impact interest rates are having on the real estate market and the stock market – what should your portfolio hold?
Click to listen here.
Beyond the Markets
This Sunday, July 17th, Vancouver Opera and the City of Burnaby are hosting the inaugural Opera in the Park at Festival Lawn at Deer Lake Park.
The family-friendly event starts at 7:30pm and is titled Opera in the Movies. It is going to be an operatic journey through the music of Hollywood hits and best of all, it is free so seating is first come first served!
Be in the Know
“I have always been delighted at the prospect of a new day, a fresh try, one more start, with perhaps a bit of magic waiting somewhere behind the morning.” – J.B. Priestley
One data point but an array of interpretations
Marcus Aurelius wrote that “everything we hear is an opinion, not a fact. Everything we see is a perspective, not the truth.” One interpretation is that how we perceive an event or single data point is subjective, and that is certainly the case when it comes to economic data and markets.
One day the market goes down due to worrying inflation reading, slower earnings, or recession concerns. But the next day, it goes up because some other data made it feel like those threats are all of a sudden less alarming. Back and forth it goes.
Earnings season kicked off this week with investors keenly watching how inflation may affect corporate profits and company leaders future guidance. Bellwether earnings this week saw IBM report in-line, SAP and Seagate missed earrings per share by a penny (less than 1%), while the banking behemoth JPMorgan reported a 10 cent miss with $2.63 EPS and revenues down 3.9% and their forward guidance was negative. JPMorgan’s stock fell a few percent on the news over the next couple of days, but today opinions and perspectives shifted and the stock jumped over 5% after healthy consumer spending data (more on that later).
Unfortunately, U.S. inflation data failed to cool for June, as the Consumer Price Index (CPI) grew at a 9.1% annualized clip and increased from May’s 8.6% pace. Gasoline prices rose 11.2% in June. However, so far in the month of July, gasoline prices have been easing, following oil’s drop from a peak of about $130 to a close of $97.50 this week.
Because of gasoline’s month-long decline, July inflation may have peaked last month.
Nevertheless, central banks are not done hiking interest rates. The Bank of Canada hiked its key interest rate by 1 percentage point, more than the 75 basis point hike expected. The Fed is expected to hike by another 75 basis points later this month.
As normally happens, the US dollar rises in popularity during rough times. The euro slipped below parity for the first time in 20 years. It is the market’s way of saying the EU has more economic challenges than America. It also makes it more expensive for Europe to buy imports like natural gas (especially American liquified natural gas and oil) that are priced in USD, making their inflation challenges even worse overseas.
Spending remains as American as apple pie
Despite inflationary pressures and slower corporate earnings, today’s U.S. retail sales data showed that shoppers increased their spending last month.
But not all consumers are in a spendy mood. Canadian banks had a terrible week, worried that the steep rate hikes will drive up the cost of mortgages. This will expose some mortgage holders at the banks’ expense, as well as cool down what has been a very profitable industry for banking.
But all of this seems rather quaint when one looks at what’s happening in China’s housing market, which makes up 25-30% of their overall economy. A growing number of developers have defaulted on debt obligations and were forced to stop building, which is now angering condo buyers themselves who are increasingly stopping their mortgage payments in protest (in China, payments are made during construction). Citigroup research estimates that unfinished project condo prices are 15% underwater.
Not making mortgage payments is in turn putting pressure on banks.
Publicly traded bonds of Chinese developers illustrate their woes. Below is a chart of three large U.S. dollar-denominated bonds (par is 100 cents on the dollar):
Breaking our cellphone addictions cold turkey? Please no!
Competition is the cornerstone of capitalism, but so is good sportsman-like conduct. Canada’s Industry Minister is making Canada’s telecoms formally agree to help one another in the event that one of their networks goes down as recently happened to the Rogers network.
Their intent is noble, but experts say such agreements would not have helped in last week’s outage as the disruption was the result of a malfunction in the company’s core network during a scheduled upgrade. A 12-hour outage occurred 15 months ago lasting 12 hours.
Cell phones are essentially magic: we can send messages globally, speak to anyone in real-time, record and share our world, shop and send items to our doorstep, research any topic, pay bills and receive money, etc. In fact, it isn’t magic because sometimes it breaks.
The banks’ gloomy outlook prevailed this week, as per the above fore mentioned hurdles they are up against. With a sector that is out of favour, we understand things can get worse before they get better. Thus one of our portfolio changes over the week included cutting-back our portfolio’s minimal exposure from the sector.
We also saw some opportunities that feel ripe – so we started pickin’. With yields showing signs of peaking, we started to add back some bond exposure after we reduced it throughout last year when yields began to move higher. Remember, when yields go up, bond prices go down and vice versa.
U.S. markets have had an encouraging move off the lows with the S&P 500 now up about 5% since then. Some are rushing to call it “the bottom”, though we are still patient with our call.
We understand that the consumer is proving to be a lot more resilient than previously thought (further exemplified from today’s strong U.S. Retail Sales data). Inflation is also sticking around much longer than initially expected. Although we are seeing the price of many commodities drop such as wheat, soy beans, corn – all down 15% to 40% from recent peaks. The drop in oil will have a significant impact on gas at the pump as well – which should help reduce inflation in coming months.
We remain patient as we would like to see further evidence of a cooling economy to convince us that conditions are starting to change, confirming that we have likely reached “the bottom” rather than “a bottom”. At which point, we will be ready to add back exposure and participate in what is expected to be a rally with significant upside potential. Remember, the harder it falls the greater it rallies!
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.
CANACCORD GENUITY WEALTH MANAGEMENT IS A DIVISION OF CANACCORD GENUITY CORP., MEMBER-CANADIAN INVESTOR PROTECTION FUND AND THE INVESTMENT INDUSTRY REGULATORY ORGANIZATION OF CANADA