Market Commentary

Making Cents of the Markets

Listen to our latest episode of Ready.Set.Retire! Lori and Jon are joined by Senior Mortgage Broker, Paula Siemens of Invis – The Siemens Group.

With over 32 years experience, Paula answered some key questions on our minds: How has the real estate market changed over the last two years? Is now a good time to be purchasing or refinancing?

Paula also explained the benefits of working with a mortgage broker and how they can help make the process easier for you!

Listen here.

Listen now to the most recent Making Cents of the Markets on CKNW, where we discussed the markets ahead of the Fed’s interest rate decision.

We also talked about the different stages of the “Cycle of Investor Emotions” and the importance of understanding what stage you are at before making investment decisions.

Click to listen here.

Beyond the Markets

Ronald McDonald House Golf Tournament 2022

Lori and some of our team recently volunteered at the 29th Annual Vancouver Island Golf Tournament, which Pinkowski Wealth Management was a proud sponsor of.

The tournament raised a whopping $218,000 which equates to approximately 1,453 nights of comfort for families across BC & Yukon whose children are in need of medical care.

Click here for more information on the Ronald McDonald House and how you can help!

Be in the Know

“Great cacophony is the nature of democracy. Dictators take it for vulnerability when it is in fact the key to perpetuity.” – J.R. Campbell

Was that the last Fed rate hike?

There is a saying that goes “everything will be okay in the end. If it’s not okay, it’s not the end.”

This week, the U.S. central bank hiked rates an expected 0.75%, but it was during Fed Chair Powell’s unscripted remarks after the announcement that may have been the most salient message. Powell said interest rates have reached a “neutral level”, sending stocks and bonds immediately higher. This, combined with no longer guiding for more rate hikes, was taken by the market that the end of hikes may be at hand. In other words, everything will be ok.

It didn’t hurt that Powell poured cold water on the idea of the U.S. being in recession currently, saying “2.7 million people hired in the first half of the year, it doesn’t make sense that the economy would be in recession.”

He may or may not be right. A day after his comment, new U.S. GDP data suggested their economy is already in a mild technical recession. Whether it gets deemed one officially by the National Bureau of Economic Research remains to be seen, because it is so mild.

Recession or not, there is evidence that interest rate hikes are in the fight against inflation expectations. For example, the difference between the 3-month and 18-month treasury yield has plummeted, from about 270 basis points (2.7 percentage points) to just over 50 basis points as of earlier this week.

An inverted yield curve – where the 3-month yield is higher than the 18-month yield – is a sign that a recession is coming. More importantly, it’s a sign that inflation is expected to come down.

The other possible reason for stocks rallying on a day the Fed hiked aggressively? Investor negativity may have peaked weeks ago. Investors who were scared enough to give up have probably already done so.

As The Earnings World Turns

The mighty Wal-Mart fell almost 10% on Tuesday after disappointing profit guidance, a culmination of higher inflationary pressures to buy it’s goods and the need to put excess inventory on sale to stimulate consumers to buy. Many retailers stocked up on pandemic favourites just as the consumer stepped away from buying casual clothes and home goods and went outside. The stock did recoup that one day loss and followed the markets higher this week.

Amazon faired a lot better than expected, and reported ‘seeing revenue accelerate’. They didn’t post a profit due to write-downs for their Rivian EV investment. Amazon also overbuilt capacity to meet pandemic demand, elevating their overhead costs in the quarter. More importantly, their forward guidance suggests they are growing at a 17% clip.

Apple, the biggest stock in the S&P 500, reported record revenues of $83 billion and earnings of $1.20 per share (their best ever being $2.10). iPhone sales, which were almost half of revenues, held in decently. The CEO said he did not see much evidence of an economic downturn.

Not surprising to anyone, Exxon Mobile, Shell and Chevron reported record quarterly profits of $46 billion combined.

What was surprising? Luxury brand Hermes, maker of the $10,000-plus Birkin handbag. Company sales jumped 20% and operating margins rose to 42%.

Keep calm and take only a carry on

How is it possible that cruise liners and airplanes are so full these days, but their stocks are not reflecting this? In a word: debt.

This has forced airlines to cut costs any which way they can, resulting in unprecedented staff shortages. Lost luggage, cancelled flights, and impossible wait times are the result of being understaffed. Some workers moved on to other careers, some stay home due to sickness.

As Bloomberg points out, airline indebtedness is on par with insolvent businesses. The outer limits of indebtedness that banks see as safe is about 3-4 times operating earnings. Today, industry debt is almost 15 times operating earnings (earnings before interest, taxes, and amortization). Rising interest rates add all the more pressure – approximately doubling airline interest costs – this is why super full flights and higher ticket prices is still not enough to restore profitability.

Jet fuel has also been soaring to levels not seen in as much as a decade (depending where).

Flying in a chair 33,000 feet in the air is still a modern-day miracle by any standard, even with all of today’s extra inconveniences of delays and cancellations. As much as we’d all like to see airline and vacation travel go back to pre-pandemic norms, it’s worth recognizing that we all got used to ticket pricing that was not very sustainable.

We should all expect to pay more to fly than we did a few years ago and, we should not lose perspective of just how wonderous these 33,000 foot chairs in the sky still are.

Our Strategy

We are happy to report that markets and our portfolios had a very strong week – up 3% on average. We have been putting cash back to work over the past few weeks as we felt markets were showing signs of stabilizing.  We have seen a few catalysts this week that moved investors to start buying – mostly due to better than expected earnings, less aggressive Fed comments and some softer economic data. Remember, this is a time when bad data equals good markets!

We continue to add high-quality companies to the portfolios and have reduced our cash position by a third at this time. We will continue to put cash to work as we move through earnings season. So far, some companies have reported very strong earnings, showing us they have resilient businesses during these uncertain times and have beaten expectations. Other reports have been less than stellar, with some companies having a tough time in this environment as their costs continue to rise, ultimately hurting profits.

For example, we recently added Sleep Country, which had a blowout earnings report, and Nike which we believe should see a nice bounce off the bottom (it was down 35% YTD, so we are taking this as an opportunity to purchase at a low). Many high-quality companies have been beaten up in this market, but that doesn’t mean they have lost their value to perform well over a long time horizon. It is important for investors to not just focus on the past, but to be looking into the future! All market sell-offs create opportunities as well and as we believe in active management, we are ready to adjust again to the current market conditions.

Visual of the Week

Stay cool and enjoy the long weekend!

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