Tag: Dividends

The acquisition looks to be turning out quite well for America’s largest bank, as it claimed that the former First Republic Bank contributed $4.1 billion in profit in 2023.

Dimon provided some macroeconomic context in forward guidance. “The U.S. economy continues to be resilient, with consumers still spending, and markets currently expect a soft landing.” 

Of course, being a banking CEO, he then had to hedge his position by saying deficit spending “may lead inflation to be stickier and rates to be higher than markets expect.” 

New Morgan Stanley CEO Ted Pick cited two “major downside risks” as reasons for concern: geopolitical conflicts and the U.S. economy. 

Mirroring Dimon’s “on one hand, and on the other hand” PR formula, Pick stated, “The base case is benign, namely that of a soft landing. But, if the economy weakens dramatically in the quarters to come and the [U.S. Federal Reserve] has to move rapidly to avoid a hard landing, that would likely result in lower asset prices and activity levels.”

Like their Canadian banking brethren, the U.S. banks all reported substantial increased provisions for credit losses. This money, set aside to cover the inevitable increase in interest-led loan delinquencies, also weighs on banks’ bottom lines.

Canadians looking for exposure to U.S. banks can get it through TSX-listed ETFs, such as the Harvest US Bank Leaders Income ETF (HUBL), RBC U.S. Banks Yield Index ETF (RUBY) and BMO Equal Weight US Banks Index ETF (ZBK). Investors can also get single-stock exposure to JPMorgan, Bank of America and Goldman Sachs in Canadian dollars through Canadian Depository Receipts (CDRs) listed on the Cboe Canada Exchange.

Check MoneySense’s ETF screener for all ETF options in Canada.

2023 asset returns versus the last 10 years

As we enter the New Year and investing columnists write their prediction columns, it’s also a worthwhile exercise to take a look back at the history of just how varied returns have been across various asset classes. The chart below comes from Wealth of Common Sense blogger Ben Carlson. It shows and the equities shown were available on the major U.S. stock exchanges.

Here’s the Canadian total market data below for comparison. Slide the columns right or left using your fingers or trackpad, or hover your mouse over the table to reveal a scroll bar below.

My main takeaways from Carlson’s data:

• The year 2022 was really bad for the value of most assets; 2023 was really good.
• Commodities saw a real drop from 2022.
• Despite excellent years for commodities in 2021 and 2022, the 10-year returns remain negative.
• Reversion to the mean is pretty clear if you look at the last 10 years across all the asset classes.
• If we go all the way back to the end of 2008, the S&P 500 is up nearly 350%. That’s a pretty incredible run.
• Bonds have had a pretty rough stretch the last 10 years, only outpacing cash by 0.7% per year.

I couldn’t track down the total return of Canadian stocks over the past 15 years, but the S&P/TSX Composite Index has increased by more than $2.75 trillion since 1998, when SPG Global started keeping track. That’s a total return of nearly 600%! (Exclamation point warranted.)

So, despite some bad years, for every $1 you invested in the broad Canadian stock market as far back back in 1998, you’d have $6 today. Sure, inflation would have eaten up some of that gain, but that’s still a great run.

Any time we look at these types of charts, we know that people who forecast based on trends of the preceding year are rarely correct. Returns over one-year timeframes are mostly “a random walk.” That said, equities (large-cap, small-cap, U.S. or Canadian) come out on top more often than not.

Speaking of asset classes, bitcoin exchange-traded funds (ETFs) started trading Thursday, after the U.S. Securities & Exchange Commission approved 11 ETFs tied to the spot price of bitcoin. I’ll have more to say about this next week.

The small short? The big long?

Much of the world was introduced to short selling via the movie The Big Short, based on the book by Michael Lewis of the same name (WW Norton, 2011). When you “short” a stock, you’re essentially placing a bet that the stock’s price will go down within a given period of time. The more it goes down, the more money you make. If it goes up though, the losses can pile up quickly.

A look at 2024

Since we made this crystal ball thing look pretty easy last year with our 2023 markets forecast, we’re at it again for 2024. And, it’s always good to begin a market predictions column with the caveat that this stuff is really hard to do.

It’s impossible to make accurate predictions consistently, especially about the markets, as there are just too many variables at play to always get it right. I mean, if you could tell me the outcomes of wars, upcoming elections, more pandemics and unexpected natural disasters of 2024, then I could give my some predictions with a little more confidence. 

All that said, there are some big-picture trends and general rules of thumb that Canadian investors can apply to their thinking about the year ahead. 

So, with those caveats out of the way, here’s a look at how we see the markets playing out this year.

Canada’s TSX 60 will gain 15%, outperforming the 8% gain for the S&P 500

It’s not that Canada’s economy is going to do better than America’s, or that our domestic companies have any hidden advantages. A prediction for TSX 60 outperformance is simply a bet that lower valuations may suffer less from the negative headlines than any higher-priced valuations of the S&P 500 composite index.

The 500 biggest companies in the U.S. had a fabulous 2023 and finished up 23% for the year. The markets always look ahead, true, and I think they foresaw sunny skies for late 2024 as early as spring 2023. Consequently, there would have to be additional excellent news coming to light for a repeat of such a strong year.

Canada, on the other hand, saw its TSX 60 index go up about 8%. There were a lot of negative headlines about lack of economic growth in Canada, and no equivalent of an “AI bubble” to drive a positive narrative for boring companies like Canadian railways or pipelines.

Right now, a TSX 60 exchange-traded fund (ETF), such as XIU, trades at about a price-to-earnings (P/E) ratio of 13x. An S&P 500 ETF, like SPY, clocks in at about 24x. I don’t think there’s any debate that the U.S. has more world-beating companies and a much more favourable tax environment than Canada. But are American companies that much better that they should be valued so much higher? Based on historical averages, we’re betting no.

So, given that context, we’re pretty proud of how these predictions held up.

Inflation will continue to dominate the news

“People who are unemployed feel the unemployment rate: but everyone feels the inflation rate.

“Nothing gets people’s attention faster than paying higher prices for housing, gas and groceries. That’s what makes it such a tempting news story to keep reporting on. It also makes it almost impossible for politicians and policy makers to ignore.

“Until the inflation rate comes down, to at least 4% (it’s currently 6.8%), I don’t see most investment commentators talking about much else.”

Making sense of the markets this week: January 1, 2023

Grade: A

OK, admittedly, I started with a layup. Given how important inflation and interest rates are to the pricing of assets in almost every market, it was a high-probability bet that this would dominate markets in 2023. That said, it’s undeniable that the rapid pace of interest-rate rises took up most of the oxygen in the room this year. Over the last few months inflation has been coming down to the 3% to 4% level. And, as predicted, we’re finally seeing some other stories emerge. This week, for example, the Bank of Canada (BoC) announced a headline inflation rate of 3.1% and it failed to lead the news anywhere I looked (despite being slightly higher than predicted).

The Russian invasion remains predictably unpredictable

“None of the experts I read about a year ago predicted Russia would invade its neighbours and send geopolitical shockwaves reaching every corner of the planet.

“None of the experts I read about 10 months ago predicted the Ukrainian military response would be able to stand up to the Russian war machine for more than a few days.

“At some point maybe it would be best to admit that the experts really have no idea where this conflict is headed. Despite the tragic loss of life and catastrophic disruption of society, it seems to me that there is little evidence that either side will back down as we enter 2023. 

“If—and this appears the more likely situation—the war drags on or escalates, it becomes difficult to quantify the damage inflicted on economies, like Germany’s, which are so dependent on Russia’s energy. 

“Sure, demand destruction and the Green Revolution are coming… eventually… and at substantial cost. Even scarier is the unpredictable nature of the response to food shortages in desperate countries around the world. Generally speaking, food riots aren’t good for business (or humanity).”

Making sense of the markets this week: January 1, 2023

Grade: B+

It’s not fun predicting that war will be awful. The tragedy taking place in Ukraine continues to be a struggle for all parties involved, and I don’t think we’re much closer to a long-term peace than we were at this time last year. The war has definitely contributed to high food costs around the world and continues to be quite disruptive within specific industries.

That said, much of Europe adapted to new energy supply chains more quickly than originally anticipated. A new market equilibrium appears to have been established, but there is no question that the war continues to be a worldwide drain on resources and, more importantly, an absolute tragedy.

The much-talked-about recession will continue to be talked about

“At this point, I feel like we might forecast a recession forever.

“Whether a recession will ever actually arrive or not is another story. 

“With inflation in the U.S. falling to an annualized rate of 3.7% over the last three months, I’d argue we’re not only past peak inflation, but are actually well on our way to some sort of ‘new normal.’ With a substantial lag between when monetary policy is announced, and when its full effects are felt, we might not need a recession to lower inflation despite all of the headlines.

“Of course, I continue to refer to the fact that whether we see two quarters of -0.1%, and -0.1% GDP shrinkage, or a quarter of -0.3% growth followed by a quarter of 0.2% growth, the distinction of ‘recession or not’ is irrelevant. The first scenario is a technical recession by most definitions. The second scenario is just a bad quarter followed by a less bad quarter. Whether we have a recession or not really isn’t that important in the long term.

“Have the asset markets (such as stock or property markets) in which I’ve invested my money already anticipated the bad stuff coming by ‘pricing it in’?

“Almost assuredly.

“Remember that the stock market and the economy are not the same thing. Professional investors look past current events—they’re aware of the recency bias. They foresaw some rough waters ahead throughout 2022, but that doesn’t mean 2023 will also be so bleak.”

Making sense of the markets this week: January 1, 2023

Grade: A+

Given the gross domestic product (GDP) situation Canada announced two weeks ago, we’re comfortable saying we knocked this one out of the park. Considering how many experts were predicting a recession at the end of 2022 and calling for falling markets, the theory that markets had priced in a pretty rough ride was the correct one.