Tag: GICs

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.

The S&P 500 (index of the 500 largest U.S. stocks) was up over 8%. That’s significantly better than its November average of 1.54% going back to 1950. November is historically the best month in the U.S. stock market.

The Toronto Stock Exchange’s S&P/TSX composite index was up 7.2% in November. There are only five single months since 2002 when there was a higher return: November 2020, April 2020, January 2019, May 2009, March 2009. By the way, January 2023 was pretty great too at 7.13%.

Stock markets across the globe also did pretty well in November, with an all-world index up 9%.

Remember, the stock market goes up most of the time.  

It pays to be an optimist!

Forget “girl math,” here’s “old man math”

One of the most popular personal finance gurus of all time is Dave Ramsey. He’s incredible at promotion, and he’s written more books than the number of times a Canadian NHL team has ever won the Stanley Cup. Ramsey hosts radio shows, appears constantly on network TV, and is generally a one-man financial content machine.

But, does any of this mean that Ramsey actually gives good advice?

I’m sure there is someone somewhere who Ramsey has helped. But the number of times he makes absolutely outlandish, nonsensical claims is incredible. Thanks to Dollars and Data for the assist, here’s his latest take, which is an unedited quote from Ramsey’s show. 

When a recession is not a recession

This week saw a perfect example of why the word “recession” has now largely been rendered irrelevant. 

So, obviously we’re in a recession, or at least we’re in a technical recession, right?!

Nope.

In its Q3 announcement, Statistics Canada revised its second-quarter GDP measure. To me, it says: “Yeah, so we had another look at the numbers, and, uh, it turns out instead of a slight contraction of GDP, we actually had a very small growth in GDP. So, if you look at the six months from April to September, there was a very small overall shrinkage in Canada’s GDP, we’re not in a ‘technical recession’.”

The much bigger story here could be that Canada’s large immigration numbers are creating an overall GDP number irrelevant to the average Canadian. After all, most people want economic reporting to explain if their own personal situation is likely to get better or worse.

When you look at our GDP-per-capita and overall production-per-capita numbers, Canada is right where it was in 2017. 

That’s not to say that increased immigration is a problem or that it has a negative economic effect. I personally feel quite the opposite. 

It’s simply a question of how to explain math to Canadians. Whether Canada’s economy grows by 0.2% or shrinks by 0.2% from quarter to quarter is much less important than the fact we’re increasing population by 2.7% per year, and getting nowhere near the level of GDP growth. If our collective economic pie is staying essentially the same size (or perhaps growing very slowly), but we’re cutting it into more and more pieces at an increasing rate, then the most relevant statistic isn’t GDP. Rather it’s the real GDP per capita.

In a report full of positive figures, perhaps the most impressive highlight was that data centre revenue (mostly from cloud infrastructure providers like Amazon and Microsoft) was up 279%, to USD$14.51 billion. Only a few years ago, Nvidia was basically known as a fairly simple (albeit still profitable) company that made computer chips for video games. As long as it maintained its competitive advantage on AI chips, it essentially has license to print ever-increasing amounts of money. We’ll see how long it takes the other chip heavyweights to catch up.

The fly in the ointment of Nvidia’s earnings report, though, was a warning that export restrictions from China and other countries were going to have a negative effect on the fourth quarter’s bottom line.

When should we expect the stock market to hit new highs?

Ben Carlson is back, on A Wealth of Common Sense, with an interesting look at how often the U.S. stock market breaks its previous all-time high.

With all the negative news headlines these days, you might be forgiven for assuming things must be pretty rough at the moment. Heck, you might even have thought we were a long way away from a new market high.

The truth is the U.S. stock market is fast approaching its all-time high. And it looks like this gap between market peaks will be the fifth longest on record. In other words, the recent bear market has caused substantial pain, but it’a far from the worst-case scenario.

In Canada, the TSX Composite index index hit 22,213 in April of 2022. Today, we sit at about 20,114, so we’re still down about 10% from all-time highs. That said, we wouldn’t bet against the Canadian stock market crashing through that ceiling in early 2024. (Predictions column to come soon!)

It’s also important to remember that the companies that make up Canada’s stock market index pay out higher annual dividends than their U.S. counterparts. That isn’t reflected in these index comparisons.

Of course, one might want to consider that while stock prices are bouncing back they’re still pretty far away on a “real” basis if we adjust for inflation. In other words, if you’re selling stocks to pay for life’s expenses, then you will have to sell more of those stocks (even if they’re back up to 2022 levels) to buy the same stuff that you used to. That price difference is obviously due to the high inflation rates the last couple of years.

Target shareholders finally avoid slings and arrows

The big headlines in U.S. retail this week centred around Target shares seeing a massive 18% spike, while Walmart shares came down over 8% after Thursday’s earnings announcement. However, we look behind those headlines to the context of those moves to get the real story.

While the quarter was obviously a great redemption story for Target, these volatile stock moves were based on sky-high expectations for Walmart (the stock hit an all-time high this week before the earnings announcement) and a relatively terrible year for Target so far. It’s still down over 14% year to date even after the earnings bump.

Target’s C-suite commented that its improved margins were due to progress made on inventory management and reducing expenses, as well as reduced shrinkage (theft).

Walmart’s team stated the company is still worried about pressure on the U.S. consumer despite higher online sales (24% increase in the U.S. and 15% worldwide this year) and increased grocery revenues. 

Walmart CEO Doug McMillon believes price relief might soon be in the cards, saying that general merchandise and grocery prices should, “start to deflate in the coming weeks and months.” He said, “In the U.S., we may be managing through a period of deflation in the months to come. And while that would put more unit pressure on us, we welcome it, because it’s better for our customers.”

We’re fairly certain that Walmart will be able to resist that “unit pressure” and that it will manage to satisfy both shareholders and customers, given its track record over the years.

CPI goes down, stocks go up

If you needed confirmation that U.S. interest rates are still foremost on investors’ minds, this week’s Consumer Price Index (CPI) from the U.S. Department of Labor was a big checkmark. Stocks rallied after Wednesday’s news that headline CPI was down to 3.2% annually (before coming down slightly later in the day’s trading session).

Market watchers at CME Group report that the chances of any immediate interest rate hikes by the U.S. Fed have declined to nil. As you might expect, this confidence drove down long-term bond rates and raised future expectations for corporate earnings (and share prices).

Disney (and most U.S. companies) surprise to the upside

With 88% of companies in the S&P 500 having now reported results, nearly 9 in 10 have surpassed earnings estimates. Consumers continue to feel worse about the economy, and companies just continue to make more money. It’s quite an odd time to try to make sense of the markets.

Disney’s outperformance was chiefly due to ESPN+ subscriptions and continued revenue increases at theme parks. Investors appear to be big supporters of CEO Bob Iger’s announcement that Disney will “aggressively manage” its costs and will now be targeting $7.5 billion in cost reductions (up from a $5.5 billion target earlier in the year). Shares were up 4% in after-hours trading on Wednesday. 

“As we look forward, there are four key building opportunities that will be central to our success: achieving significant and sustained profitability in our streaming business, building ESPN into the preeminent digital sports platform, improving the output and economics of our film studios, and turbocharging growth in our parks and experiences business.” 

— Disney CEO Bob Iger

Uber, on the other hand, had a more subdued day. The earnings miss was contextualized by CEO Dara Khosrowshahi, when he pointed out that gross bookings for people-moving mobility were up 31% year over year (YOY), while UberEats gross bookings were up 18% YOY. The markets appeared to agree with Khosrowshahi’s spin, as shares were up 3% on Tuesday, despite the earnings news.

Canadian fossil fuels profitable—for now

Despite a United Nations report stating that Canadian fossil fuels should be kept in the ground, the sector continued right on pumping out profits this quarter. 

While accounting changes at Keyera resulted in an earnings-per-share miss, shareholders appeared to take the news in stride. Share prices were down less than 1% on Wednesday. Management highlighted the Pipestone expansion being on track and to be completed in the next two months, as well as a recent credit upgrade. The company was in great shape going forward. With net debt to adjusted EBITDA (earnings before interest, taxes, depreciation and amortization) at 2.5 times, the company is on the conservative side of its 2.5- to 3-times target range.

TC Energy was up nearly 1% on the day after positive earnings news and the announcement that the new Coastal GasLink was completed ahead of the year-end target. Management also stated that it is taking steps to strengthen the company’s balance sheet, including selling off $5.3 billion in asset sales that will be used to pay down debt.

Despite total barrels of oil produced falling from 724,100 to 690,500 in last year’s third quarter, Suncor outperformed expectations and shares rose 3.7% on Thursday. Investors were forgiving in the decrease of adjusted earnings due to lower crude oil prices and increased royalties.

The company attributed the decrease in adjusted earnings to lower crude prices and a weaker business environment, as well as increased royalties and decreased sales volumes due to international asset divestments.

Both hardware and software continue to siphon profits from all over the world back to the U.S.A. and into shareholders’ pockets. No big surprises.

Air Canada and Cameco fly high

Air Canada was so confident in its profits this quarter that executive vice-president of network planning and revenue management Mark Galardo stated:

“We see relatively strong demand for (the fourth quarter) in almost every single geography that we operate in, in almost every single segment that we operate in. […] We’re not seeing any major slowdown at this point in time.”

Despite Air Canada’s results, share prices closed down slightly on Monday, as shareholders appear skeptical that the good times can continue. You can read more about investing in Air Canada at MillionDollarJourney.ca.

Cameco’s quarterly report didn’t dive into operations too deeply, but instead it focused on the bigger picture for nuclear energy. President and CEO Tim Gitzel stated:

“Increasing average global temperatures and the fires and floods that are becoming more and more frequent can’t be ignored. The evidence continues to point to our carbon-based energy systems as a key contributor to the problem. This has led to electron accountability and proposals by countries and companies for achieving net zero targets taking center stage. And today it’s clear, achieving those targets does not happen without nuclear power. That itself is a notable difference, but it goes even deeper. This time policymakers are not shying away from proposing nuclear as a key part of their energy mix, some even reversing their previously anti-nuclear stance.”

Despite the positive long-term view and substantial earnings beat, share prices were nearly flat on Wednesday, closing at $56.88. That said, the stock is up about 10% this week, as we go to press.

Nutrien’s bad quarter can be chalked up to the volatile price of potash. (Nutrien is a Canadian company based in Saskatoon, but trades on the New York Stock Exchange and reports in U.S. dollars.) As an almost pure play on the resource, Nutrien’s stock generally rises and falls with supply and demand in that single market. It’s similar to the dynamics behind an oil producer.

With more potash products from Russian and Belarus slipping through the sanctions net and onto the world market, Nutrien’s brief period of market dominance is at its end. That said, the share price didn’t move much this week, so it appears the market somewhat anticipated the bad news. It rose 2.3% to USD$55.39 at the close Thursday. 

The U.S. Fed tones down hawkishness 

The U.S. Federal Reserve continues to be the predominant market mover. 

IBM’s business is split into two key divisions: IT consulting and software. The latter is the primary revenue driver. The software unit generated $6.27 billion revenue, up 8% versus the consulting division, generating $4.96 billion in revenue, up 6%. Like many tech companies, IBM’s software division is also investing in AI to drive future growth.

Amazon

Amazon announced record third-quarter profits after the close Thursday and surged 5% Friday morning (at press time) after strong growth in its highly profitable Cloud business. While the stock was up 40% on the year, shares had fallen 8% in the previous two days after rival Alphabet warned that cloud customers were curbing spending. 

Growth is growing…

While North American bank stocks answered the question about how the economy is fairing, technology stocks answered questions about growth. The big message with tech is that growth is still there, and it will continue to be going forward. In today’s market, investors looking for growth need to own at least a few big-cap tech stocks. These companies are becoming the consumer staples of tomorrow. That includes stocks from companies like food and grocers and utilities that ground portfolios. That’s because, when the market dips, people still have to buy food and heat their homes. In today’s digital age, the technologies we’ve been talking about are embedded in our everyday lives and are poised to continue to grow.

Bank of Canada pauses interest rate hikes 

The general consensus going into the week was that Bank of Canada Governor Tiff Macklem would push the pause button on another interest rate hike. And that’s exactly what he did on Wednesday. Even though interest rates didn’t go up another quarter point—which was the plan—the damage has been done. Some Canadian investors and the markets worry that another rise in interest rates could increase the pressure on individual households and businesses, ratcheting up the fear and likelihood of a recession. 

The Bank of Canada (BoC) itself was under a lot of pressure from provincial premiers to hold off on a rate hike precisely for these reasons. That’s despite not being closer to the 2% inflation target the BoC has set its sights on. For me, though, the question has always been: Is 2% a realistic target? And even if it is, how much pain is the BoC willing to inflict on the economy to achieve it? 

Personally, I’d rather see a 3% inflation rate target, along with strong employment and healthy consumer spending, over targeting 2% inflation and lost jobs and a recession. Some analysts are predicting that the recession that was expected this year will take hold next year.

Ahead of this week’s decision on interest rates, I’ve written to the Governor of the Bank of Canada to again express my opposition to any further rate hikes. Higher interest rates are hurting people and businesses that are already struggling to pay their bills. pic.twitter.com/B0l4yBYDAO

— Doug Ford (@fordnation) October 22, 2023

I’m surprised we’re here, in the third week of October, still talking about interest rate hikes. I thought by now the central banks would have stopped relying on them so heavily. The Bank of Canada has raised interest rates 10 times since March 2022.

It’s interesting that both the BoC and the U.S. Federal Reserve keep referencing the lag effect between when a rate hike is implemented and when its effects show up in economic data. Yet, neither specify just how long this can and/or should take. How do we know if the hikes are working? Are they willing to blow everything up because we’re stuck on 2% inflation? 

When you have the cost of borrowing tripled, in some cases because of all these interest rate hikes, I have to wonder whether the BoC is sending an inadvertent message to Canadians: “You are living beyond your means. You’ve enjoyed a run of many years of low interest rates, where money was basically free with no worry about what happens later, when the cost to carry debt rises. The days of high interest are here now for the foreseeable future.”