Market Update
Mike Holyk 2023
Source: iA Private Wealth GIC Rates
Happy August everyone. I am not sure if everyone else feels like somehow we're suddenly living in California. The endless sunshine we have seen over the past two months has been a pretty good change from the dreary start to summer that we had last year. One month left so I hope everyone gets to enjoy it while it lasts.
Markets seemed to enjoy the sunshine in July as well as both the TSX and the SP500 were up for the month. By all accounts it appears that markets believe we have seen the last of rate hikes for this cycle and more and more the idea of a soft landing for the Canadian and US economies seems to becoming a more popular opinion. Many may remember it was July 13th last year that the Bank of Canada began its very aggressive rate hiking cycle. The chart below illustrates the Bank of Canada overnight rate over the past 18 months. It has been these rate increases that have been the headwind for North American Markets.
While it has been difficult for stock markets, the rise in interest rates has helped more traditional interest bearing investments like High Interest Savings Accts, GICs And Bonds become a more attractive option. Currently the HISA Rate is approximately 4.7 - 5.0% (depending on the issuer), with 1year GICs paying 5.5%. We have access to a wide variety of issuers for these products so please do not hesitate to contact the office about the best rates we have.
Below I have provided the 1 year chart for the TSX. You can see the see-saw pattern that I have pointed out in previous newsletters. The September and October lows from 2022 (red circle) were replaced by series of peaks and valleys (yellow circle) in 2023. All this volatility has been driven by the macroeconomic noise of Inflation, Interest rates, GDP and Employment.
Source: QuoteStream as of August 1, 2023
The three largest sectors of the TSX… Financials, Materials and Energy have had a particularly difficult time navigating the rise in rates. I have included the charts of three of Canada’s largest stocks; Royal Bank, Enbridge and Canadian Natural Resources that best highlight this. You can see from the three charts that the last 12 months have been rough on these stocks and indicative of most of the TSX.
Royal Bank
Source: QuoteStream as of August 1, 2023
Enbridge
Source: QuoteStream as of August 1, 2023
Canadian Natural Resources
Source: QuoteStream as of August 1, 2023
While the three charts are all a bit different in shape, all three points to how confused investors have been with the conflicting messages that they have been getting on the Macroeconomic front. The good news I believe is that three stocks, like much of the TSX are fairly valued and present very good opportunity over the next 12-18 months.
My last thought that despite a potential peak in rates, a continued downtrend in inflation and continued resilience in employment and the economy, I think we may have one more rough patch coming into the fall. A couple things make me believe this scenario and while we may not go back to last October’s lows we may be headed for a correction in a historically volatile period of the year. In my opinion it will be driven primarily by the real world news on the economy, mortgage stress, layoffs and bankruptcies caused by the lagging effects of the past years rate increases. These are all signs of a slowing economy and the resumption of a more traditional economic cycle that we have experienced so many times in the past.
While many of these stories will find their way onto the evening news or into newspaper over the coming months and be the source of some additional volatility and anxiousness by individual investors this fall, the market will begin to look forward into the inevitable recovery sooner than many think. Therein will lie the opportunity as markets tend to look forward and in this case it will begin to look to time when central banks will begin easing rates.
So, what does all this mean? I believe the TSX is well positioned given its low relative valuation for a good rebound from the previous 12 months once we get through the final parts of this part of the economic cycle.
Mike
Market Data
Source: QuoteStream as of August 1, 2023
ETF's & Funds We Favour
Source: QuoteStream as of August 1, 2023 - *as of last
Stocks We Favour
Source: QuoteStream as of August 1, 2023 - (1 year target price source: Yahoo Finance as of Jan 4, 2023)
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