A Comment -- General Comments From an Expert (A Commentary)

Earnings season (so far) has been better than expected, but YOY earnings growth bottomed a quarter ago, and such growth is modest now. Market reaction is very subdued; economic gravity is setting in as companies offer modest guidance in Q4. Investors are trading down Canadian banks to fresh lows and they face difficult comparisons and pressures to net interest margins. Also, the banks have been cutting staff.

The operate very different; US banks face a lot more competition and Canadians enjoy a tight oligopoly. Canadian ones pay higher returns consistently and grow dividends faster. Canadians don't stretch balance sheets and are more conservative. Regulators are closer to our banks. Canadian banks gain a foothold in the US by buying US regionals. A big plus. So, he chooses Canadian banks, hands-down.

The size of the U.S. deficit is scary. But he expects yield-curve control to be imposed on Western countries. So if rates rise above 50 basis points in, say Japan, that government will buy all the bonds to get the yield down by 50 points. The market is waiting for the switch from QT to QE. The US Fed will have to be the last resort-buyer of debt.

OPEC+ is down 4 million barrels/day in supply which is putting a floor on the price. But he sees a recession coming. Add to that China's output falling. So, oil prices should be lower for these reasons. He already made his money in oil, but will wait and see before returning. Macro events mean everywhere, not individual stock plays. Doesn't know where oil is going, whether higher or lower.

Likes physical gold, not the stocks, gold that's already mined and smelted.

He still urges getting out of Canadian dollars and into the US dollar. Go through your broker. He expects the USD to rise. He sees deflation which he worries about. The US treasury trade has been painful. Buy USD to protect your capital during this difficult time.

We're in the middle of earnings season, but there's volatility in the market. The Nasdaq peaked at July 19, but is testing the bottom of its range since then. He's pretty hedged. The USD is stronger because of fear of inflation and rates. He expects the next AI development to be in software to house and interpret all that more data being produced. 

The Backdrop of the Decline in Utility Stocks

Bond yields, interest rates, and yields on cash products like GICs have been rising to levels greater than 5%, and this has been leading investors to reconsider the risk/rewards of their high-yielding stocks. Right now, investors are worrying over the ‘higher for longer’ theme on interest rates and not only has this led to some investors selling their high dividend-paying stocks, but it’s also led to concerns over companies with high debt loads. Of all the companies in the stock market, none are more leveraged than utilities, and these high debt profiles have sparked a recent sell-off in utilities stocks.
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The rising bond yields are a return to normal levels before the financial crisis of 2007/2008. The questions are: do rates keep going up and does the peak hold for longer. Equity markets seem to be adjusting to higher rates. Inflation is trending down but is still above the 2% target. U.S. corporate profits are down but are expected to be up a bit in the third quarter and maybe as much as 9% in the 4th quarter so this type of yield is not reflecting a recession. Canadian banks have a good yield at 6 to 7% so you could start taking a position in them.

Believes interest rates have most likely peaked. Retail sales data pointing towards consumer spending slowdown. Higher interest rates adding pressure on consumers. Expecting inflation to moderate with higher interest rates. Long term bond yields also impacting spending behavior. ~5.5% Canadian bank yields very attractive for investors. Lots of opportunity for investors in Canada at this moment. 

30 Year Treasuries: Risky government bond. Would prefer 1-5 year bonds. 

Weekly Market Update:

Canadian inflation cooled to 3.8% in September, down from 4.0% in August amid a continuing relief of grocery prices, leaving room for the Bank of Canada to keep interest rates unchanged. On the other hand, in a recent meeting, Federal Reserve Chair Jerome Powell validated a pause in policy tightening in November while being open to a further interest rate hike if necessary, putting pressure on the equities market. The Canadian dollar was 73.03 cents USD. The U.S. S&P500 ended the week down 2.2%, while the TSX was down 1.5%.

This week had more reds than green. Real estate slid by 4.0%, while financials gave up 3.2%. Industrials ended the week down 2.3%, while consumer staples and information technology slid by 1.9 and 0.4%, respectively. On the other hand, materials gained 2.1%. Consumer discretionary and energy both ended the week slightly up 0.4%. The most heavily traded shares by volume were  Canopy Growth Corporation, Baytex Energy, and Argonaut Gold.
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Despite big challenges in markets and in the economy, exiting could be the biggest mistake investors make. Lots of fear circulating. Rapid changes in interest rates have had big impacts on the economy, on both businesses and consumers. Easy to get sideswiped by negative sentiment.

There are a lot of bargains today. If you own good companies, you'll do quite well over the long term. Over the short term, there could be some volatility.

There were some views of interest rate cuts later this year. Because inflation has been stickier than thought, that pushes out the likelihood of rate cuts, even into the back half of 2024.

The Fed puts out the dot plot every quarter. You can clearly see that the view right now is that rates will trend down. Higher rates have had a big impact on a lot of stocks. There will be some relief down the road, but not right now.