Bonds Bounce like Footballs - Your Money for November 25th, 2022

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Not sure how we should interpret the performance of stocks this week. Despite some bearish sentiment, the S&P 500 broke through the 4,000 level and held there through the holiday shortened week. Yes, on Wednesday the Federal Reserve sparked confidence with its prognostications of lower rate hikes (0.5% vs 0.75%) in upcoming meetings, but in our opinion did not provide a terminal target rate. Meanwhile the bond gurus and portfolio strategist continue to undershoot the terminal rate of Fed Funds rate, meaning rates will likely stay up higher for longer. But that has not stopped bond investors from buying longer dated securities. 10-year US Bond yields sit at 3.7% versus 4.47% for the two-year bonds. Historically, inverted yield curves lead to recessions, and this time history looks to repeat itself. 

On the other hand, we note 10-year US Bond yields have slid from 4.24% last month to 3.7% today. In terms of price, one month ago they were trading at 88 and today its 103. That translates into a 17% jump in one month, beating the heck out of stock market returns. In fact, if you bought the 10-year bonds on January 2nd and held it, through the year, you would have received a modest amount of interest income plus some capital appreciation. Who says you cannot make capital gains in the bond market?

As for stocks, they seem to be climbing the wall of worry. China COVID, Ukraine invasion, and falling US economic stats are being ignored as North American stocks end the week in the green. In fairness, the perceived demand destruction in China sent crude oil prices to its lowest levels since late September which should translate into lower gasoline prices and by extension lower inflation. If that plays out, the Fed could end its rate hikes sooner rather than later and that would be good for stocks and bonds. 

Unfortunately, we disagree with the general view and the price declines hitting the tape. US oil inventories fell again this week and that is with ongoing sales of Strategic Petroleum Reserves which have fallen by 203 million barrels this year. Clearly in our opinion, sliding prices can be laid at the feet of commodity traders with a net bearish bet. We don’t believe the Euro price cap on Russian oil will stick for any length of time and if it does, it could be a long cold winter for European consumers. 

Turning to Tech, the mega caps did not fair well this week, as investors favored names like Home Depot, Walgreens, and Disney (which benefited from a change in management) over Netflix, Amazon and Apple (which is getting bruised from one of its iPhone factories in China.) Apple fell 2.1% this week while Home Depot jumped 4.2% and Disney soared 7.7%. Then again, there is a strong likelihood that trading this week was impacted by American Thanksgiving on Thursday and shortened trading hours today, so perhaps a more normal trading week will return next week.

As for Canadian investors, despite the drop in oil prices, natural gases climbed again as Fall ends and Winter sets in keeping energy sub index up for the week. In fact, all of the sub indexes finished up this week except health care. The best performing sectors included gold, materials (up 3%) plus consumer staples, real estate, and utilities (remember utilities act like bonds so when interest rates go down, utilities usually go up. 

The top performing stock was Home capital up 54% on a takeover announcement from one of Warren Buffett’s companies in the US. As for gold stocks, they seem to be attracting analyst upgrades because bullion itself is unchanged on the week. 

Turning to next week, investors will need to digest the earnings from yet another 400 plus companies we get the monthly jobs data on Friday, and Q3 GDP on Wednesday. In Canada 160 companies report including Suncor and Shaw Communications plus our banks starting with the Bank of Nova Scotia on Tuesday.

Happy trading and stay safe out there.

Steve Bokor and the Ocean Wealth team.

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Steve Bokor

Steve Bokor

Portfolio Manager