Shocks to the Market - Your Money for June 9th, 2023

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Shocks to the Market

Two exogenous shocks surprised markets this week starting with yet another supply cut by OPEC. Initially, it sent oil stocks up as shrinking supplies should offset perceived demand destruction from the lower economic activity in Europe, North America, and Asia. We feel investors have incorrectly focused on falling stats coming out of Asia as Chinese exports hiccupped again. However, we think this is a head fake and could provide opportunities for Canadian oil stocks. It may not seem like it, but the TSX Oil Subindex is actually down 5% year to date. That is even worse than the Healthcare sector, aka pot stocks! Yet if you look at the profits of oil companies, they are rolling in dough and many are paying very attractive dividends. Freehold Royalties yields over 7% and it’s a pittance compared to Birchcliff and Peyto. Both Enbridge and TC Energy yield over 6% mainly because their stocks can be considered alternatives to corporate bonds much in the same way as Telus and BCE. Heck, we have three Canadian Banks yielding over 5%. A word of caution, oil companies are notorious for cutting dividends if cash flows drop.

Speaking of bonds, the second “shock” (not to us, by the way) was the Bank of Canada’s decision to raise short-term interest rates to fight stubbornly high inflation rates. We have discussed many times why we feel central banks are making a mistake trying to anchor interest rates to support 2% inflation but, if that is their number, there is almost no alternative to raising rates right now. It will cause a growing level of economic hardship for those that can least afford it and at the same time probably lock out the huge inflow of immigrants moving to Canada. 

According to Statistics Canada, just over 1.3 million new immigrants settled in Canada from 2016 to 2021. The trouble is our country might not be building enough homes for those immigrants to live in. Housing starts for 2022 fell from 211,284 last year to 207,940 and, with interest rates skyrocketing, it should continue to shrink. We recently spoke with a developer in Greater Vancouver and between all the red tape and costs of dealing with City Hall, builders are pulling in their horns - never mind the rising cost of building materials. 

On the other hand, short-term interest rates are now north of 5%, so more money will likely flow into T-Bills, B.A’s and GIC’s to capture higher risk-free returns. In fact, several financial institutions are offering one-year deposits above 5%. Meanwhile, five-year Canada Bonds only yield 3.7%- and ten-year bonds are 3.41%. Historically, we all know what happens when yield curves stay inverted for prolonged periods of time.

Turning to next week, U.S. investors will likely be on pins and needles ahead of their Wednesday rate decision. To make matters worse, U.S. CPI hits the tape at 5:30 Tuesday morning and PPI (Producer Prices aka inflation at the manufacturing level) arrives on Wednesday at 5:30 - just in time for the 11:00 rate decision. The Fed has been hinting about a pause but, with the debt ceiling crisis over and done with, any outsized inflation numbers could cause them to raise rates at least once more. Plus, investors will need to digest rate decisions by the E.U. and Great Britain after the Fed’s decision.

That could take some of the air out of the hottest A.I. boom/bubble and lead to a pullback in the Nasdaq. With a year-to-date gain of over 25%, it has room to fall. We continue to note the difference between it and the Dow which is up only 2% this year much the same as the TSX. However, we also note that the S&P broke through 4,300 or 20% above the October low, so theoretically we are in a new bull market. Our only word of caution would be the lack of breadth in the S&P. If we look at the DJIA, we note 16 of the 30 stocks are still negative for 2023. Bottom line? We may be at an inflection point, especially if markets cannot hold these levels after next week’s rate decision.
Happy trading and stay safe,

Researched and written by Steve Bokor, CFA®, BA Economics
Chartered Financial Analyst and Portfolio Manager at Ocean Wealth of PI Financial

Information contained herein represents the views of the writer and not those of PI Financial Corp., and based on assumptions which the writer believes to be reasonable. The material contained herein is for information purposes only and is not to be construed as an offer or solicitation for the sale or purchase of securities. This information is intended for distribution in those jurisdictions where PI Financial is registered as an advisor or a dealer in securities. Any distribution or dissemination of this article in any other jurisdiction is strictly prohibited. PI Financial is a member of the Canadian Investor Protection Fund

Steve Bokor

Steve Bokor

Portfolio Manager