Interest Rate Jitters Spook Markets - Your Money December 3rd 2021
Posted by Steve Bokor
Goodbye November, hello December. Sadly, it’s been a rough week for traders. Many of the high flying “meme” stocks like Peloton, Beyond Meat and Docusign are coming back down to earth and fast. Why? Because the analysts who imbedded ridiculously high growth rates and stock targets have come to the realization that maybe they got a little aggressive in their forecasts. In other words, they have been priced to perfection and a miss on any metric or a lowered forecasted growth rate caused serious revisions to price targets. Oops!
In fairness, this week’s mini meltdown was due in part to suddenly hawkish comments from Jay Powell over at the Federal Reserve. The immediate about face regarding the word “transitory” and inflation sent a shock wave through Wall Street. The implied change in interest rate policy caught most investors off guard sending investors out of the stock market and into bonds. Ten year bond yields fell from about 1.65% to 1.35%. To put that in perspective on November 24th the 10 year US T Bond was trading at $97.5 and today they are $100. That is a huge move when the bond holder is only collecting 1.6% in interest income for the year.
Curiously, today’s near disaster US jobs data (210,000 versus and expectation of 500,000) would technically give the US Central bank room to pause providing the November number is not an aberration. Right now there is a huge disconnect not just in the US but in Canada with business owners begging to hire employees while the bulk of the labor force (millennials and Gen Z) have decided to take a more laid back approach especially if both governments continue to hand out grants and loans. Sadly, prognosticators are already predicting the Omicron virus could slow global economic growth. Given today’s market slide, it seems market psychology has switched from bad news is good news to bad news is indeed bad news…economically speaking. Clearly investors are on edge and looking to take profits especially if next week’s inflation data surges to the upside.
Next week investors will also ruminate over earnings from Costco, Dollarama and Lulu Lemon to get insight on preholiday sales. Shortages and bottlenecks may impede some of the top line numbers and or it will provide confirmation that businesses can successfully pass on rising costs to consumers. It does not take a rocket scientist to see how food and energy prices have surged over the last year, and if price increases transfers into retailers generally, then Jay Powell will indeed have to accelerate his plans to reduce money supply and increase short term rates.
In Canada, you just have to look at the Billions raked in by the Banks…again. BMO is raising their dividend by 25% on top of a significant stock buy back. Evidently explains why banks stocks are trading within about 5% of their all-time highs, while the tech stock holders are looking for a parachute to slow the slide. Just a few weeks ago Shopify was trading at $2200 per share. Today it’s just over $1800. Granted the aggressive trading could have bought it at $1300 earlier this year but at $1800 it is still trading at 220 times earnings. So while it may be the next Amazon, the valuation is still too steep for me. And remember Bay Street’s other darling? Lightspeed. The stock rocketed up from the $80’s in the beginning of the year to $165 in September. It is now $57.
Bottom line, it is normal to expect a five to ten percent correction every year but if history repeats itself and it usually does, stocks move up on an escalator but come down on an elevator. It is painful to watch but it does provide buying opportunities unless we are back in 1999. One of my partners remembers buying Nortel at $60 after it had plummeted from $200 thinking he had a bargain only to watch it melt down to near zero. We are keeping an eye on our favorite companies waiting for prices to go on sale.
Happy trading and Stay safe.
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 and/or its’ officers, directors, employees and affiliates may, from time to time, acquire, hold or sell a position in the securities mentioned herein.