Bulls Tame the Bears ... for Now - Your Money July 8th 2022

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Talk about fickle, bond and stock investors could not figure out which way to play this week. Granted we ended June on an ugly footing, but calmer heads seem to take the reins last Friday with an optimistic view for the back half of 2022. That evaporated when fears of a looming recession gripped traders from Bay Street to Wall Street. But there was no logic to it. Yes, central banks will likely overdo it with their interest rate policies, and keep raising rates even as the US economy slips into a recession, but they will likely just as quickly reduce interest rates as inflation drops back to their target level of 2%. Investor psyche swung from “good economic news is bad for the economy because it will drive interest rates higher” to “bad news is bad news for the economy because who wants to own stocks if we are in a recession”. The problem is “heads I win, tails you lose” scenario, and you cannot have it both ways.

There is no doubt in my mind that as corporate earnings roll out this month, the majority will likely beat analysts estimates but, I also suspect most companies will give cloudy guidance for the second half only because they have no idea how consumers will react to rising interest rates. Remember, most millennials and Genz’s have never experienced an inflationary economic environment, and I suspect a meaningful portion of them have watched their cryptocurrency holdings evaporate right in front of their eyes. Couple that with high gasoline prices and at least a doubling of mortgage costs and suddenly their wealth and discretionary cashflow have taken a serious hit.

On the other hand, Cathy Wood’s Ark Innovation fund has jumped 17% this week and if we look at the Nasdaq, the leaderboard has Roblox, Docusign, Peloton Lucid and Okta plus another dozen high growth stocks that are all up over 10%. Again, forget earnings, these companies are the posterchild for growth for growth’s sake. Meanwhile, Chevron, IBM, Verizon, and Honeywell lost ground this week despite high and rising dividends. Sadly, their losses paled in comparison to Canadian gold and energy stocks. Gold I can sort of understand. With rising interest rates, the cost of holding bullion goes up and it does not pay a dividend. As for energy, I was shocked to see the price of crude fall to $98 because Citigroup predicted it could fall to $65 this year and $45 next year if a severe recession wipes out demand. Call me crazy but Iran is advancing its uranium enrichment program so forget more supplies from them. Columbia just voted in a leftist government, Libya is a mess and Norwegian oil workers just went on strike. Most other OPEC members are close to operating at full capacity so no joy there. And don’t get me started on yet another hurdle for Enbridge’s approval of their Line 5 pipeline. It’s a 69-year-old pipeline that transports 540,000 barrels per day to both US and Ontario refineries and if it springs a leak or is forced to shut down for major upgrades or repairs, then today’s current sky-high gasoline prices will seem like a bargain.

Bottom line unless Russia suddenly reverses its invasion policy, expect high prices for the foreseeable future (in my opinion.) But that did not stop a mini panic slide in energy stocks this week. Personally, I think we will continue to see increasing dividends and stock buy backs both of which are good for stock prices.

Turning to next week, the big variables are the consumer price index (CPI)and the producer price index (PPI), I believe the latter stat will have more impact. If the CPI stat exceeds the 8.6% number from May, then expect bond investors to run to the sidelines. Don’t quote me on this but I seem to recall that most recessions are induced by central banks forcing short term rates above long-term rates and this inversion effectively pulls liquidity from the financial markets sending stock prices lower. Having said that I again think the Fed will pivot and after the July rate increase, they may have enough time to see prices adjust before they meet at the end of September and if the inflation trend is decidedly down, they might pause for a longer time rather than dogmatically raising rates in the face of slowing economic growth. As for the PPI, I think supply chains might bring the top line below last month’s 0.8% which could soothe worried bond and stock investors.

Bottom line, between the inflation stats and 75 odd companies reporting earnings, we could find some buying opportunities show up if more irrational trading sets in. Don’t get me started on Mr. Musk terminating his Twitter deal…

Happy trading and Stay Safe.

Cheers Steve and Michele.

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Steve Bokor

Steve Bokor

Portfolio Manager