Oil's fall is tech's gain - Your Money March 18th 2022

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Stock markets enjoyed a sudden and swift ride upwards as investors took note of Jay Powell’s forecast for a steady and consistent Federal Reserve Bank rate increases. We cannot say for sure, but some of the snap back is clearly a short squeeze on high growth tech stocks that got pounded over the last six weeks. The question is how long it will last, given the upward sloping interest rate curve coupled with the upheavals centered around the Russian invasion in Ukraine. In addition, with oil over $100 US a barrel, consumers have not yet really felt the full impact of the inflation spike on corporate bottom lines. Fedex released cloudy guidance yesterday and the stock fell nearly 4% today. Their insights into rising labor and fuel costs could be a harbinger to more margin compressions by Corporations worldwide.

Still, the strength of this week’s rally cannot be denied and bodes well for more next week…unless of course more damaging activities develop in Europe. And of course, the big elephant in the room continues to be ratcheting sanctions on Russian energy exports that will support even higher crude prices globally and higher gas prices in Europe. Interestingly, energy stocks on the TSX actually fell this week and so did gold stocks falling 2% and 4% respectively. However the TSX hit a another record high this week thanks to a 2% gain in consumer discretionary stocks, real estate and financials plus a 6% bounce in tech stocks. Think Sleep Country, BRP and Linamar with impressive gains, but their 5% to 9% gains pale in comparison to the 23% gain in Shopify and the 36% gain in Lightspeed. Personally, I think it may be dead cat bounce in tech and a resumption of the energy rally next week. I think investors took additional comfort in a conciliatory call between President Biden and Xi Jinping earlier today and the euphoria could be short lived especially if China chooses to buy more oil from Russia. Finally, we cannot discount today’s action in stocks because it was quadruple witching day which can cause major disruptions as traders offload expiring option positions and the hedges supporting them.

Next week, Mr. Powell will have another opportunity to spell out the Fed’s interest rate policy and right now reactions to the first rate increase reminds me of his predecessor Alan Greenspan who coined the term “irrational exuberance” when referring to the positive reaction in stocks to ever increasing short term interest rates. It took several rate increases to temper the boisterous stock markets of 1999 and 2000. Beyond that it is a very quiet week on the economic front and on the earnings front, we get over a 100 companies reporting with Nike on Monday, Adobe on Tuesday and General Mills on Wednesday. In Canada, about 20 companies report but most are either junior mining or pot stocks aside from skidoo maker BRP on Friday.

Happy trading and stay safe.

Michele and Steve Bokor

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Steve Bokor

Steve Bokor

Portfolio Manager