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I wanted to say “it’s déjà vu all over again” but this time it’s truly different. The last time a central banker decided to remove the punch bowl from the proverbial Wall Street party, bond and stock investors ran for the hills sending both markets into a mini tailspin. This week, when Jay Powell announced the US Central Bank would begin the same process of liquidation, investors rejoiced. Mind you they might have been preoccupied with stronger than expected earnings from some marquee names coupled with a misguided belief US politicians would actually come together and pass an infrastructure spending bill. And to add icing on the cake, the US added 531,000 new jobs in October with nonfarm private payrolls increasing by 604,000 and average hourly earnings jumping by 0.4%. The one, two punch should have caused bond investors to bail, but instead they went long and by purchasing bonds, they actually drove the 10 year bond yield down, not up, as one would guess.

Make no mistake, central bankers on both sides of the border are making the right decisions in my opinion. There is far too much credit in the system and with interest rates near zero and government handouts to anyone who applies, the excess cash has found its way into the stock & bond market, crypto currencies, and real estate. And since the great rally that started in May of 2020, for many companies, valuation measures went to the stratosphere. But over the last several weeks, the irrational exuberance exhibited by many investors, suddenly and somewhat violently reversed itself. Either that or Wall and Bay Street ran out of patience for companies that failed to deliver the implied profits dreamed up last year.

You may recall the hot online learning company called Chegg that ran from $30 in April of 2020 to $115 by February 2021. Well after an earnings miss, the stock is back to $30. Another favorite for the meme day trading crowd is Peloton aka the stationary bike manufacturer. Again, from April of 2020 to February 2021 the stock ran from $25 to $171. This week capped off a spectacular slide all the way back down to $55. Apparently, eventually, earnings do matter. And Canadian darlings were not immune to the effects of down grades. Take a look at Lightspeed. The stock skyrocketed from $25 last year to $165 by September of this year. Yes they have made some very smart strategic acquisitions using their own stock as cash to make purchases, but the company reported a loss of $59 million in the latest quarter and the stock has fallen back to $90.

Now for the patient ones who have faithfully held onto banks, telecom and utility stocks, we are finally getting our dues. Enbridge chalked up a new high this week thanks to stronger earnings. In fact we had a boat load of companies reporting this week with most of them moving higher after beating street estimates. Even Air Canada flew up 18% this week on the hopes of a stronger economy in 2022. However the real winners were the consumer stocks this week. Maple Leaf foods knocked it out of the park sending the stock up 17%.

However, the frothiness of the stock market is not over in my opinion. We are still seeing companies going public with no hope of profits for years and getting billion-dollar valuations. Call me old fashioned but I am going to stick with companies that have a lower than average PE and pay a reasonable dividend.

Happy trading and stay safe out there.

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