Market Musings
Good day to you,
After a very busy summer for Patrimonia Wealth, we are happy to take a few moments to update you on your team, as well as the market.
- The team has grown: We are pleased to officially introduce you to Aidan Moisan, our newest member. Aidan interned with us for the summer. He has accepted to remain with the team on a part-time basis while he completes his studies at the John Molson School of Business. He has provided great support to the team. Welcome aboard, Aidan.
- The new FHSA: In the next few days, you will be receiving a summary of the new FHSA, the new federally registered account created by the Canadian government, allowing first-time home buyers to take advantage of a very tax advantaged (like the TFSA and RRSP) way of saving for their first home. This account will probably not be useful for you, but may be of great benefit for your children, younger friends, nephews and nieces, etc. Please contact us if you or they have any questions.
- Isabelle is away this week at the Raymond James Ltd. annual Admin Development Conference in Vancouver. She was invited on merit. She will be back next week.
- Volunteer work: Your Patrimonia team participated in several charitable activities:
- The annual clean up at La Colonie Sainte-Jeanne D’Arc
- Food preparation at the Ronald McDonald House
- The Ride to Conquer Cancer. Laurent and Aidan rode 150 km, while Laurent was the principal organizer for the Raymond James team.
- New online appointment booking system (if you prefer the phone, please don’t hesitate): We signed on to Calendly this summer. Through this application, you can access our respective agendas and book a call, a Zoom meeting, or an in-person visit at the office. Thus far, our clients appreciate this new service, as it makes it easier to set up some time with us. Please let us know your thoughts.
For Erik: https://calendly.com/erikmoisan
For Guillaume: https://calendly.com/gdtessier
Now, let’s get to the markets.
After a very difficult 2022 for both stocks and bonds, 2023 has seen a spectacular rally in share price in the U.S., particularly for the tech sector, which was a huge loser in 2022. As strong as this rebound has appeared, this bounce has not brought the U.S. index back to its 2021 high, nor the Canadian equity index. The bond indexes are still holding near the bottom achieved earlier in 2023, and have a negative return for 2023 thus far. So, what, given the present environment, are we expecting? A quick consultation of the crystal ball and POOF, profits for all and global stability... ah, if only it were that easy. War rages on in Ukraine, Hamas attack in Israel, Donald Trump back for another try, Javier Milei elected in Argentina as well as far right party victories in Italy, Hungary and Poland, for example… trying to put all of these puzzle pieces together to get a cohesive view at present is indeed difficult. Economically, market sentiment seems to be principally driven by data on inflation, and therefore the variation of interest rates, in advance of the U.S. central bank’s rate and policy decisions. The big questions: “When will central banks start to reduce the overnight rate?” and “Will it be too late?” The consequences of the rate hikes of 2022 are just starting to have an impact in the real economy. Consumers are now cooling their consumption habits, or so major retailers are starting to report for Q3. Thankfully, lower demand for goods is key to reassure central banks that their policy decisions are working.
What does the stock market tell us? We need to remember that the markets (stocks, bonds and rates as well as currencies) have often been an early indicator of corporate profitability and health. When the CPI was higher than expected at the end of this past summer, the equity market regressed in price and the bond rates rose. Last month, in October, the opposite was true: CPI was more muted, and bond rates fell while equity prices rose. A lesser rise in CPI (even a slight inflation read is a price rise - (zero per cent over one month but 3.2 per cent annualized for the last quarter) below the consensus CPI anticipation in October led to one of the best equity days in the past two years, following the last announcement on November 14.
While this encouraging sign (one month of cooler CPI does not mean that inflation is under control or that the U.S. Fed will stop raising rates) pushed equity prices up, it pushed bond yields for all maturities down. Currently, the yield curve remains inverted (shorter maturities are offering more yield than longer ones - not healthy). This being said, rates across the board have risen, presenting Canadian residential mortgage debtors with grave concerns, as their costs of borrowing have ballooned. No less than 3.4 million mortgages come to term in 2025 (https://financialpost.com/news/3-4-million-canadians-renew-mortgages-2025). The resetting of these will have a significant impact on discretionary spending in Canada, as there will not be as much money left at the end of the month for many families after they pay their increased (due to rate hikes) mortgage payments. In the U.S., it is not as severe, as most mortgages are recent rentals at more favourable rates, and extend for up to 30 years. What is of some concern are the commercial loans in default in the U.S. The number of defaults have tripled over the past 12 months. Banks have stopped lending in that segment. There is rumoured to be over 1 billion square feet of vacant office space in the U.S. That is the equivalent of 370 Empire State buildings. Rates and remote working (brought in by the COVID virus) are to blame. Rental rates can fall, but will employers force a full return to the office? And will employees adhere?
The market is somewhat efficient. It adjusts quickly (sometimes, painfully) when economic expectations are worrisome. The only sectors that offered positive performance over both the past one- and two-year timeframes are tech in the U.S., and consumer staples (Alimentation Couche-Tard, Metro) in Canada. Not much has changed this year in interest-sensitive stocks: utilities, real estate, financial/banks and telecom are all lower year-to-date.
As we have previously written, we remain cautious when picking our equity portfolio names, and analyze and research sectors that have suffered more greatly, for possible opportunities. Currently, we are finding terrific opportunities in discount bonds. The differential between the discounted price and the maturity at par is taxed as capital gain. Translation: you would need as much as seven per cent interest to end up with the same after tax return. Actual dollars in your pockets. We expect rates to start to reverse on the short maturity end, corresponding to the central banks lowering their overnight rates. But we also expect the bond rates to stay higher for longer. Those days of five-year irrigate at sub two per cent are not going to be back for a while, if ever.
Please forgive our lengthy commentary. These are interesting times. We hope you will now get back to a more relaxing activity. Please do not hesitate to connect via Calendly or tested telephone to set up your next meeting.
Wishing you an excellent month.
Erik & Guillaume
Your team Patrimonia Wealth at Raymond James
Disclaimer
Erik Moisan isand Guillaume Desjardins-Tessier are Portfolio Managers with Raymond James Ltd. The views are those of the authors, and not necessarily, those of Raymond James Ltd. Investors considering any investment should consult with their Investment Advisor to ensure that it is suitable for the investor’s circumstances and risk tolerance before making any investment decision. Raymond James Ltd. is a Member - Canadian Investor Protection Fund. Commissions, trailing commissions, management fees and expenses all may be associated with mutual funds. Please read the prospectus before investing. Mutual funds are not guaranteed, their values change frequently and past performance may not be repeated.
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