Stocks surged on Thursday with their best day since 2020 after a key inflation indicator came in softer than expected. The S&P 500 was up 5.5% while the Nasdaq Composite was 7.3% higher. It was the biggest percentage jumps for the S&P and Nasdaq since spring 2020. Canadian stocks were up almost 3%. The Consumer Price Index, a key inflation gauge, rose 7.7% for the year ending in October, down from 8.2% in September and below analyst estimates of 8%. Investors took that a sign to break out the party hats, suggesting that peak inflation may be behind us. Stock markets rip on the Sunday Reads.
We might curb our enthusiasm. Inflation is still driving the bus, and the central bankers are strapped into that bus. As always, no one knows how this all plays out. But it is certainly entertaining – grab the popcorn, sit back and watch.
Less than two weeks ago Fed Chair Jerome Powell made it clear that rates would remain higher for longer. Price pressures in housing, plus sticky wage pressures and energy costs mean the central bank still has a long way to go in its battle against inflation. We’re likely still in the first or second inning.
From an Ian McGugan post in the Globe and Mail …
However, the Fed’s ultimate destination shows no signs of changing, Mr. Perli says. It is probably still headed toward a peak Fed funds rate of about 5 per cent, compared with 3.75 per cent to 4 per cent now. It is unlikely to back down until there is compelling evidence that inflation is trending down to its 2-per-cent target.
Here’s the basic backdrop. Inflation remains a threat, central banks will likely continue to raise interest rates, there is a looming recession and corporate profits are slowing.
John Mauldin offered this chart in Recession Thoughts.
Profits today vs far, far away
Many believe that expensive stocks (think tech and other growth) with promises of far-away profits will struggle, as cheap stocks that are generating meaningful profits today – even if they are slower growth, continue to offer much better opportunities.
Value-oriented investors such as GMO’s Inker offered “boring companies, trading at undemanding valuations.”
Dividends could play an important role as well
David Kostin, chief U.S. equity strategist at Goldman Sachs, argued in a research note in late October that companies that return cash to shareholders typically outperform when economic growth is slowing, which is the economic backdrop he expects in 2023.
I recently updated my dividend-heavy Canadian Wide Moat Portfolio post. Wide moats plus Canadian oil and gas stocks put us up about 8% or more over the last year. We also have an ode to dividends on Findependence Hub, from Noah Soloman.
Kostin is also bullish on energy.
They are taking their excess cash flow and increasing their buybacks or growing their dividends, which is constructive for shareholders and driving the supply-demand cycle in the medium term,” said Simon Skinner, who leads the European investment team at multinational Orbis Investment Management.
If history is any guide, and the economy shifts to accommodate higher interest rates and inflation, the old bets may fizzle. New market leaders – perhaps energy producers, value stocks, dividend payers, or a combination of all three – could reward investors for years.
From BlackRock …
“We have entered a regime of higher macro and market volatility,” economists at giant investment firm BlackRock write. They argue that “central banks’ singular focus on inflation” means policy makers will likely raise rates too high in the near term and “cause economic damage that markets are underappreciating.”
Lance Roberts (no relation) delivered the go-to post with the Policy Pivot May Not Be Bullish. So many great charts and sensible commentary.
Keep on keepin’ on
It was an exciting week, and certainly the cooling inflation readings are more than welcome. But we don’t know what we will get, we don’t know the future. Stick to your investment plan. In late September I asked – what stocks and ETFs are you buying? The markets have been whipsawing all over the place since then. The markets are reacting and guessing. You don’t have to join them.
That said, if you are one who manages your own stock and ETF portfolio, you might pay attention to the real earnings, value, energy and dividend story in this post.
The Sunday Reads
And Dividend Hawk snatched the big stories and post of the week. Included in the mix of reads is 20 recession-proof stocks for the (potentially) pending downturn, from Simply Safe Dividends. That is a good blog, and a very good service for U.S. stock analysis. Canadian investors might look to stocktrades.ca as well.
The Simply Safe Dividends post will pair nicely with The Defensive Canadian Dividend Portfolio.
We have the better way to budget on My Own Advisor – including the weekend reads.
Kyle is Making Sense of the Markets on MoneySense. I will be coming out of the bullpen to cover for Kyle for a few weeks starting the end of November.
Matthew at All About The Dividends delivers his October portfolio update.
Here’s an updated, and very good post, from Banker on Fire – How to build wealth in your 50’s.
On The Retirement Manifesto, Fritz is expanding his Mountain Homestead.
FiPhysician discusses joy, happiness and expectations in retirement.
We experience happiness when we remember that gratitude is a continuous spiritual practice. Be grateful for the unexpected moments of joy, and don’t fear (or expect) anything but what is. Seeking certainty is seeking scarcity, just as joy is being grateful for what is already in your life.
The all-in-one asset allocation ETFs
This week I updated the returns for the Canadian asset allocation ETFs.
Of course, core balanced portfolios have had a rough go. 2022 is the worst year ever, period. That said, if central bankers are successful in creating a recession or even just successful enough in bringing inflation under control, we will likely see the return of the balanced portfolio. Keep your eye on the horizon, the longer term.
Even over the last 3 years, the balanced growth model has delivered solid, positive returns.
It’s even better for the all-equity models.
This might sum up the current market outlook.
On Berkshire Hathaway and Mr. Buffett …
And more importantly …
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