Moving in slow motion might be a fitting description for the success of central bankers in their attempt to cool economies and add more weight to the inflation fight. We might go as far to suggest that rate hikes have had almost no effect on inflation to date. Very robust and shocking employment gains in the U.S. and Canada show that rate hikes have had little effect on that front. And central bankers offer that they will need to hit the job market to ensure that wage demands do not feed inflation. The rate hikes will eventually go to work (pun intended), but many forget there is a lag effect. It can take 12 to 18 months before rate hikes work their way through the economy. I would agree with many economists that we are moving in slow motion.
No rate cuts in 2023?
It was a soft week in stock markets as investors digest the possibility or likelihood that central bankers are not likely to cut rates in 2023. We would need to see some economic weakness or a recession for that to happen, and again, we’re moving in slow motion on that front. And of course, inflation must continue to cooperate and move down.
From Liz Sonders, here’s the returns for sectors and styles to date in 2023. We have a complete reversal from 2022 (when value and earnings mattered). Optimism and the hope of year-end rate cuts have mostly dominated the investment psyche in early 2023. Growth stocks have been fast out of the gate.
When the Fed pushed up unemployment by 0.5% we’ve always had a recession.
So far the rate hikes have had almost no effect in the U.S.
Essentially, things are moving in slow motion thanks to a very strong labour market. There’s a lot of jobs and a lot of optimism to mop up before the rate hikes can go to work. Pandemic savings are estimated to run out mid year in the U.S.
Lance Roberts suggests that bullish investors continue to fight the Fed.
In 2023 we might see the no landing scenario.
Making Sense on MoneySense
This week on Making Sense of the Markets at MoneySense, Kyle Prevost takes a look at Canadian telco earnings.
No big surprises from Canada’s major telecommunications companies that wrapped up their 2022 earnings statements: Telus slightly underperformed expectations; while Rogers outperformed; and Bell finished exactly where most thought it would.
Here are the Big Tech earning highlights:
- Telus (T/TSX): Earnings per share of $0.23 (versus $0.28) and revenues of $5.06 billion (versus $5.03 billion predicted).
- Rogers (RCI.B/TSX): Earnings per share of $1.09 (versus $0.98 predicted) and revenues of $4.17 billion (versus $4.16 billion predicted).
- Bell (BCE/TSX): Earnings per share of $0.71 (versus $0.72 predicted) and revenues of $6.44 billion (versus $6.39 billion predicted).
Telus forecasted sunny skies, predicting big gains in both revenue and earnings for 2023, due to its capital spending needs trending down.
I’m happy to hold BCE and Telus in the Canadian Wide Moat Portfolio. There’s some very nice yield that grows modestly. The telco’s help anchor team defense for the overall portfolio. The Canadian wider moat portfolio might be the best stock portfolio option in Canada.
On stocktrades.ca, Dan offers 11 of his favourite Canadian stocks for 2023. Interestingly, you’ll find Shopify and Algonquin on the list.
Mark and his wife are back from their incredible trip to Costa Rica. You’ll find some great trip pics (and posts) in the Weekend Reads.
U.S. earnings in the consumer space
We check in with Dividend Hawk for the earnings reports for the week. Included in the mix is my CVS Health …
CVS Health Corporation (CVS) Reports Fourth Quarter and Full-Year 2022 Results; CVS reports Non-GAAP EPS of $1.99, beating analyst estimates by $0.06 by increasing 0.5% year-over-year. Revenue grew 9.4% to $83.8 billion, topping estimates by $7.43 billion. For FY23 Management guides GAAP diluted EPS guidance range of $7.73 to $7.93, Adjusted EPS guidance range of $8.70 to $8.90 , Cash flow from operations guidance range of $12.5 billion to $13.5 billion.
CVS one of the 8 core U.S. stocks in my retirement portfolio – that has trounced the market from 202o, when the world changed. The portfolio was designed to perform in tumultuous times. Pepsi an other wonderful defensive stock in that U.S. crazy 8, with inflation protection capabilties. Pepsi had another strong quarter.
PepsiCo, Inc. (PEP) o Reports Fourth Quarter and Full-Year 2022 Results; PEP reports Non-GAAP EPS of $1.67, beating analyst estimates by $0.02 and increasing 10% year-over-year. Revenue grew 10.9% to $28 billion, topping estimates $ 1.18 billion. Management expect to deliver 6 percent organic revenue growth and 8 percent core constant currency earnings per share growth. We also announced a 10 percent increase in our annualized dividend, starting with our June 2023 payment which represents our 51st consecutive annual increase, and plan to repurchase approximately $1.0 billion worth of shares.
The Hawk also looks at blog posts for the week. Included in the roundup is a post from Bob at Tawcan. It has been 12 years since Bob ‘got serious’ about self-directing his dividend growth portfolio. While there’s much more to investing than the dividend count, here ya go …
The dividend growth can certainly create a powerful positive feedback loop that helps investors stay the course. I will always suggest that investors should not sell themselves short with the idea of living off of the dividends in retirement.
Rob offers a January portfolio update on Passive Canadian Income.
And it’s all about the January dividends with this post from Matthew at All About The Dividends.
The value dive
On Findependence Hub, a very interesting dive into value investing. Earnings might continue to matter over the next few years, and perhaps decade.
As of the end of last year, U.S. value stocks were trading at a 45.2% discount to their growth peers, and the corresponding discount of global value equities stood at 50.4%. Assuming a reversion to their respective average historical discounts of 27.9% and 26.7%, U.S. value stands to outperform by 31.6% and global value will outperform by 46%.
Also on the Hub, a recent BMO survey showed that Canadians think they will need $1.7 million to retire. Jonathan Chevreau looks at the numbers of what it might take to retire.
Of course, retirement will look different for everyone. If you enter retirement with no debt (a great advantage in my opinion) you might enjoy a comfortable retirement with a very modest portfolio sum. I’ve talked to many retirees who enjoy very comfortable (but humble) retirements in that situation. With the proper management of CPP and OAS payments (delay taking them for increased payments when possible), a $500k portfolio can go a long way.
Bonds and GICs are back in business
Fritz at the Retirement Manifesto explains how to build a bond ladder. That post has a U.S. focus, but we can follow the same theory by building GIC ladders. We can even buy laddered bond ETFs.
EQ Bank offered an update this week and has a 5% GIC back on the table. Here’s my EQ Bank review. You’ll find the rates in that post.
I would not argue with a retiree who sets out on the retirement journey with the first 3 ,4 or 5 years of retirement spending needs covered by GICs. They would combine that with an equity or balanced portfolio. We would still have to ensure that we have enough growth potential in the portfolio to meet our long term spending needs. But there is certainly nothing wrong with removing the sequence of returns risk in the first few years of retirement.
The 60/40 history
While I like to add in some dedicated inflation fighters, here’s a great table and reminder, thanks to Martin Pelletier …
Check out the balanced ETF Model Portfolios on Cut The Crap Investing.
And the all-in-one asset allocation ETF portfolios.
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