The Bank of Canada says “I’ll hold” on the Sunday Reads.

The Bank of Canada stood pat for the second time in a row. There are enough signs of economic weakness. And that economic weakness is likely to continue and accelerate. While inflation has been sticky, it’s also very likely that weakness will contribute to further downward pressure on inflation. The real estate sector appears ready to buckle, and that has been a big driver of the Canadian economy. As I offered as we were heading into the rate hike cycle, Canada is one of the most rate-sensitive countries on the planet. The Bank of Canada says “I’ll hold” on the Sunday Reads.

Inflation is sticky while oil and gas stocks pump the free cash flow.

Here’s the rate history chart for Canada.

The U.S. economy is booming

The U.S. just experienced a surprising ‘blowout quarter” for economic growth …

Americans continued their revenge spending in the third quarter despite persistent inflation and rising interest rates, helping the U.S. economy grow at its fastest pace since late 2021.

Real gross domestic product (GDP) grew at a 4.9% annual rate last quarter, according to the so-called advance estimate that the Bureau of Labor Statistics (BLS) reported Thursday. That’s up from just 2.1% in the second quarter.

While many economists feel is it the last gasp for the consumer, they’ve had many recent last grasps. The consumer and the economy continue to confound experts with surprising resilience. Employment remains strong and wage growth feeds consumption.

Some basic economic principles are being challenged – the economy vs theory.

But, are bonds sniffing out weakness?

Bonds are up 5pct vs stocks over the last week.

Starting to price in recession dynamics. Very different market action than we’ve seen for most of the year. Particularly notable on the day the strongest growth in two years was reported. pic.twitter.com/pgMkpElV8L

— Bob Elliott (@BobEUnlimited) October 26, 2023

Via Scott Barlow in the Globe & Mail, from Andrew Pauker and Mike Wilson. Wilson has been notoriously bearish for quite some time. All said, the following does lay out the theme on how to play defense with equities. You’ll find some stock ideas for that defense and some growth ideas for the late cycle theory.

“The leading macro data suggests that we’re in a late cycle market environment as do the internals of the equity market. This is historically a supportive performance backdrop for (1) traditional defensives (Healthcare, Staples and Utilities), (2) select growth opportunities (lower volatility growth, in particular, along with stocks levered to secular themes that can outweigh cyclical risks … ,

Here are the stock ideas mentioned –

Walmart, Keurig Dr Pepper, Molina Healthcare, Colgate Palmolive, Biogen, and Thermo Fisher.

Buy-rated growth stocks with low volatility include Lowe’s Co., TJX Companies, Marriott International, McDonald’s, Visa, American Express, Boston Scientific, Linde, Colgate Palmolive, Eli Lilly, Thermo Fisher, IQVIA Holdings, Apple, and Microsoft.

Markets fall 2.5% for the week

The benchmark gauge’s slide this week has resulted in it slipping into correction territory, with Friday’s closing price marking a more than 10% drop from the S&P’s (SP500) 52-week closing high of 4,588.96 points notched on July 31. The negative milestone comes just two days after the Nasdaq Composite also enterered correction territory.

The main driver of Wall Street’s retreat this week was a slide in megacap technology stocks, especially the “Magnificent 7” club. All members, except for Amazon (AMZN) and Microsoft (MSFT), notched weekly losses, with Netflix (NFLX) down 0.8%, Nvidia (NVDA) down 2.1%, Apple (AAPL) down 2.7%, Meta Platforms (META) down 3.9% and Alphabet (GOOG) (GOOGL) down about 10%.

The “Magnificent 7” comprises nearly 30% of the S&P 500’s (SP500) market cap and an advance in that club has been one of the primary drivers for the benchmark index’s rally in 2023.

That said, growth has been solid for big U.S. tech, but the markets have had enough with the insane valuations …

In the U.S. all sectors are down in October.

Bonds are beating stocks in Canada

Here’s the Canadian bond market (XBB) vs Canadian stocks (XIC) for a one-month period. It’s a brief period, and it could be a head fake, but bonds are back to offering that inverse relationship. I would guess and think that this will continue and accelerate if econcomic weakness continues in Canada, and especially if we do get some form of recession.

I my wife’s accounts I had added to XBB a few weeks ago, for the first time in a long time. She is overweight ultra-short term treasuries for the higher yield. But I’m happy to now also nibble away at longer term bonds for that stock market correction protection.

Buying Canadian banks

On Canadian banks I offered in a Tweet …

These are tough times for Canadian bank stock prices, for sure. But market timing is impossible. The markets try to think ahead and price ahead. If history repeats investors will look back at this as an incredible opportunity. Of course, greater diversity rules so banks are just part of the mix. Only the dollar cost averager finds the bottom and the period of greatest value.

Here is a little math on long term total returns for RBC and TD Bank.

Fast-forward nearly 40 years, to Sept. 29, 2023. Royal Bank’s shares closed that day at $118.70. So, based on capital growth alone, excluding dividends, the initial investment of $34,380 would have grown to $949,600 (8,000 shares times $118.70). That works out to a return of about 2,662 per cent, or 8.7 per cent on a compound annual basis.

Pretty impressive, right? Now, let’s add the secret sauce: dividends.

Assuming all dividends were reinvested in additional Royal Bank shares, the initial investment would have grown at a compound annual rate of slightly more than 13 per cent. Today, it would be worth … wait for it … more than $4.5-million.

Of course, it’s possible the returns would have been similar if the bank had not paid a dividend and simply used those funds to reduce debt and buy back shares. That said, we can buy more shares funded by the dividends and dividend growth. But we are simply returning that value to the holdings. The share price drops by equal value to the dividends on each ex dividend day.

More Sunday Reads

At My Own Advisor, the stock market is easy to beat. 😉

While I am a big fan on index-based portfolios, I also think that one can beat the market with simple stock portfolios.

I can find no better model than the Canadian Wide Moat Portfolio for Canadian stocks. We’ve had great success with a U.S. stock portfolio built around a dividend growth core and a few picks by way of Apple, BlackRock and Berkshire Hathaway.

It may be key to add in the Canadian oil and gas stocks as well.

The Canadian dollar continues to get hammered as we are much further along on the economic weakness, and we are a country without a growth strategy. That stresses the importance of holding U.S. assets in U.S. Dollars.

Of course, holding non-North American international is prudent as well. We’re back to the idea of a global balanced portfolio of some sort.

11 Canadian stocks for for November and beyond

From stocktrades.ca Dan offers 11 Canadian stock ideas. I always have time for Dan’s ideas and analysis.

With earnings season in full flight, it’s a great time to check in with Dividend Hawk. You’ll find many earnings wraps for each day of the week – plus the blog reads of the week.

Thanks to the Hawk for putting my Sunday Reads in the mix –

Canadians leave $17 billion on the table each year. That’s ‘thanks to’ sticking with high-fee mutual funds over low-cost ETF portfolios.

In the Banker on Wheels weekly wrap you’ll find that bonds are not dead, just dormant. And you’ll find a look at the investment themes of each decade thanks to visual capitalist.

For U.S. readers, here’s partial Roth Conversions from FiPhysician.

And a new post from Fritz at The Retirement Manifesto – Ready Aim Fire.

Making the decision on When Can I Retire? comes to mind, and we’ll use it as an example for the balance of this article.

By definition, you’ll never really know when you’re ready to retire.  How much am I REALLY going to spend in retirement?  How are the markets going to perform?  How long will I live? What about inflation?  Don’t forget about health care costs…

It’s easy to get obsessed with the numbers.  You can give up valuable years trying to perfect your aim.

And there’s 4 posts each week at The Findependence Hub.

Thanks for reading. Don’t forget to follow this blog. Enter your email address in the Subscribe area. 🙂

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