Stock markets in the U.S. cheered a rate pause and a weaker than expected jobs report. U.S. stocks had their best week of the year and of course, Canadian and international stocks played along. Equities notched sizable weekly gains as investors grew hopeful that the Federal Reserve’s rate-hiking campaign is over. The Dow was up by 5.07% in its best week since October 2022. Canadian stocks were also up over 5.0%. All that, and more on the Sunday Reads.
Good news and ‘bad’ news
While bad news has been good news (weak economic readings might suggest progress on the inflation fight), that bad news can create earnings headwinds.
The Canadian banks to face earnings pressure thanks to rising borrowing costs. From a Globe and Mail article …
“We believe a significant number of mortgages are coming due in the next three years (around 60 per cent of all outstanding mortgages at the Canadian chartered banks) and that payment shock (the increase in payment at renewal) could be significant and represents a tail risk to Canadian banks.
Unless there are significant declines in interest rates, we believe that credit losses will inevitably rise, perhaps significantly in 2025 and beyond … We are not changing our estimates with this report but feel confident that our tepid outlook for revenue growth of approximately 4 per cent in 2024 and 3 per cent in 2025 in Canada retail banking is reasonable as we believe banks will be managing through this phenomenon carefully with slow loan growth, low NIMs [net interest margins] , and fee pressure.
We believe there will be more than $186-billion of mortgages renewing in 2024 at the chartered banks in Canada and at current interest rates (for example, the 5-year fixed mortgage rate of 5.54 per cent is over 180 bps higher than five years ago), a weighted average payment shock of 32 per cent could be expected. .. In 2025, we believe there will be $315-billion of mortgages renewing at chartered banks in Canada.”
Mortgage reset shock
Here’s a Tweet that highlights the mortgage renewal ‘shock’ to come in Canada …
The Bank of Canada may reduce rates before inflation hits the target
Senior deputy governor Carolyn Rogers told the committee that the bank didn’t want to give “false precision” about when it would begin cutting rates. But she noted that monetary policy is forward-looking. That means the bank needs to set interest rates today based on where it thinks inflation will be many quarters in the future.
“We would love to be surprised and find out that we were too pessimistic and we’re able to bring rates down sooner. … We will look forward as much as Canadians to getting interest rates back to a neutral level. But right now our priority is to get inflation down,” she said.
The near-term inflation outlook is mixed. Higher interest rates are slowing the economy and dragging down inflation across a range of goods and services. However, oil prices are rising amid geopolitical turmoil and shelter costs keep going up, leading the bank to warn last week that inflation risks are increasing.
Canada on track for a technical recession?
Preliminary data suggest gross domestic product was unchanged in September, Statistics Canada reported Tuesday. The numbers point to a decline in output of 0.1% annualized for the third quarter, following a 0.2% contraction from April to June.
Canada might head into a technical recession – two successive quarters of negative growth. That seems almost certain, but the economy has been fooling a lot of experts for quite some time. That said, the basic laws and forces of economics suggest that the higher borrowing costs will continue to take more and more money out of the pockets of Canadian – reducing the amount they can spend on goods and services.
Many experts feel that the economic decline could accelerate.
Is the rate peak in?
Unless inflation starts to soar again, if feels like a lock that we’ve seen our last rate hike in Canada for a while, and rate cuts might be on the horizon. Once again, inflation would have to cooperate (somewhat).
5-year government bonds have mostly been trending down over the last month – sniffing out that economic weakness.
As I wrote in mid 2023, perhaps the bulk of the inflationary forces were transitory.
At many times, and in early 2023 I offered that the forces of economic contraction (due to rate hikes) were moving in slow motion. That has played out to script in Canada as we now enter that technical recession. The real estate market has stalled. Of course it’s called the lag effect. And the forces are still in play.
But from those posts I have consistently suggested –
Every week I work with readers and suggest (not advice) that they consider dollar cost averaging into the markets. Take out the guess work. Take out the emotion.
Awareness is preparedness.
The Canadian petro dollar
I think this reponse from C The Opportunity nailed it, re Canada as a petro dollar …
And what an incredible several weeks it has been for Canadian oil and gas producers. Many names started reporting very solid earnings and dividend updates. My favourite, CNQ raised the dividend by 11% and there are hopes of another special dividend. With robust debt reduction, CNQ will soon return all free cash flow to shareholders by way of dividends and share buy backs.
Here’s the breakdown by stock and indexes and for NNRG.
And on my other favourite energy stock, funny and true …
National Bank on Enbridge
Energy and inflation protection is a crucial and essential part of the all weather portfolio approach.
And Buffett beats
I’ve long suggested that retirees take a good look at Berkshire Hathaway and investing with the world’s greatest investor. Berkshire is the largest position in my wife’s accounts.
From early 2020 …
And the recent earnings …
More Sunday Reads
Let’s check in with the Dividend Daddy blog for the September update.
A very successful real estate and stock investor, Daddy also reported that he added another $42,000 to stock investments so far in 2023.
That’s a very solid portfolio in the shape of a Canadian Wider Moat mix, with additional real estate exposure. He has very solid exposure to the U.S. market via the VTI ETF. That is his largest position. He also owns a global ETF or two.
You can also check out this podcast featuring Dividend Daddy.
He is a very sensible investor who recognizes the importance of eventually selling down assets to create income. He states/admits that the total return approach is superior to counting and harvesting dividends.
He is also building up that cash pile as he approaches his semi-retirement stage, or work on own terms. I call mine semi retirement. Mark at My Own Advisor calls it FIWOOT –
Telus profit is down 20.8%
In the inreasingly-competitive telco space, Telus saw profits decline. Accounting for special items profit was down almost 21% even as revenues increased by 7.2% to $5 billion, year over year.
The stock markets applauded the results sending the share price up 2.5% on Friday as the stock was up 9.4% for the week.
I have wondered aloud (a few weeks ago) if the bottom was in for the Canadian big dividend space. That may be the case, but of course we don’t know the future. The rate holds are certainly helping the space.
I posted many, many times that we continue to add to Vanguard VDY in my wife’s accounts. Only the dollar cost averager finds the bottom. Guesswork, does not work.
At My Own Advisor Mark asks – More money or more pension? Most Canadians would prefer higher pension payments over higher salaries.
Check out Dividend Hawk for the week in review.
And for THE mix of reads and podcasts of the week cruise on over to Banker on Wheels. Topics include ‘is the 60/40 a good investment now’, the history of risks and bubbles, the GDP of developing markets vs developed, how aging populations affect economic growth but not stock returns – and more.
There’s also a crash course on Telsa valuation.
And for the potential greater risk / greater returns prospect check out 6 Canadian penny stocks from Dan at Stocktrades.ca.
At Findependence Hub, most retirees would keep working if they could reduce hours and stress. From the post …
55.1% of those not yet completely retired but planning to retire said they would keep working longer if they could work part-time, and 48.9% would do so if they could work fewer hours without affecting their pension(s). 43% would keep going if it were less stressful or physically demanding, and 37.6% would do so if the work became more interesting.
I am with Jonathan Chevreau on that semi retirement thing – do enjoyable and meaningful work on your own schedule.
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