Nov 1st Bi-Weekly Market Update

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The Top-Line

In the Macro
  • Are higher prices hurting consumers? Companies are betting no. 
  • The Canadian economy is enjoying somewhat of a boon from cyclicals. Canadian stocks are rallying. 
In the Micro
  • Big Bank Earnings season pushes American stocks higher

The Bottom-Line

In the Macro

Are higher prices hurting consumers? Companies are betting no. 

Table

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Source: Tradingeconomics

Inflation is definitely the investing word of 2021 so far. Around the globe, inflation rates have surged, and in the G20 there are some notably high rates. Consumer prices in Canada are in the top half coming in at around 4.4% for September, the highest rate in 18 years. The US is even higher at 5.4%. A combination of supply chain shocks, pandemic-related shutdowns, and increased demand from government spending programs has caused prices to spike.

With input prices surging you would think that companies would be taking a hit. But it’s actually been the opposite – some of the world’s biggest are betting that they can hike prices without much issue. Stock markets agree, hitting all-time highs this last week:

When companies are able to raise prices without a large dip in demand, the bottom-line profits increase. And if inflation is indeed transitory, as many economists believe, it will be a boon for companies. 

Lowering prices after inflation dips is something corporations rarely do. After all, when’s the last time you saw Starbucks lower the price of your latte? 

The Canadian economy is enjoying somewhat of a boon from cyclicals. Canadian stocks are rallying. 

The S&P TSX is having a moment. Financials are surging thanks to lower default rates, oil and gas companies are taking advantage of the highest oil and gas prices since 2014, and inflation is pushing up the price of cyclicals overall. Those three sectors make up the bulk (about 57%) of the Canadian stock index, and have pushed the TSX gains to over 21% for this year (as of close Thursday October 29). 

Recent retail sales numbers in Canada have shown a bit of weakness, falling 1.9% in September. Generally, that is a bad thing economically, as consumers tend to drive the economic bus. However, that is a smaller part of our economy. 

If you’re worried about inflation for Canadian companies, you need not be, at least for the majority. Those three main sectors have “little quarrel with inflation – energy and materials naturally fare well when commodities are in favour, while financials are benefitting from a steeper yield curve and the solid credit gains that underpin the inflation pressure.” – Bank of Montreal’s Chief Economist Douglas Porter.

Financials are about to get a boost as well, likely. They have been storing cash reserves to cover pandemic-related losses that really haven’t materialized for some time now, and are wanting to send those reserves to shareholders in dividends. They need approval from the regulators first, but that could come before year-end. 

It is not often that the TSX has outperformed their bigger brother to the south in the S&P 500, but 2021 might just be the year. 

In the Micro

Big Bank Earnings season pushes American stocks higher

It is that time of year; it is officially earnings season. While the season is slow to start, it picks up steam quickly, and, by the week of October 18, 78 of the S&P500 companies release their earnings reports with another 157 companies reporting this last week. 

Earlier this month, analysts had increased earnings per share (EPS) expectations compared to mid-summer predictions as economic recovery is expected to pick up again. So, have analysts been proven correct? How have earnings stacked up so far?

Chart, line chart

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Source: Scotiabank

The season kicks off with the major American banks having all reported by October 15, and the results left nothing to complain about. As a surprise to many, the pandemic’s effect on the sector has been particularly positive as trading revenue, and pandemic stimulus drove revenues higher. Reuters reported that the investment banks, when compared to pre-covid, saw a substantial bump in trading revenue when compared to pre-pandemic years. That is a bump of $51 billion extra during 2020 and the first few quarters of 2021 to be exact.

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Source: Reuters

Trading is expected to remain a considerable driver of revenue for the banks as the Federal Reserve continues to ease stimulus. According to Citigroup’s CFO, “as investors look to position based on that volatility, that creates an opportunity for us to make markets for them. And obviously, that would lend itself to improved performance.” 

Profitable results from the financial sector proved to be exactly what the stock market needed. The Dow Jones Industrial Average and the S&P500 closed the week out within 1% and 1.3% of previous highs respectively. As earnings continued, the week of October 18 carried on the sentiment. By the week’s end, the three major indexes all posted gains. This marks the third consecutive week of gains for each, with the Dow closing at a new all-time high.

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Source: Wall Street Journal

As always, if you have any questions or would like to discuss further, please do not hesitate to reach out. Feel free to share with your friends and family too, as referrals are the best compliment we can receive. 

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