Making sense of the markets this week: September 17, 2023

U.S. inflation battle: Mission not accomplished 

Despite increasing interest rates and hawkish talk from the U.S. Federal Reserve chair Jerome Powell, the U.S. economy doesn’t look to be slowing down anytime soon. The U.S. Consumer Price Index (CPI) update for August came out on Wednesday and the headline inflation rate was higher than anticipated at 3.7%.

On one hand, the continued economic strength is obviously good news for job seekers and Americans trying to negotiate wage increases. If you prefer to focus on inflation rates, though, this labour market strength, combined with resilient price pressures, is really backing the U.S. Fed into a corner as far as raising interest rates is concerned.

In related news, the European Central Bank (ECB) also raised interest rates this week, lifting its key interest rate to 4% from 3.75%. This is the highest interest rate in the ECB’s history (founded in 1999) and it’s worth noting that a mere four years ago the institution was much more worried about deflation and had a negative interest rate of -0.50%.

It appears the markets largely believe the mixed news from the CPI report will lead to the U.S. Fed standing pat next week, when it comes to the latest decision on interest rates. The CME FedWatch Tool predicts no change—with 97% certainty. That said, nearly two-thirds of market watchers believe an interest rate increase is probable for November.

Adobe and Oracle beat expectations—but still disappoint 

The U.S. tech hype train slowed down a bit this week as Oracle (ORCL/NYSE) and Adobe (ADBE/NASDAQ) both saw share prices drop after mixed earnings reports. (All numbers in this section are in U.S. dollars.)

The disconnect between Oracle’s earnings beat and the subsequent massive share price decline (the steepest drop for the company since the March 2002 dot-com bust) is a perfect example of the role expectations play in the market.

While Oracle clearly executed on its overall game plan over the last quarter, its decreased sales predictions and slight revenue miss were enough to puncture the AI-inflated expectations balloon.

Oracle’s cloud sales were up 30%, but this was a significant slowdown from the scorching-hot 54% growth of last quarter. To keep things in perspective, Oracle shares are still up 34% this year, so long-term investors are still pretty far ahead of the game.

Similarly, Adobe shares were down slightly after a positive earnings report, but with the stock up 64% so far year-to-date, we think most investors will take the news in stride.

CEO Shantanu Narayen stated, “For a long time now we’ve been talking about ‘Will this customer confidence continue?,’ and I think we’ve all been pleasantly surprised by how much it’s sustained.”  
Due to an unwritten rule that every CEO must now mention AI several times at every opportunity, Narayen went on to add, “We are unleashing a new era of AI-enhanced creativity around the world with innovations across our product portfolio.”

Canadian consumers prefer value over luxury

Given the stretched budgets of Canadian customers, the juxtaposition of Dollarama’s and Roots’ earnings numbers for the quarter was as predictable as it was stark.

It’s not a surprise that Dollarama continues to show increased customer traffic as Canadians search for budget solutions. Dollarama president and CEO Neil Rossy stated, “Once again this quarter, we delivered excellent operational and financial results, including notable growth in comparable store sales, EBITDA and earnings per share. Our performance year to date for this fiscal year reflects our differentiated ability to provide compelling value across our broad product mix and a consistent shopping experience.” (For those without accounting backgrounds, EBITDA stands for earnings before interest, taxes, depreciation, amortization. The number is usually referenced as a quick measurement of the operational profits of a company.)

Rossy went on to add that Dollarama aims to open between 60 and 70 new stores in Canada over the next year. 

By contrast, BNN Bloomberg reporter and anchor Amber Kanwar summed up Roots’ earnings announcement by saying, “The stock has been remarkable in how unremarkable it has been. It has basically clung to $3 per share for the past 2.5 years.”

While Roots did manage to reduce its inventory bloat, the cost resulted in higher promotional spending. Trying to put a positive spin on significant losses for the quarter, Roots CEO Meghan Roach stated, “I think we’re really in a good place from a liquidity perspective, we’ve got really healthy debt levels, we’ve got really low net debt.”

From a liquidity perspective, Roots might be in a somewhat good place. From a profit perspective… not so much.

The best Canadian bank is—drum roll—EQ

While many investors have enjoyed the outperformance and stability of Canadian bank stocks over the last decade (and beyond), it’s unlikely that most would know which Canadian bank has actually been the pick of the litter.

We know it’s in the headline, but you could imagine Canadian investors’ surprise that it’s not Canada’s biggest company (RBC), nor is it those banks that keep gobbling U.S. acquisitions (TD and BMO). It’s not even one of the other Big Six banks (National Bank, Scotiabank or CIBC). 

Instead, it’s small-but-mighty Equitable Bank (EQB/TSX), which rewarded shareholders with a 354% gain over the last decade.

Canadian fintech guru Tal Schwartz believes the outperformance is due to the bank becoming “dominant in niche sectors—equipment finance, alt-a mortgages, reverse mortgages and specialty finance (revenue drivers) while also building out a killer online consumer banking platform (deposit drivers).”

When it comes to investments, there’s still a lot to be said for the diversity and stability of the Big Six, but there’s no denying Equitable’s ability to channel the deposits from its ultra-efficient online banking brand (EQ Bank) into profitable lending contracts.  

You can read my thoughts on why I’m such a big fan of EQ Bank at MillionDollarJourney.ca and the glowing MoneySense EQ Review as well. It wasn’t a big surprise to us that Equitable Bank has had such success, as you can find it prominently positioned on our best banks in Canada list.

About Kyle Prevost

Kyle Prevost is a financial educator, author and speaker. He is also the creator of 4 Steps to a Worry-Free Retirement, Canada’s DIY retirement planning course.

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