Making sense of the markets this week: August 13, 2023

Markets celebrate low inflation—but the party ends early

The Dow Jones Industrial Average immediately rose more than 400 points on Thursday after the U.S. Bureau of Labor Statistics announced that the U.S.’s consumer price index (CPI) was up only 3.2% from one year ago. The market then proceeded to give back most of those gains throughout the day and slipped a bit more Friday morning as we went to press (S&P 500 and Nasdaq were down but the Dow was up.) While 3.2% is obviously not down to the U.S. Federal Reserve’s 2% target, it’s much closer than last summer’s numbers were. It wasn’t all good news, though, as core CPI still stubbornly clung to 4.7%.

The positive-if-not-perfect direction of inflation from the last few months has led many to speculate the U.S. Fed may pause interest rate hikes in September, after its 11 hikes going back to March 2022. With American consumers racking up over $1 trillion in credit-card debt for the first time ever, the ability of domestic spending to keep powering the U.S. economy should begin to decline despite record-low unemployment.

You can look to Eli Lilly to lose weight but not profits

The excellent earnings quarter for U.S. companies continued this week, as three very U.S. different companies all posted earnings beats. (All numbers in this section are in U.S. dollars.)

Disney rode a 13% revenue increase in parks and experiences to a very solid quarter. Streaming woes continue to plague the company with a 7.4% Disney+ subscriber decline. It’s unlikely subscribers will be easier to come by in the immediate future as Disney also announced a price increase for its streaming services as well as cracking down on password sharing.

UPS followed up a solid earnings call with news that it would likely avoid a driver strike on Wednesday, August 9, 2023. Given the fact the delivery company has a sub-16 price to earnings (P/E) ratio at the moment (substantially below the 23.46 average of the S&P 500), investors appear to still be worried about the bite that Amazon is taking out of the company. Jeff Bezos’s retail titan has been slowly reducing reliance on UPS as it builds out its own logistics network.

Pharmaceutical giant Eli Lilly made the biggest move of the week, blowing away expert projections. A big part of the enthusiasm stemmed from its new drug Mounjaro, which is a diabetes injection. There are hopes that it might have a similar stratospheric trajectory as Wegovy and Ozempic. Profits for the pharmaceutical company were up 85% on a year-over-year basis.

There’s gold in them there uncertainties 

Talk about fool’s gold… There was nothing foolish about Canadian gold profits this week.

Despite the above companies largely meeting investors’ expectations, neither’s share price moved much on the earnings news. And with a small price reduction for gold in the second quarter of 2023, prices for the precious metal continue to flirt with USD$2,000 per ounce for the year. Given the broad uncertainties around stock markets, interest rates and cryptocurrency, there doesn’t appear to be any catalyst for downward price pressure on gold for the foreseeable future.

Of the two listed, Franco-Nevada is likely a less-risky bet due to its no-debt royalties-based corporate structure, as opposed to Barrick’s more traditional mining company business model. In a higher-for-longer interest rate environment, some may consider having no exposure to rising interest costs as a major advantage, for those looking for a way to get gold exposure. For more information, check out my article on Canadian mining stocks at MillionDollarJourney.ca.

Does your portfolio need insurance?

Canada’s insurance and financial service companies don’t get as much coverage as the big banks do, but they offer similar long-term oligopolistic advantages. Several of our largest insurers reported earnings this week.

Both Manulife and Sun Life reported increased earnings in Asia as the key to their outperformance, whereas Great West Life cited the sale of Putnam Investments down in the U.S.A. as its major highlight for the quarter.

Power Corporation (which includes controlling shares of both Great West Life and Investor’s Group) absolutely crushed its predicted earnings and yet shares were flat (marginally down) as we went to press.

For more information on stable blue-chip Canadian companies, such as Power Corp, check out my article on Canadian dividend stocks at MillionDollarJourney and, of course, MoneySense’s Best dividend stocks.

Overall, we continue to see North America’s largest companies be boringly profitable this week. While it doesn’t give quite the adrenaline rush of the meme stock and NFT buzz of yesteryear, it is welcomed by those who appreciate stable wealth-building conditions. As always, the market crashes generate more attention than the slow and steady market gains.

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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