Making sense of the markets this week: February 5, 2023

Mixed earnings results for Big Tech

The fourth-quarter tech earnings season has been difficult to paint with a single stroke… as with many things so far in 2023. Is the dominant story that Meta (META/NASDAQ) shares popped 27% on Thursday after CEO Mark Zuckerberg announced a “year of efficiency”? Or is it the fact that Apple (APPL/NASDAQ) had its first earnings miss in seven years?

In reading through the transcripts of these earnings calls, I noticed what they all have in common. It’s the mention of the headwinds created by the strong American dollar, as well as declining spends on advertising across the community and controlling costs.

And Zuckerbeg isn’t the only one highlighting efficiencies for 2023. Amazon announced 18,000 layoffs. Its CEO Andy Jassy stated: “We’re working really hard to streamline our costs and trying to do so at the same time [so] that we don’t give up on the long-term strategic investments that we believe can meaningfully change broad customer experiences and change Amazon over the long term.”

Apple’s and Meta’s quarters might be outliers and not really part of a broader trend. It’s tough to argue with CEO Tim Cook stating Apple’s lacklustre results were chiefly due to the strong dollar, Chinese production issues and declining consumer spending due to the macroeconomic environment. Meanwhile, while the market loved Meta’s new focus on cutting costs, and the $40 billion stock buyback announcement, it is notable that the company’s main source of revenue (advertising) was down 4.3% year over year.

It’s clear that even after massive share price hits in 2022, the market is still finding it difficult to value these tech behemoths.

“The disinflationary process has started” but also “ongoing increases” expected

Good luck to the folks who get paid to parse the utterings of U.S. Federal Reserve chairman Jerome Powell. Key U.S. stock indices whipsawed yesterday as the U.S. Fed announced a quarter-point increase of their benchmark interest rate to a target-range of 4.5% to 4.75%.

While the 0.25% interest rate raise wasn’t a surprise, the hawkish tone of Mr. Powell’s statement did raise a few eyebrows. Despite admitting that “Inflation data received over the past three months show a welcome reduction in the monthly pace of increases,” the Fed chair concluded it was “very premature to declare victory,” and that “ongoing increases” should be expected.

Seeing how quickly inflation has been falling for both sides of the border, the bond markets are still betting Mr. Powell is bluffing. They appear to be betting there will be one more quarter-point increase, before the Fed starts to cut rates in the latter half of 2023. Powell on the other hand stated in crystal-clear terms, “I don’t see us cutting rates this year.”

Of course, this comes from the same man who indicated that interest rates would stay near zero for years back in the fall of 2020. So, I might take that “forward guidance” with a grain of salt. 

Former Goldman Sachs president Gary Cohn speculated the Fed was primarily influenced by job data. It appears that in the quest to quell the drivers of core inflation such as wages, Powell is willing to do substantial short-term damage to the economy. At this point, I’m joining the chorus of folks who are more worried about over-tightening interest rates than the effects of 3% to 4% inflation.

In addition to the obvious negative considerations for those who hold U.S. debt, higher U.S. interest rates are likely:

• Really bad news for developing economies (which hold USD-denominated debt, but take in taxes in local currency).
• Mostly bad news for American businesses that depend on sales in other countries for export revenue.
• Great news for Canadian companies looking to sell to U.S. consumers.
• Sad news for folks wanting to take a vacation down south in 2023.

Canada tech outperforms, while infrastructure stocks keep profits moving on time

On the Canadian earnings scene, infrastructure darlings CP Rail (CP/TSX) and Brookfield Infrastructure Partners (BIP-UN/TSX) met expectations. Canadian tech companies don’t get nearly the press of their larger U.S. counterparts, but they did slightly outperform predicted earnings results this quarter.

The real takeaway is that it continues to be tough to go wrong betting on the Canadian rail duopoly.

Should Canadian investors have 100% of their portfolio in stocks?

Ben Carlson, of awealthofcommonsense.com, posed an interesting question to his readers last week: Is it realistic to have your portfolio 100% in stocks?

Carlson believes it isn’t irrational at all. In fact, his personal investment portfolio is 100% stocks. He writes that, over the last 100 years, an investor in the U.S. stock market was more likely to experience a yearly gain of 20% or more, than they would encounter a yearly loss.

There’s more. Carlson notes, as you get older, your human capital (generally referred to as the ability to earn money as a result of experience and skills) naturally decreases with age. And, he adds that your portfolio increasingly makes up a larger share of your overall capital. Consequently, it makes sense for investors to get a bit more risk-averse as we approach the end of our careers.

The average bear market in the U.S. has seen the market decline just under 33%, and the average time it took to sink from the top to the bottom was about a year. Perhaps, the more relevant number is that it takes about three years to get back to previous market highs—or to “breakeven” from the previous market top. The worst-case scenario (which would have been in 2000) saw the market take nearly seven years to get back to previous highs.

That’s a tough pill to swallow if you’re relying on selling off parts of your portfolio to fund your day-to-day expenses. But it’s also not panic-inducing if you’re still in your prime earning years.

From a Canadian investing perspective, our average bear markets happen a little more frequently, but they also only last an average of just over eight months. They are also a bit more “shallow” with our average drop during a bear market coming to -24.6%.

When trying to determine risk tolerance at various stages of life, keep in mind that the market doesn’t go up in the neat linear way you might think of when you hear the phrase, “The stock market has averaged a 10% return annually.” 

Bear markets aren’t the end of the world. And going through one is more common than you’d think, especially if you started investing after 2008 (the most recent recession here). That said, “being down” for several years can be psychologically difficult if you need to withdraw money from your investment portfolio. (Statistically speaking, you’re likely to be OK, as the market will very likely go back up. That said, it’s mentally hard for a lot of those who are saving to watch their nest egg disappear as they’re withdrawing funds.)

My recent best investments for Canadian retirees article on Million Dollar Journey explored similar risk-tolerance themes.

In case anyone out there is keeping score, the U.S. stock market has been an official bear market (a 20% decline) since June 2022, coming down off of the January all-time high. If history is a guide, we may not breakeven for a while yet. 

The Canadian stock market never hit the 20% market decline level in 2022, so we didn’t technically enter a bear market. The S&P/TSX Composite Index did drop 17% from April 2022 highs, but it has since climbed substantially off of those lows.

Kyle Prevost is a financial educator, author and speaker. When he’s not on a basketball court or in a boxing ring trying to recapture his youth, you can find him helping Canadians with their finances over at MillionDollarJourney.com and the Canadian Financial Summit.

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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