By Kyle Prevost on March 10, 2023
Estimated reading time: 9 minutes

Making sense of the markets this week: March 12, 2023

By Kyle Prevost on March 10, 2023
Estimated reading time: 9 minutes

Markets nervous over central banks, Campbell Soup and Dick’s are relative havens, the Loonie weakens, and will stocks keep refuting investor bearishness?

Treasury building, as we talk about U.S and Canadian interest rates, REITs, stocks and more

Image by kstudio on Freepik

Kyle Prevost, editor of Million Dollar Journey and founder of the Canadian Financial Summit, shares financial headlines and offers context for Canadian investors.

Inflation and interest rates continue to dominate

Canadian and American central banks may finally be starting to move in slightly different directions.

The Bank of Canada (BoC) announced last Wednesday it’s keeping the key lending rate at 4.5%, after a year of rising rates. The move was widely expected and welcome news to Canadians whose mortgages are coming due in the next year.

Meanwhile, the U.S. Federal Reserve chairman, Jerome Powell, cited the country’s strong labour market as proof that the “Ultimate level of interest rates is likely to be higher than previously anticipated.” He went on to add: “If the totality of the data were to indicate that faster tightening is warranted, we would be prepared to increase the pace of rate hikes.”

The CME (Chicago Mercantile Exchange) FedWatch Tool now predicts, with fairly high confidence, that the U.S. is in for another interest rate hike when it meets on March 22, 2023.

The markets swiftly reacted, as the S&P 500 lost 1.53% to drop below 4,000 on Tuesday. The U.S. dollar also trended up quickly versus the Canadian dollar.

There continues to be a tug of war of war for predicting which way this market will go. On the one side, we have very solid company earnings and a strong U.S. consumer that doesn’t look close to running out of steam. On the other, we have the market-depressing realities of high interest rates and according to Chairman Powell, no end in sight for rate increases. As of this writing early Friday, the market trajectory was decidedly down in North America and overseas, led by US and European banks.

Getting back to Canada’s side of things, the BoC is taking into consideration the fact there was very little gross domestic product (GDP) growth in the final months of 2022. But, it remains consistent in its inflation-fighting focus. The news release stated: “[The BoC] will continue to assess economic developments and the impact of past interest rate increases, and is prepared to increase the policy rate further if needed to return to the two per cent inflation target.”

Some experts believe, if the gap between the Canadian and U.S. dollars widen, the BoC will be forced to further raise rates, as paying more for all the goods and services we buy from the U.S.A. will be inflationary in and of itself.

While the weakening Loonie could be rough on households feeling inflation, it should continue to be a tailwind for Canadian companies selling products and services to Americans.

How the Bank of Canada’s interest rate affects you

Campbell stock is M’m M’m Good!

A real mix of earnings results out of the U.S. again this week. With more negative interest rate news, the move to defensives might ramp up in the next few months. (All values in this section are listed U.S. currency.)

U.S. earnings highlights

Oracle (ORCL/NYSE): Earnings per share of $1.22 (versus $1.20 predicted) and revenues of $12.40 billion (versus $12.42 billion predicted).
The Gap (GPS/NYSE): Earnings per share of -$0.75 (versus -0.46 predicted) and revenues of $4.24 billion (versus $4.36 billion predicted).
Dick’s Sporting Goods (DKS/NYSE): Earnings per share of $2.93 (versus $2.88 predicted) and revenues of $3.6 billion (versus $3.45 billion predicted).
Campbell Soup (CPB/NYSE): Earnings per share of $0.80 (versus $0.73 predicted) and revenues of $2.48 billion (versus $2.43 billion predicted).

Investors punished Oracle for a subpar earnings forecast, as shares sank 5% after its report on Thursday. Operating expenses were up 37% year-over-year, leading to decreased net income. The Gap continued its downward slide with a big earnings miss and was down 4% on Thursday.

It wasn’t a total rout for brick-and-mortar retailers though, as Dick’s Sporting Goods shares were up 9% on excellent holiday season earnings plus reports of decreased inventory levels.

Finally Campbell Soup Co. shares were up 3% in premarket trading on Wednesday after releasing earnings. The stock has been comfort food for cautious investors over the last year as it’s up 24% year over year.

Canada’s top 100 dividend stocks READ NOW

Investing for the REIT reasons

While I’m a not a fan of being a landlord, I do enjoy the returns on Canadian real estate. If you own a broadly diversified Canadian equity exchange-traded fund (ETF) like Vanguard FTSA Canada All Cap Index ETF (VCN/TSX), you already have some exposure (about 2.5% in that specific case) to Canadian real estate investment trusts (REITs). I also wrote about the best REIT ETFs in Canada on MillionDollarJourney.ca.

This week, we saw two very different REITs release their quarterly earnings reports. Granite REIT (GRT.UN/TSX) is primarily invested in warehouse and industrial properties, and has had a great five-year run, relative to the average Canadian REIT as defined by the iShares S&P/TSX Capped REIT Index ETF (XRE). While InterRent REIT (IIP.UN/TSX), which specializes in multi-unit residential properties, had a difficult couple of years, it too has enjoyed long-term success, compared to most Canadian REITs.

For those curious, I don’t own these individual REITS, as I’m content with the real estate exposure of the broad indexes.

InterRent REIT reported positive earnings results last Tuesday. Unlike stocks, REITs don’t usually report according to earnings-per-share, but InterRent did disclose the following:

InterRent highlights

Its occupancy rate was up to 96.8% in December 2022 (versus 95.6% in December 2021).
Average monthly rent was up 7.1% year-over-year.
Refinancing means that mortgages insured by Canada Mortgage and Housing Corporation (CMHC) went from 63% to 82% over the last year. The weighted average interest rate increase rose from 2.38% to 3.22% over the last year, bringing up total financing costs from $8.5 million to $13.9 million.
Perhaps most important to dividend investors, cash flow is up as in Funds From Operations (FFO) rose 5.6% in 2022 vs 2021.

Overall, while its results appear mostly positive, unit prices were down slightly on Tuesday.

Granite REIT’s reported results on Thursday.

Granite REIT highlights

A net loss for 2022 of $126.3 million compared to a net income of $341.2 million in 2021.
Most of the net loss was due to fair value of investment properties going down by $579 million, as operating income was actually up $16.1 million. (So the rent keeps coming in, but the underlying properties aren’t worth as much as they were in the booming industrial asset world of 2021.)
Adjusted Funds From Operations (AFFO) was $1.05 per unit for 2022, up from $0.90 per unit in 2021.

The market appeared to take the net loss in stride, as Granite REIT was up 0.48% on Thursday. There appears to be no concern about the 4% dividend for now.

Where to Buy Real Estate in Canada read now

Bear-ly believable

Michael Batnick wrote an interesting piece over at the Irrelevant Investor this week in which he opined that “Everyone seems bearish on stocks except the stock market itself.”

For those who haven’t been initiated into the super secret code language of stock market wonks, “bulls” refer to people who believe the market is going to go up from here, while “bears” believe we’re headed downward.

Highlights of the bulls versus bears argument

Bears now outnumber bulls 2-to-1.
The U.S. stock market is 8% higher since June 2022, when the official “bear market” for the S&P 500 began.
While different groups of experts call themselves “bearish,” the stock market itself appears poised to trend higher.
Large-cap stocks are near their 52-week lows relative to small-cap stocks, which is usually a strong “bull” indicator. (See above chart.)
Transportation and semiconductor stocks aren’t exactly “defensive,” and should be headed to go lower if we think the general economy is about to get worse—but they’re trending higher.
U.S. airlines, hotel stocks and consumer banks are all on a tear, which only makes sense if investors really believe earnings are about to grow for those companies.
The stocks that are supposed to do best when people are scared and “bear-ish”—utilities, health care, and consumer staples—have some of the weakest return numbers year-to-date.

One of the only semi-decent metrics we have for predicting the long-term returns in the stock market is the Shiller CAPE ratio. The basic idea is that instead of comparing the current price of a share to only the last year of earnings, we compare it to the last 10 years of earnings to give us more context in regards to long-term earnings trends. The current elevated CAPE ratio for American stocks does give us pause…

But the price-to-earnings ratio (P/E) for the S&P 500 is not quite as historically alarming as it is much more in line with long-term averages.

Overall, it remains pretty obvious that, while many stock market commentators continue to have a negative bias, some pretty serious money has moved into stocks since the market low last summer. And that’s despite significant interest rate increases since that time. It will be interesting to see whether the bear-ish headline writers or the bullish market participants are correct on this one.

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.