Making sense of the markets this week: November 13, 2022

Cooling inflation leads to red-hot day for the markets

Part of being neighbours with the most powerful country in the world is that sometimes their news tends to get reported with a louder megaphone than our own—even in our own backyard.

That was certainly the case in business news this week as the U.S. consumer price index (CPI) data was released. October’s year-over-year inflation came in below expectations at 7.7%, which is down from 8.2% in September. The S&P 500 shot up 5.5% in response, the 15th-largest daily gain for the index since 1950. 

The TSX also rose that day, up a strong 3.3%. Expectations of a 0.75% rate increase at the next U.S. Federal Reserve funds meetings decreased as traders started to lean towards only a 0.5% increase. The drastic movement we saw in the markets around the world illustrates just how important U.S. interest rate moves are right now.

Hopefully this deceleration of prices allows the Fed the breathing room they feel they need to stand back and observe before taking more dramatic actions. Several really smart investment folks are getting nervous or downright hostile about the risks that the Fed is courting by raising interest rates so quickly. 

On a recent Masters in Business podcast, guests chief investment officer Jeremy Schwartz and investing prof Jeremy Siegel broke down why they’re scared of overtightening. Considering these two market gurus just put the finishing touches on the sixth edition of Stocks for the Long Run, I’d say their predictions are much more worthy of consideration than most. This book is commonly cited as the most authoritative text on historical returns of the U.S. stock market.

The other big news story this week was, of course, the U.S. midterm elections. When we get past the pageantry that is the U.S. electoral process, we see that the markets generally embrace the idea of a “split government.” This is due to the fact that investors enjoy stability. And, in this polarized age, it is quite unlikely that major corporate tax legislation is bound to change much with a Democratic president likely to veto any proposed changes from the Republican House of Representatives.

Perhaps some of this “no changes needed” psychology is behind the fairly large outperformance of the U.S. stock market in years that follow midterm elections. That said, the S&P 500 dropped 2% on Wednesday (before skyrocketing on Thursday) likely due to a mix of general unease with the yet-to-be-determined makeup of the new Congress, along with a slight pro-business bias that a stronger Republican turnout would have spurred.

Disney’s returns aren’t magical

To wrap up U.S. markets before moving on to Canadian happenings, earnings season is beginning to tail off for our neighbours to the south. Here’s a look at a few notable reports this week. (Disney and Mosaic report in U.S. dollars, while BioNTech reports in euros.)

Disney (DIS/NYSE): Earnings per share of $0.30 (versus $0.55 predicted) and revenues of $20.15 billion (versus $21.24 billion predicted).

BioNTech (BNTX/NASDAQ): Earnings per share of €6.98 (versus €3.42 predicted) and revenues of €3.46 billion (versus €1.90 billion predicted).

Mosaic (MOS/NYSE): Earnings per share of $3.22 (versus $3.40 predicted) and revenues of $5.35 billion (versus $5.78 billion predicted).

Disney’s substantial earnings miss was a pretty big surprise and share prices fell 8% on Tuesday after earnings. While Disney+ had a solid quarter in terms of adding more accounts than analysts predicted, Disney’s streaming companies still aren’t even close to profitable. With the rest of the company not bringing in quite the anticipated profits, investors were quick to punish “The House of Mouse.”

German company BioNTech (listed on the NYSE via depositary share) also had a rough quarter.  With COVID-19 waning, analysts had predicted a massive earnings drop. While the biotech standout did see profits drop 43% year-over-year, that wasn’t quite as bad as many in the industry had predicted. Consequently, shares actually rose 4.2% on Tuesday after the earnings announcement.

Mirroring its Canadian competitor Nutrien’s (NTR/TSX) disappointing earnings results from last week, potash and fertilizer heavyweight Mosaic also saw their share price take a hit. That said, despite the massive fall from $78 per share in April to today’s $49.63, Mosaic is still up over 23% on the year. Here’s a quick comparison of the Canadian versus American plays on potash/fertilizer scarcity.

Canadian pipelines continue to pump profits

If you want to profit from Canada’s natural resource bonanza without direct exposure to the volatile price of oil, then pipelines seem like a logical choice. As long as oil and natural gas flow, these companies should continue to make money and pay dividends. All values in this section are in Canadian dollars.

Enbridge (ENB/TSX): Earnings per share of $0.67 (versus $0.66 predicted) and revenues of $11.57 billion (versus $12.97 billion predicted).

Keyera (KEY/TSX): Earnings per share of $0.56 (versus $0.46 predicted).

TC Pipelines (TRP/TSX): Earnings per share of $1.07 (versus $0.99 predicted) and revenues of $3.80 billion (versus $3.65 billion predicted).

Pembina Pipelines (PPE/TSX): Earnings per share of $1.32 (versus $0.61 predicted) and revenues of $2.78 billion (versus $2.53 billion predicted).

Investors largely got what they paid for this quarter. Sometimes no news is good news. Demand for pipeline capacity remains strong, and supply remains severely constrained. (For more reading, visit milliondollarjourney.com.) As long as oil and natural gas companies are willing to do anything they can to get their products to market, the profit margins and overall revenues for these midstream operators should stay at their peak. With all four companies paying a dividend close to 6%, getting what you paid for is a pretty good deal!

Insurance company investors need coverage for their portfolio 

Here’s looking at other Canadian earnings this week. Stay tuned next week for a roundup of the Brookfield family of companies, as well as a look at Canada’s telecoms and utilities.

Franco Nevada (FNV/TSX): Earnings per share of USD $0.83 (versus USD $0.86 predicted) and revenues of USD $304.20 billion (versus USD $326.01 billion predicted).

Intact (IFC/TSX): Earnings per share of CAD $2.70 (versus CAD $2.75 predicted) and revenues of CAD $4.94 billion (versus CAD $5.08 billion predicted).

Manulife (MFC/TSX): Earnings per share of $0.67 (versus $0.68 predicted). (Revenues to come.)

Power Corp (POW/TSX): Earnings per share of $0.63 (versus $0.87 predicted). (Revenues to come.)

Canadian Tire (CTC/TSX): Earnings per share of $3.34 (versus $3.92 predicted) and revenues of $4.23 billion (versus $4.23 billion predicted).

Saputo (SAP/TSX): Earnings per share of $0.42 (versus $0.37 predicted) and revenues of $4.46 billion (versus $4.27 billion predicted).

A tough week for insurers and more softness in the retail sector are my takeaways from the Canadian earnings scene this week. Insurance companies cited increased payouts due to natural disasters, as well as cost rough investment markets as their main reasons for the earnings miss. Canadian Tire appears to be experiencing the same issues as most other retailers in regards to supply chain issues and inventory costs. Overall, given the relatively small movement in share prices, the negative reports don’t appear to be anything the market wasn’t somewhat expecting.

Last week’s Dale Roberts-inspired meme appeared to be a hit, so maybe it’s a feature we’ll bring back every now and again!

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.

Linkedin Twitter Facebook Website