Making sense of the markets this week: October 30, 2022
What the latest Bank of Canada rate hikes mean yet again, and rails keep rolling while tech stocks crater.
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What the latest Bank of Canada rate hikes mean yet again, and rails keep rolling while tech stocks crater.
Kyle Prevost, editor of Million Dollar Journey and founder of the Canadian Financial Summit, shares financial headlines and offers context for Canadian investors.
The biggest story in Canadian markets this week was the Bank of Canada’s decision to go with a relatively modest 0.5% interest rate raise to 3.75%. Given the hot inflation announcements last week, most economists were certain we’d see an aggressive 0.75% hike.
Bank of Canada (BoC) governor Tiff Macklem struck a decidedly more balanced tone than he has in recent months, saying, “We are trying to balance the risks of under- and over-tightening.”
Most analysts now believe we will see one or two more monthly interest rate increases of 0.25% before a wait-and-see approach comes to the fore.
The good news for Canadians with mortgages? Inflation is eating away the real value of their debt. That bad news involves the following arithmetic:
If you signed up for a 25-year mortgage at a five-year fixed rate back in 2017, your rate was likely around 3%. Today’s 5-year posted rates from the big banks are around 5.6%. You might be able to get a rate closer to 5%—if you shop around.
Using MoneySense’s mortgage payment calculator, we know that if you had a $500,000 mortgage on a $650,000 house back in 2017, you were likely to have a monthly payment of around $2,370.
Five years later you would have paid off around $73,000 in principal, and $69,000 of interest. If you now renew your mortgage with the same amortization, at a five-year fixed rate of 5%, you’re looking at a new monthly mortgage payment of around $2,800.
Most Canadians don’t negotiate their mortgage rate, so if you signed on for the posted 5.6% 5-year fixed rate, you’d be looking at a $2,950 monthly payment. Your bank may allow you to stretch out the remaining $427,400 mortgage loan over a new 25-year amortization, but that would still only bring the monthly payment down to around $2,600—and you’re going to pay tens of thousands more in interest payments over the lifetime of the mortgage for this privilege.
I don’t see this as the end of the world for homeowners or for the Canadian economy. Hopefully, most folks with a large mortgage are earning more money now than they were five years ago.
With a tight labour market, I think most Canadians will be able to scratch together enough income to make their new mortgage payments. That said, it’s definitely going to sting when it comes to re-allocating the monthly budget. The rising mortgage payments are also going to negatively impact the amount of disposable income Canadians have to spend in other areas.
Of course, on the flip side, savers seeking super-safe investments are finally able to earn more than the paltry 2% fixed-income rates of yesteryear. There are some excellent GIC (guaranteed investment certificate) rate promotions going on amongst both online and traditional banks currently. We’ve written about Canada’s GICs over at MillionDollarJourney.
On the earnings front, Canadian earnings kicked off with a fairly predictable strong performance from our railway duopoly. Both Canadian Pacific Railway (CP) and Canadian National Railway Company (CN) appear to have kept cost increases under control while ramping up revenues versus last year. Shares of CP and CN have realized positive returns so far in 2022, and not many stocks can lay claim to that feat.
Here’s a look at notable earnings in Canada this week. All figures are in CAD.
Canadian Pacific Railway (CP/TSX): Earnings per share of $1.01 (versus $1 predicted) and revenues of $2.31 billion (versus $2.27 billion predicted).
Canadian National Railway (CNR/TSX): Earnings per share of $2.13 (versus $2 predicted) and revenues of $460 million.
West Fraser Timber Co. (WFG/TSX): Earnings per share of $2.50 (versus $1.89 predicted) and revenues of $2.09 billion (versus $1.88 billion predicted).
Canadian Utilities (CU/TSX): Earnings per share of $0.45 (versus $0.36 predicted) and revenues of $898 million (versus $797.4 million predicted).
Cameco (CCO/TSX): Earnings per share of $0.03 (versus a loss of $0.01 predicted) and revenues of $388.6 million (versus $370.3 predicted). Later in the earnings week, we saw Canada’s commodity-driven companies come through with substantial beats on earnings expectations as well. Uranium-king Cameco is feeling so flush, it even made a major acquisition. Canadian investors who kept putting money into our tech-lite markets in 2020 and 2021 are feeling a lot better about their decisions now than they were during the pandemic tech boom.
The world’s biggest technology companies announced earnings this week, and while ad revenue was down (hurting bottom lines at Facebook and Google) it wasn’t all bad news. When it comes to share prices though, we’re seeing a real trend away from the high valuations we saw during the pandemic tech boom. Investors appear ready to sell on anything but incredible news.
For example, it isn’t enough that Apple beat earnings estimates because iPhone sales were weak. It isn’t enough that Amazon beat earnings estimates by over 27% because cloud-giant AWS showed weaker-than-expected growth.
CNBC stock guru Jim Cramer highlighted the recent flow away from FAANG stocks by saying, “Money is coming out of tech to everything else.” All figures below are in USD.
Microsoft (MSFT/NASDAQ): Earnings per share of $2.35 (versus $2.30 predicted) and revenues of $50.12 billion (versus $49.61 billion predicted).
Alphabet (GOOGL/NASDAQ): Earnings per share of $1.06 (versus $1.25 predicted) and revenues of $69.09 billion (versus $70.58 billion predicted).
Amazon (AMZN/NASDAQ): Earnings per share of $0.28 (versus $0.22 predicted) and revenues of $127.10 billion (versus $127.46 billion predicted). Shares cratered 15% after Thursday’s close.
Apple (APPL/NASDAQ): Earnings per share of $1.29 (versus $1.27 predicted) and revenues of $90.15 billion (versus $88.9 billion predicted).
Meta (META/NASDAQ): Earnings per share of $1.64 (versus $1.89 predicted) and revenues of $27.71 billion (versus $27.38 billion predicted). The stock plunged 25% on Thursday.
Despite the tech carnage south of the border, Canada’s Shopify (SHOP/TSX/NYSE) bucked the trend, with shares rising 16% on Thursday after beating analyst expectations. We’ll look at this in more depth next week.
While it was a tough week for tech valuations on the NASDAQ exchange, some of the trusted names behind the “old economy” continued to show earnings strength this week. All figures are in USD.
3M (MMM/NYSE): Earnings per share of $2.69 (versus $2.60 predicted) and revenues of $8.62 billion (versus $8.70 billion predicted).
UPS (UPS/NYSE): Earnings per share of $2.99 (versus $ 2.84 predicted) and revenues of $24.16 billion (versus $24.30 billion predicted).
CocaCola (KO/NYSE): Earnings per share of $0.69 (versus $0.64 predicted) and revenues of $11.05 billion (versus $10.52 billion predicted).
Texas Instruments (TXN/NASDAQ): Earnings per share of $2.45 (versus $2.39 predicted) and revenues of $5.24 billion (versus $5.14 billion predicted).
Norfolk Southern (NSC/NYSE): Earnings per share of $4.10 (versus $3.64 predicted) and revenues of $3.43 billion (versus $3.22 billion predicted).
McDonalds (MCD/NYSE): Earnings per share of $2.68 (versus $2.58 predicted) and revenues of $5.87 billion (versus $5.69 billion predicted).
Overall this week, we see the markets continuing to balance on knife-edge expectations of just how bad the upcoming six to 12 months will be.
Just how high will interest rates go? And by how much will that affect consumer spending and employment rates?
Only time will tell for sure. But given the more balanced comments we see from Mr. Macklem, as well as mostly-solid non-tech earnings reports, I continue to believe that the downside from here is fairly limited. Bad news and probably a recession has been baked in.
It could turn out that pessimistic market expectations were correct, but barring another black swan event (Taiwan, maybe?), I have a difficult time believing that markets aren’t pessimistic enough at the moment.
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.
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