Making sense of the markets this week: October 9

Bad news is good news for Canadian investors

Possible central bank moves continued to dominate the investment news cycle this week. In the (weird) market universe investors created for themselves, bad economic news is a great sign for the value of companies within that bad economy. Let me explain… 

Shouldn’t bad economic news mean companies make less money? As a group, investors are making decisions that affect the markets. The belief that bad economic news means share prices go up seems to be self-fulfilling. It appears the vast majority of share prices are now in lockstep and are moving to the beat of inflation-rate data and interest-rate moves. It doesn’t matter if you’re a giant company with a successful quarterly earnings report (read what I wrote about Nike last week), investors only have eyes for the Fed. 

While waiting on the U.S. jobs report on Friday, the Fed speculators were focusing on the data from the Manufacturing Purchasing Managers Index and the U.S. JOLTs Job Openings earlier in the week. Clearly, stock investors are hoping to see evidence that the increased interest rates advocated by inflation hawks are having their desired effect on inflation.  

Consequently, if we hear news about lost jobs and crushing worldwide recessions, that’s viewed positively. If everyone still has a job and people are making more money, then the dominant thought appears to be that the Fed will be forced to continue to raise interest rates. Raised rates will not only reduce borrowing, depress the current value of equities, give Canadian and U.S. investors better fixed-income options relative to stocks and make life really difficult for developing economies—it will also feed the increasingly alarmist headlines that a recession is inevitable.

For those of you trying to calibrate expectations, the Manufacturers Purchasing Index and the preliminary jobs data seemed to indicate that the economy was indeed heading in a negative direction. That means good news for stocks. 

Of course, this type of speculative momentum could all be reversed by a few sentences from Fed Chair Jerome Powell at any time. Your future portfolio will almost assuredly thank you if you choose to ignore all this noise and stick to a long-term investing plan.

Note: You can hear my in-depth thoughts on the current bear market at the 2022 virtual Canadian Financial Summit, October 12 to 15. I’m joined by esteemed MoneySense colleagues Jonathan Chevreau, Lisa Hannam, Justin Dallaire and Dale Roberts, as well as 30-plus other Canadian financial experts. It’s free to view as a MoneySense.ca reader. But there are limited spaces, so don’t delay in reserving your spot. Read more about the MoneySense sessions.

Booze a better bet than breeches 

With Constellation Brands (STZ/NYSE) and Levi Strauss LEVI/NYSE) reporting earnings this week, investors got another look at the current mixed environment for consumer goods.

For those not familiar with the Constellation Brands, it’s one of the bigger producers of beer, wine and spirits in the world. It also has a stake in Canopy Growth, a marijuana company. On Thursday, Constellation reported a massive earnings beat of USD$3.17 per share (versus a predicted USD$2.81). That’s up from USD$2.38 a year ago. Net sales were also up, with the beer product vertical leading the way.

In a sign of generally negative market sentiment, shares of Constellation dropped 1.45% on Thursday despite the positive news. Meanwhile, Canopy Growth (CGC/Nasdaq) rose 22% after Joe Biden called for a review on how marijuana is classified under federal law.

Levi Strauss’s earnings report focused on inventory and cost pressure challenges, as well as negative headwinds generated by the strong U.S. dollar. This has been a theme from all of the clothing retailers over the last few months. 

While the iconic American jeans company did post an earnings beat of USD$0.40 per share (versus USD$0.37 predicted), it revised its long-term predictions for both profits and revenues downward. Investors punished the company with a drop of more than 6% in after hours trading on Thursday.

Monstrous returns for index investors

Here’s something interesting, courtesy of the Big Picture blog and @CharlieBilello. Check out the best performing stocks in the S&P 500 over the last couple of decades.  

The obvious names are right where you’d expect them to be. We weren’t surprised to see these four tech leaders on the list:

1. Netflix (NFLX/NASDAQ) up 8,725% over 15 years
2. Tesla (TSLA/NASDAQ) dominate the last five years to the tune of a 1,164% gain
3. Apple (AAPL/NASDAQ) realize growth of 70,357% over the last 20 years
4. Amazon (AMZN/NASDAQ) up 16,859% over the last two decades

That said, we certainly wouldn’t have guessed that the returns of all these heavyweights from the tech world would pale in comparison to the beast that is Monster Beverage Corp. The only thing higher than its energy drinks’ caffeine levels are their year-over-year price gains.

If you invested USD$1,000 in Monster Beverage (MNST/NASDAQ) about 20 years ago, you would have a cool USD$1.34 million today. Anecdotally, I can tell you that 1.34 million is also roughly the number of high school teachers driven to an early retirement by Monster-consuming students.

However, Monster wasn’t the only unexpected name on this list. 

We would never have guessed that old-school “boring” companies—like Old Dominion Freight (ODFL/NASDAQ), Domino’s Pizza (DPZ/NYSE), Tractor Supply Co. (TSCO/NASDAQ) and Extra Space Storage (EXR/NYSE)—would have generated higher returns than Microsoft (MSFT/NASDAQ) or Walmart (WMT/NYSE).

While one can fantasize about what it would have been like to pick these outliers before they started their rapid ascents, the long-term results of Monster should instead prove just how difficult it is to predict companies’ growth rates. 

Consequently, it reinforces the idea from Vanguard founder Jack Bogle that owning the whole haystack (buying the whole market) is a much better bet for the average investor than trying to find the Monster-like needle. 

Many of these companies referenced here wouldn’t have had a single analyst covering their quarterly earnings reports when they started their rapid rise! By owning index funds you get to ride these incredible wealth-builders all the way up their market-capitalization journey. Sure, you’ll own a few Nortels along the way, but overall, it’s far easier to profit off of the fact that innovative human beings will continue to bring new ideas to market—if you own the entire market. I’ve written quite a bit about getting started in index investing.

Will the recession claim the pound sterling and Credit Suisse?

As rough as things have been for Canadian and U.S. investors in 2022, our neighbours across the pond would likely swap places pretty quickly. Last week, we saw the collapse (and subsequent shaky re-stabilization efforts) of Great Britain’s currency, the pound sterling. The pound’s crippling is a major event in financial markets. As the oldest currency in continuous use, it is also one of the world currencies most found in foreign reserves.

The movement of currencies is very unpredictable and far more volatile than the stock market. A wide variety of factors can affect a currency’s valuation at any given time. But ultimately, it’s the forces of supply and demand that establish its worth—like most other assets.

When the newly elected U.K. government announced the country’s biggest tax cut since 1972, the markets decided they had much less faith in the former empire’s economy going forward. As investors digested the news of additional borrowing of £411 billion over the next five years, it’s probable that currency speculators were quick to jump in and put further pressure on the falling pound. 

While new Prime Minister Liz Truss and Co. were busy trying to incentivize growth with loose fiscal policy, the Bank of England (BoE) had to step in and whipsaw the market back in the other direction with tight monetary policy (using emergency financial stability operations to buy government debt and stabilise the markets). BoE Governor Andrew Bailey also stated: “We will not hesitate to change interest rates by as much as needed.” This, naturally, led to widespread criticism of the contrary policy positions.

Looks like that Brexit experiment is going great!

With the mortgage market in complete disarray, there may be some very good opportunities for folks holding U.S. dollars (and Canadian dollars to a lesser degree) to buy up U.K. assets in the near future. The fact that the U.K. has a free-floating currency and a strong central bank with centuries of institutional stability behind it, should help stave off the worst-case scenarios.  While the “2008 Portugal, Italy, Ireland, Greece and Spain”-type of crisis should be avoidable, it will be difficult for any British government to extricate themselves from the structural balance of payments issue.

Credit Suisse (SWX/CSGN) joined the U.K.’s government on front pages this week, as shares of the company plummeted 10% on Monday to historic lows. The bank rushed to avoid comparisons to the infamous Lehman Brothers Crash by stating it’s much better capitalised than the former American bank.

That said, the market appeared to believe there were significant issues with Credit Suisse, as its corporate bond value collapsed. And purchasing insurance via credit default swaps grew much more expensive. 

While a complete Lehman-style collapse might be unlikely, I sure wouldn’t want to be a shareholder of the Swiss bank.

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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