Even a strong start to the first quarter earnings season this past week wasn’t enough to shake a bad case of the inflation jitters.
The S&P 500 index lost 2.8 per cent for the week, and the Nasdaq – with its heavy concentration of glitzy growth and tech stocks that are particularly vulnerable to surges in interest rates – shed 3.8 per cent.
Yet a decline in the S&P/TSX Composite Index may have been the most disconcerting. After outperforming U.S. indexes for much of the past year, it was fully swept up in the downturn, losing 3.1 per cent for the week and suffering its biggest percentage decline of the year on Friday. The TSX is full of resource and other cyclical stocks that do well when the economy is humming along nicely. Its decline suggests the outlook is now darkening.
Chalk that up to central bankers this past week in Canada and the U.S. leaving no doubt they are willing to flex some real muscle in their battle against inflation, with 50-basis-point rate hikes – maybe more – in the cards at their next policy meetings.
That has ratcheted up worries that the U.S. Federal Reserve and Bank of Canada are about to slow the economy to such a degree that a recession can’t be avoided.
Look closely, and you’ll see those concerns reverberating across asset prices. Copper, known for its prowess in predicting economic trends, is at its lowest price level in a month. Crude oil – even with tightening supplies owing to Russia’s invasion of Ukraine – fell nearly 5 per cent this week.
The bond yield curve is flattening fast, with the 30-year U.S. Treasury yielding almost at par with the 10-year. The so-called smart money in credit markets is signalling rate hikes will be coming fast and furiously – with economic consequences to follow.
Stock market bulls, though, still have something working in their favour: corporate earnings.
Of 99 S&P 500 companies that have reported first-quarter results so far, 77.8 per cent posted profits above analysts expectations, according to Refinitiv IBES. That beat rate is well above the average of the past 28 years of 66 per cent. Overall, S&P 500 earnings are expected to be up 7.3 per cent year over year.
Next week will be key. Companies worth about half of the S&P 500′s market value are due to report results, including heavyweights Apple, Microsoft, Amazon and Alphabet. Markets may be down, but they are still priced for relatively good news: The S&P 500 trades at about 19 times forward earnings estimates, above the long-term average of 15.5 times.
The earnings season in Canada heats up as well next week, with the Canadian railways, Air Canada, Teck Resources and several oil and gas producers reporting. S&P/TSX Composite Index companies are expected to have grown earnings 26 per cent during the first quarter – with not just energy showing robust growth, but also the health care, industrial and materials sectors. The companies’ top lines should also look healthy, with revenues expected to grow 17 per cent.
The problem, of course, is that earnings are in the rearview mirror – and central bankers are gearing up to slam the brakes on an economy that’s been speeding precariously in the fast lane.
-- Darcy Keith, Globe Investor
Also see:
Dow dives nearly 1,000 points, TSX suffers worst day of 2022, as traders fret about higher rates
Stakes are high as U.S. megacap companies highlight big earnings week
Fed to go even bigger on rate hikes, traders bet
Some investors tiptoe back into U.S. Treasuries, as hawkish Fed clouds outlook
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Stocks to ponder
Richelieu Hardware Ltd. (RCH-T) Investor sentiment has turned against this company in a big way over the past couple of months, reducing a darling stock of the pandemic to an early casualty of housing market pessimism. Richelieu’s shares are down by 26 per cent since early February, as rising interest rates have weighed on assets linked to the boom in real estate activity. That’s a big speculative dip for a company with one of the best long-term track records in the S&P/TSX Composite Index. Richelieu’s stock posted losses in just four of the past 20 calendar years. Is this then a perfect setup for a buying opportunity? Not so fast. Tim Shufelt reports.
The Rundown
Pipelines are facing lofty valuations and rising interest rates. Here’s how to approach the sector
When energy prices were in the dumps earlier in the pandemic, Canadian pipeline stocks were solid investments thanks to their stable cash flows and big dividends. But the sector is facing a couple of stiff challenges, leaving investors with a tough question: Should they stay put? David Berman shares some thoughts.
His tech ETFs are down 30 per cent - should he weather the storm or sell?
The flagship ARK Innovation ETF (ARKK-A), managed by Ark CEO Cathie Wood, delivered a stunning return of 152.5 per cent in 2020 and then fell 23.4 per cent last year. So far in 2022, it’s down more than 40 per cent. Other ARK funds have had similar trajectories, including a trio of them owned by a reader, who wonders whether it’s time to ditch them. Rob Carrick has this advice.
Also see: Cathie Wood buys the dip on Shopify and other pandemic darlings
British discounter, U.S. auto-parts retailer among stock picks at Value Investing Conference
The Value Investing Conference, organized by the Ben Graham Centre at the University of Western Ontario, has become an international forum for those who like the idea of buying a dollar for fifty cents. A British discounter of household goods and a U.S. auto-parts retailer were two of the investing ideas spotlighted at the annual get-together of value hunters. Ian McGugan tells us about them.
What $400-million portfolio manager Stan Wong is buying and selling
Stan Wong, a portfolio manager at Scotia Wealth Management who oversees $400-million, has been pivoting of late from growth to value stocks, tilting mostly to cyclical sectors. Brenda Bouw found out why, and what stocks he has been buying and selling.
Others (for subscribers)
Number Cruncher: 12 U.S. dividend stocks growing at a reasonable price
Number Cruncher: Ten dividend stocks that can weather a higher rate environment
Thursday’s analyst upgrades and downgrades
Friday’s analyst upgrades and downgrades
Thursday’s Insider Report: Mining billionaire invests over $2.7 million in this stock forecast to nearly double
U.S. dollar’s rally may be nearing ‘tipping point’ as Fed readies big hikes
Globe Advisor
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Ask Globe Investor
Question: Is it better to divest individual and spousal RRSPs before 70 or convert to a RRIF? – Louisa M.
Answer: By “divest” I assume you mean withdraw the assets and collapse the plans. If that’s your intent, my question is why? Unless there is a compelling reason to withdraw funds, I have always advocated tax-sheltering as much of your money as possible.
There could be a reason to cash out the plans if the income would compromise your eligibility for the Guaranteed Income Supplement or expose you to the Old Age Security clawback. But you could be paying a hefty tax price for the RRSP withdrawals. Think it through carefully.
By the way, a RRIF doesn’t need to opened before Dec. 31 of the year you turn 71.
--Gordon Pape (Send questions to gpape@rogers.com and write Globe Question on the subject line.)
What’s up in the days ahead
Bullion is rising at the same time as real interest rates. This does not usually happen. Ian McGugan goes hunting for explanations.
April showers earnings and elections: World market themes for the week ahead
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Compiled by Globe Investor Staff