Making sense of the markets this week: November 27, 2022
[ad_1] This week, Cut the Crap Investing founder, Dale Roberts, shares financial headlines and offers context for Canadian investors. It’s wonderful to be back writing “Making sense of the markets this week” at MoneySense. I am gladly filling in for a few weeks while Kyle Prevost is away on a dream family vacation. The Fed tries to crush investors’ hopes I’ll start with my take on what the heck has been going on in the markets over the last few weeks. While the story evolves, the main theme hasn’t changed since the last time I penned this column, back in early August. The U.S. Federal Reserve and central banks around the world are raising interest rates to attempt to cool spending and bring down inflation. U.S. stock markets entered a bear market (down over 20% from their peak) in June, but they were rallying in August on the hopes of a Fed pivot. But that rally stalled. Markets fell hard again. And then they recovered again. In late November, we are now about six weeks into another uptrend. And, investors are on a roller coaster ride. Here are the S&P 500 returns over the past year. Source: Google When markets go down, investors are often anticipating a recession. When they go up, investors are thinking we’ll get a “soft landing” or are suggesting they don’t think the central banks are that serious about continuing with their aggressive rate hike cycle. The Fed and other central banks are trying to curb the enthusiasm of consumers. But at times, investors are having none of that tough talk. Federal Reserve officials made a series of speeches over the last two weeks, indicating that the interest rate hikes needed to fight inflation would continue. On Thursday, November 17, St. Louis Federal Reserve President, James Bullard, said the central bank still has a lot of work to do before it brings inflation under control. Of course the markets went down aggressively, then up, even in a single trading session. Here’s a market direction scorecard: The Fed says: “We’re raising rates.” Markets go down. Investors say: “Nah, you’ll chicken out.” Markets go up. You can also follow the bouncing ball on my blog. My recent Sunday Reads posts have included: The markets hope and pray for a rate hike hiatus, inflation cools and stock markets rip, and the Fed pivot turned into a divot. The Fed Minutes This week, the U.S. Federal Reserve released the minutes from its last meeting in October 2022, when it raised the overnight rate by 75 bps or 0.75%. Here is a very good summary courtesy of Yahoo Finance. Essentially, there was a whole lot of fuss about nothing. Or in Shakespearean terms: “Much ado about nothing.” As anticipated, the Fed will slow the pace of rate hikes. Meaning, instead of 0.75% hikes, we might see 0.50% or 0.25% hikes. The markets moved higher thanks to that confirmation. The S&P 500 moved back above 4,000, recording its first close above that mark since September 12. Here’s more from that Yahoo Finance post: “ ‘A number of participants observed that, as monetary policy approached a stance that was sufficiently restrictive to achieve the Committee’s goals, it would become appropriate to slow the pace of increase in the target range for the federal funds rate,’ the minutes showed. “‘In addition, a substantial majority of participants judged that a slowing in the pace of increase would likely soon be appropriate.’ ” That said, the Fed also sees persistent inflation as a problem, and it may have to take rates to a level higher than previously expected. What does that mean? Here’s Fed Speak translation: That’s the terminal rate, where the rate hikes will peak. Projections from the Fed’s September policy meeting pointed to rates peaking at 4.6% next year. They will soon update their terminal rate projection. The market consensus is that we will see a 0.5% hike in December, followed by one or more 0.25% hikes. Wall Street is growing confident that the Fed might be able to pull off a so-called soft landing. The Dow soared 14% in October, its best month since January 1976. The Dow is up another 4.5% in November. These are fascinating and challenging times—but what’s an investor to do? The markets have been whipsawing all over the place, reacting and guessing. You don’t have to join them. You could stick to your investment plan. If you’re in the accumulation stage, you could keep buying on a regular schedule. Always, make sure you’re investing within your risk tolerance. If you’re in the retirement stage, you should already be prepared for all of the uncertainties. You might have a look at all-weather models in the advanced couch potato portfolios. Earnings still trickle in Earnings season is still underway, but it is winding down. Recently, many retailers have been reporting earnings that have been quite strong. Consumers have been holding up quite well, but there are reports that folks are ringing up credit card debt to keep spending. That can only last for so long. This week, Canadian retail darling, Alimentation Couche-Tard, reported a very strong quarter. I include Couche-Tard as a pick in the Canadian Wide Moat Portfolio. When you own most every street corner offering fuel and snacks, that gets close to an economic moat. In September 2020, I may have fuelled your curiosity on MoneySense. In that column, I wrote about their scalable business model: “In two words: disciplined acquisitions. Couche-Tard has proven many times over the past decade that it can pay a fair price for their acquisitions and then integrate convenience store chains in their model and make them more profitable.” This week, it reported that revenue increased to CAD$4.1 billion, up 3.0% year-over-year. Same store revenues increase by 5.6%. Net earnings were CAD$810.4 million for the second quarter of fiscal 2023, compared with CAD$694.80 million for the second quarter of fiscal 2022. Adjusted net earnings were approximately CAD$838 million compared with $693
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