Things that make you go “Hmmm…”

Economic data

This week gave investors a lot to ponder, with many questioning the next moves for both stock and bond markets as the summer comes closer to its end. Yes, I said it, the summer is almost over! Let’s start with the US equity market which, as of the beginning of this week, had seen close to 85% of S&P 500 companies report their earnings for Q2, and among those, 79% had exceeded expectations (according to FactSet). While this seems great, we can’t ignore the fact that blended earnings are down 5.2% year over year, representing the largest earnings drop since 2020. So, questions remain on stock market valuations, especially with the S&P 500 forward price/earnings (P/E) ratio (currently 19.2x) trading above both the 5-year (18.6x) and 10-year (17.4x) averages. ?

Then there’s the headlines surrounding union contract negotiations, with one trucking company raising eyebrows this week following their announcement that US drivers will be paid on average $170,000 per year. This is only one of several contract negotiation headlines this summer, but it needs to be discussed–in Canadian dollars that’s more than $225,000 per year! Of course, we believe that all workers deserve to be paid a fair wage, but this contract seems extremely generous, so let’s put it into context. According to the Canadian Federal government’s website, the median salary was $216,833 for medical doctors and $116,940 for lawyers in 2022. We have to wonder just how sustainable corporate profits can be for companies with these type of union contracts. Will consumers continue to accept higher prices to support increased costs? Doubtful, especially in our current capital-constrained capitalist society that can quickly find alternatives (UBER comes to mind). So even though a life on the road may be appealing over the high-stress nature of our jobs following the financial markets, we aren’t dusting off our resumes just yet. But if this keeps up…?

This week’s economic data also gave investors a lot to think about, with US consumer price index (CPI) for July broadly matching expectations at +0.2% month over month and +3.2% year over year. And while this was the first increase in the year-over-year number since last summer, we can’t forget how far we’ve come when headline CPI was +9.1% last June. Still, we must consider how much lower CPI can go in the near term, especially with energy and food prices now rising. Fortunately, core CPI data continues to be trending lower at 4.7%?year over year (compared to +5.6% in March) which, coupled with last week’s soft jobs data, should support a pause by the Fed at their next policy meeting in September. Other US data this week included wholesale trade and inventory data, both missing expectations. We also saw consumer credit, which continues to exceed expectations despite the rising rate environment. In Canada, we didn’t see much data this week, largely due to the holiday weekend. However, international merchandise trade came in softer than expected at -$3.7 billion, representing the biggest shortfall since October 2020 and implying an increased drag to Q2 GDP. We also saw Canadian building permits for June which, although they exceeded expectations at +6.1% month over month, only benefited from strength in non-residential structures. Residential permits continue to be an issue, dropping by -1.8% month over month and -16.8% year over year, especially in the wake of Canada’s aggressive immigration policy and lack of affordable housing. Good luck fixing this problem quickly, as even finding unaffordable housing in some regions is a major challenge. ?

Bond market reaction

Bond yields were modestly higher on the week, despite CPI being in line with expectations. And while markets further believe that policymakers will leave rates unchanged at their next meeting, it remains doubtful they will change their hawkish tone. Bond yields also continue to be negatively impacted by increased supply associated with rising deficits and quantitative tightening. Still, the move higher in rates on Thursday, following the CPI report, seemed overly bearish. Corporate bonds remained resilient on the week, with credit spreads being unchanged. New issuances were well received, with transactions being well oversubscribed and having little to no new issue concessions.?

Stock market reaction

Equity markets started the week in search for direction amidst a slew of corporate news, namely Moody’s lowering its ratings for several mid-size US banks and warning it may downgrade larger financial institutions as well. US trucking company Yellow filed for bankruptcy after nearly 100 years in operation and concerns are mounting that WeWork might be next. In Canada, it was a busy week for earnings, with Brookfield Asset Management reporting strong results and guiding for a record year of fundraising. The parent Brookfield Corp also reported a solid quarter, helped by its growing insurance franchise. WSP Global increased full year guidance amid significant demand for infrastructure investment, as evidenced in their record backlog, while south of the border cost cutting initiatives helped offset lower than expected subscriber growth at Disney. Finally, UPS lowered its outlook for the year, driven by a slowdown in global delivery volumes and cost pressures.?

What to watch next week

Next week’s Canadian data includes manufacturing sales, CPI, housing data, international security transactions and wholesale sales. US data includes retail sales, import and export prices, business inventories, housing data, industrial production, the leading index and minutes from the most recent meeting of the Federal Open Market Committee (FOMC).?

By: Adam Ditkofsky, Pablo Martinez, Sandor Polgar, Steven Lampert, Craig Jerusalim and Rahul Bhambhani

Adam Ditkofsky is Senior Portfolio Manager, Global Fixed Income; Pablo Martinez is Portfolio Manager, Global Fixed Income; Sandor Polgar, Portfolio Manager, Global Fixed Income; Steven Lampert is Associate Portfolio Manager, Global Fixed Income; Craig Jerusalim is Executive Director and Portfolio Manager, Equities; and Rahul Bhambhani is Portfolio Manager, Global Equities.

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