Time is a Tide that Disobeys, it Disobeys Me

We are less than two weeks from election day, with polling data very tight and predictions at this point being pretty much worthless. It is amusing to see pundits explain, one way or another who, who they believe is going to win but they are certainly not relying on data to come to these conclusions, as it is still too close to call. We want to touch on the election theme as well as recap more earnings and lastly, we have another Bank of Canada update.

America’s decision

November 5th is quickly approaching and as stated earlier, we have no indication of will emerge as the President. What we do know is that pre-voting is higher than in the 2020 election as well as the 2022 mid-terms. It’s quite impressive to see that 30 million voters cast ballots nationwide; clearly people are getting the message to go out and vote!

What is happening now is that investors have repositioned themselves heading into the election; a Vice-President Harris win represents some element of continuity while a Mr. Trump win suggests many changes in policy. As such, we’ve seen heavier selling in this year’s individual outperformers (people protecting their profits in the face of uncertainty), we’ve seen renewables fade (Mr. Trump does not believe in climate change) and financials have performed strongly as their operations are more domestic than other sectors (and Mr. Trump is likely to enforce a more protectionist agenda if he wins).

We’ve also seen the bond market price in a Trump win: yields on the US 10 year have gone back to where they were when the Fed cut interest rates by 50 bps last month. This is due to the belief that his policies will be inflationary, thereby reducing expectations of future interest rate cuts. We’ve also seen the spread between German and American yields widen; this is because a more protectionist America is a negative for Europe.

The market reacting to probable outcomes, is not an endorsement of said outcomes; investors are just repositioning themselves in anticipation of a change in the status quo.

Earnings

Most of our holdings are due to report next week, however, there were some interesting stories worth sharing. GE Aerospace reported well although their shares sold off 9%, the day of their reporting. We see the response to GE’s earnings as an example of the problem facing many companies today: an expansion in the company’s earnings multiple have made it more expensive than it probably should be, this has contributed to impressive share price performance this year, however, the earnings story (even if positive) eventually cannot support the multiple expansion, therefore shares sell off. GE shareholders have nothing to fret about, they are still up 40% year to date (if they held their shares since January 1st).

Tesla also reported this week and although we do not recommend these shares to our clients, some do own them at their own insistence. Shares leaped 21% in response to an earnings beat but we are not convinced that these results merit such enthusiasm; the earnings beat was attributed to higher regulatory credit sales. These sales are 100% margin for Tesla (no cost and all profit), however, the future demand for these credits will continue to diminish as more car manufacturers are producing electric vehicles. The Coca-Cola Company also reported this week and although they beat on expectations, shares dipped afterwards. Coca-Cola shares have always been seen and priced as a staple that is not sensitive to the economic cycle (Coke consumption is not correlated to employment trends for example) but also offered little future growth. In recent years, their share price growth exceeded their earnings growth all while their volumes shipped declined, which has been masked by price increases (just like Tesla, another unsustainable practice) and has us questioning their valuation, which seems unjustifiable.

Bank of Canada

Indebted Canadians will be relieved to know that the Bank of Canada cut interest rates by 50bps this week, bringing total reductions this year to 125bps. I want to recap the accompanying Bank statements but I believe our Chief Economist, Doug Porter summarized them best:

"There are?risks around our inflation outlook. The biggest downside risk to inflation is that it could take longer than anticipated for household spending and business investment to pick up. Our recent surveys suggest businesses expect subdued sales and their hiring and investment plans are modest. On the upside, lower interest rates could fuel a stronger rebound in housing activity or wage growth could remain high relative to productivity. There is also elevated geopolitical uncertainty and the risk of new shocks."?The BoC is confident that the rate hikes to-date will soon lift growth, and thus remove the downside risks for inflation—but are unsure they have moved soon enough. At the same time, they also again stress that this is?not a one-way street, emphasizing lingering concerns over?still hot wages?and a?possible snap-back in housing—completely legitimate concerns, and a good reason to believe they will lean back to 25 bp cuts.

Summarizing the summary: inflation is headed in the right direction while the economy is not, therefore they feel comfortable to provide some stimulus in the form of rate cuts. That being said, they also acknowledge wage growth is too hot and that housing could rebound and prices could spiral out of control again. What this means is that the next rate cut is up in the air and will be entirely dependent on the data; if the economy continues to slow and pricing continues to hold, we should expect more rate cuts but not necessarily more 50 bps cuts. If economic momentum picks up or we see pricing beginning to tick up again, we may see a pause on cuts.

For those who hold variable debt (including our clients who use margin for investing) or those whose mortgages are coming up for renewal, these rate cuts are a welcomed relief. The cumulative 1.25% reduction represents $6250 in annualized savings on $500,000 of debt; there is more work to do but this is still something worth celebrating.

Healthy Distraction

The oldest person in the United States passed away this week at the age of 115. I did not know who Elizabeth Francis was until hearing about her passing, but it prompted me to read more about her life. What stood out to me, was that longevity was in her family genes: her sister lived until 106, another sister was 95 and her daughter is still living at the age of 96. Ms. Francis attributed her long life to her faith in God, growing and eating her own vegetables and avoiding smoking.

Interestingly, Ms. Francis was 3 years old when the Titanic sank in 1912, 5 when World War I began, 30 when World War II began, 60 when we landed on the moon and 80 when I was born. When you think about her life in that way, I can’t help but feel better about my life.

Speaking for myself, I sometimes think of the things I’ve done and then say to myself that ‘I’m too old to do that now’. The truth is, regardless of what we can no longer do, it’s always premature to think that our business here is done. Imagine if Ms. Francis thought about calling it a life at 60 while watching that moon landing; she almost lived to double her age afterwards! Our average client is 61 so I know this message is relevant:? imagine that at this point, you’ve only lived half your life. It’s too early to wind it down, there’s still so much to do, so much to learn and so much to see!

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