Week of October 23, 2023
Dec Mullarkey, CFA , Managing Director, Investment Strategy and Asset Allocation
We are over a third of the way through U.S. earnings season and the numbers are fairly strong. Third quarter earnings from the S&P 500 Index are certainly not a blowout, but they’re not duds either. So far, revenue and earnings have beaten estimates. Most of the seven largest companies (Apple, Microsoft, Amazon, Alphabet, Nvidia, Tesla and Meta) have yet to report. The two that have, Meta and Alphabet, have disappointed. But it has been a mixed picture for these companies, with certain parts of their business slowing and other parts holding steady.
We think the best way to describe the current market sentiment is that it is fairly neutral. Volatility is contained, earnings are in line and price gains so far are positive. However, performance has been concentrated in the seven largest stocks – absent these seven, the rest of the S&P 500 Index is down for the year so far. In other words, the average stock has not done well.
Nevertheless, across global equity markets the U.S. is the top performer when measured in U.S. dollar terms. As geopolitical tensions grow, we think the U.S. will likely be seen as a safe haven and continue as a favored destination for global equity investors. ?
Source: Bloomberg, 2023.
Richard Familetti, CFA , Chief Investment Officer, U.S. Total Return Fixed Income
We were recently reminded of a brief period before the 2007?2008 Global Financial Crisis when AA- and AAA-rated long maturity corporate bonds traded at a negative spread to U.S. Treasuries. In 2006, rates had been at a similar level and had just risen by about 100 basis points (bps). Markets were still in “risk-on” mode, but more importantly demand for longer-dated credit was strong for several reasons.
Could we revisit this event? If we looked blindly at credit ratings, the answer is probably yes. There are still a handful of credits with ratings equal to or greater than that of the U.S. Treasury. Certainly, the demand for longer-dated credit is there both from pension funds as well as from domestic and international insurance companies. Non-U.S. buyers might seek to diversify away from U.S. Treasuries given deficits and rancorous political dynamics, especially given a less-favorable cross-currency hedging environment of late.
The supply conditions are in place: at this level of rates, corporate issuers are reluctant to borrow beyond 10 years of maturity. In fact, many do not need to borrow much, having already funded their debt at much lower absolute rates. High-quality issuers mostly have the luxury of cash on hand, reducing the need to borrow. To us, the conditions are ripe for this unusual credit inversion to recur – that is, for credit spreads for 30-year bonds to become negative on an absolute basis and to exceed that of intermediate and front-end paper. Therefore, despite a near-complete lack of credit term premiums at the moment, we still believe long-dated, high-quality corporate bonds may appear cheap. Seller beware.
Source: Bloomberg, 2023.
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Melissa Boulrice , Senior Director, Asset Management, Public Fixed Income
This week, there was no surprise from the Bank of Canada (BoC) as it kept its overnight rate unchanged and the door open for future hikes. Economic growth has cooled slowly, but the central bank is seeing evidence that prior rate hikes are working their way through the economy and curbing activity. This led the BoC to revise projections of growth lower for 2023 and 2024.
While the most recent Consumer Price Index print showed a slight drop to 3.8% year over year, inflation remains sticky and the BoC raised its inflation forecasts for this year and next year. The achievement of a 2% inflation target was pushed back from mid 2025 to the second half of 2025. With markets projecting that the BoC could start cutting the overnight rate lower in mid 2024, the BoC will likely be cutting rates even with inflation still above 2%. While the BoC may face both high inflation and low growth simultaneously, the U.S. Federal Reserve seems to be in a better position to fight inflation with further rate hikes given more resilient U.S. economic growth.
Source: Bank of Canada, 2023.
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Market insights are based on individual portfolio manager opinions and market observations. These are observations only and are not intended to provide specific financial, tax, investment, insurance, legal or accounting advice and should not be relied upon and does not?constitute a specific offer to buy and/or sell securities, insurance or investment services. Investors should consult with their professional advisors before acting upon any information posted here.
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