The Week in Review

Time of the Season

Earnings season is in full force, providing investors with commentary, insight and updated forecasts about the quarters ahead. Not to be upstaged, however, British politics were also in the news this week with a surprising/not so surprising resignation and a nation cast into a leadership crisis.

Amongst the first companies reporting were the American banks and they did not disappoint. The banking units outperformed expectations as earnings benefitted from higher interest rates. Conversely, trading revenues and capital markets income were lower due to a slow down in deal making. Outlook from the banks were mixed: Bank of America’s CEO Brian Moynihan highlighted the resilience and strength of the consumer, saying that while we may have a ‘shallow economy’, weakness or stress are not showing yet. Goldman Sach’s CEO David Solomon and JP Morgan’s outspoken CEO Jamie Dimon were a little more somber in their outlook as both acknowledged a probable recession with the latter even warning of the risk of further market turmoil as recession hits in the next six to nine months. Banks did set aside more money in anticipation of higher loan losses, however, defaults are currently low and the amounts set aside are still relatively small.

Markets liked what they saw as bank stocks rose close to 10% since reporting their earnings. Even with this rally, US banks are down around 30% from their peaks. As frustrating as that may be, they remain quality investments and are much better equipped to withstand a recession than they were in 2008. As higher inflation and higher rates are fully baked into markets, bank stocks could outperform as the magnitude of their selloff seems unwarranted, especially when accounting for last quarter’s earnings. For reference, Canadian banks are down a little less than half of what American banks are, even though we are dealing with similar economic realities (rates and inflation). When you consider that RBC earns close to 30% of its revenue form the US and both BMO and TD close to 25%, the gap in performance should narrow either by seeing US banks moving up or Canadian banks moving down at a faster pace.

As if markets did not have enough to digest from quarterly earnings, Britain’s chaotic political landscape continues to warrant headlines. After the disastrous budget proposal which saw bond yields spike, the Pound plummet, the firing of Kwasi Kwarteng (the Chancellor of the Exchequer), the resignation of Suella Braverman because of a disagreement over immigration quotas, Prime Minister Truss has also tendered her resignation. The Economist put it best “her resignation statement was curt and encapsulated much of her premiership. Delivered in a cheery tone, devoid of reflection, she did not try to explain to Britons the past month of chaos, let alone apologize for it”. As the Conservative Party will go back to vote for a new leader (watch out for the potential return of former Prime Minister Boris Johnson), the future of the British people and economy remain in doubt.

Going back to the decision around Brexit, the country has been dealing with uncertainty and declining economic competitiveness. Their decision compounded the labour shortage and left the country with the highest G7 inflation rate this year. Unfortunately, you get what you vote for and while I wish this would serve as a wake up call for voters in other geographies, populist style politics will continue to yield ineffective policies.

America has midterm elections coming up and inflation is the greatest concern for Americans. The Democrats will have to take some responsibility for this, even if the problem goes beyond America’s borders. Taking ownership of the problem, actually acknowledging and preparing for the upcoming recession would serve them best. Unfortunately, the Republican Party also needs to go back to the drawing board regarding their economic ideas. On September 23rd, Larry Kudlow (former Director of the National Economic Council), praised Liz Truss’s economic plan and said that it looked a lot like House Minority Leader, Kevin McCarthy’s plan. The ensuing financial market chaos and the Prime Minister’s 45 day reign should prompt them to reflect on their economic ideas, but I doubt this will happen.

While market expectations for future inflation have started to come down in recent weeks, we continue to invest cautiously for our clients.

Healthy Distraction

The rise of digital media has brought us a wealth of content to consume. Between the golden age of TV shows on streaming platforms, to Youtube channels to Tik Tokers, we have so much content to consume. As a confessed movie buff, I admit being spoiled with all that’s available for me to watch.

This wealth of options can take us away from a more traditional form of content: printed media. I am a fan of reading books and encourage people to continue to read. Having shared a list of restaurants, movie and songs, today I’d like to share 5 books that left an impression on me:

Sapiens - Noah Yuval Harari

Behave: The Biology of Humans at Our Best and Worst - Robert Sapolsky

Antifragile - Nassim Taleb

Why Nations Fail - Daron Acemoglu and James Robinson

Animal Farm - George Orwell

If you happen to have read or will read any of these books, I would be more than happy to discuss!

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