How are the stock markets doing this fall?

English Transcript:

David Raymond: Hello, I’m David Raymond, Markets and Investments Specialist at fdp, and I’m with you today to discuss the markets.

I’m pleased to be with my colleagues Yann Furic and Max D’Alessandro.

During our last round table this spring, Max, you said, and I quote: “If I look at the second half of 2021 and the beginning of 2022, the key word is really ‘inflation.’” We saw inflation that was persistent during the summer and continued into the fall, and I have the impression that what you said this spring, Max, is really still applicable today. One even wonders whether central bank interventions are having the desired effect on the economy. Could you share with us a Canadian perspective on this topic? Yann will then be able to speak about the international situation.

Max D’Alessandro: In Canada, indeed, inflation seemed very persistent. We saw increases during the spring and summer. Central banks and the Bank of Canada intervened. They have hiked rates nearly 300 basis points so far and now we can see that it’s slowly starting to bear fruit, with inflation slowly starting to fall.

We’ve seen significant increases in inflation and we’ve reached 7%, but we believe that the following months will see a drop. Of course, mortgage rates have risen, which has influenced the inflation rate. Also, we see that home sales have fallen, so its slowly starting to have an effect. It’s going to take time and we won’t see the effects of the rate hikes overnight, because we know that it always takes 6 to 8 months for the effects of an increase to be felt in the economy.

D.R.: And on your side, Yann, internationally?

Yann Furic: What Max said applies internationally as well, that is, other central banks, including the Fed, which we hear the most about, have raised their rates. There is inflation, not just in Canada, but all over the world.

With the rate hikes, what we see is that, yes, inflation may not be coming down as quickly as some central banks would like, but we see that container prices are down sharply since the beginning of the year. Used car prices are too, and they should continue to drop, which will be interesting. Also, supply chains are getting back to normal, new vehicle production is picking up again. It’s not perfect, but it’s picking up, so we have number of elements that should allow us to see lower inflation over the next few months. We’re seeing improvements in supply chains.

D.R.: But that’s not all. Max, you specialize in fixed income and bonds. How are things going in terms of corporate financing in these market conditions? When interest rates rise, we know that companies usually issue new bonds to raise funds. What are you seeing, what are the trends in this sector?

M.D’A.: At the moment, in general, I would say that the Canadian market is in good shape. After the first rate hikes, we saw companies draw on their lines of credit because, since rates were still rising quite quickly, they thought they might come down again, and then they could go back to the market and pay back this short-term loan with a longer-term bond issue.

In that regard, I think companies are having no problem obtaining financing, unlike in times of crisis, when it’s much more difficult. At the moment, I would say the Canadian market is generally in very good shape, and even the U.S. market. It’s pretty much the same story there. So it’s going relatively well in that regard.

D.R.: That’s interesting, what your saying. So, obviously, already issued bonds have suffered a little because of rising rates, but new issues offer pretty attractive opportunities…

M.D’A.: That’s right, with higher rates, we get more attractive returns. Now, we’re really seeing good opportunities in fixed income with companies that are still in very good shape and have healthy balance sheets. That creates good buying opportunities for us.

D.R.: Obviously, inflation affects consumers. For example, personally, I eat out less often and I dry clean my clothes less often. But I don’t feel like it’s going to impact the stock markets necessarily. So, can we say that there’s a kind of disconnect between the real economy and what’s happening in the stock markets?

Y.F.: Yes, we could take two examples. During the pandemic, with the shutdown of economies in early 2020, everything that was local commerce, such as restaurants and dry cleaners, suffered enormously. The stock markets also experienced difficulties, since it was mainly the big technology companies that dominated. People found themselves working from home, so the profits of these companies even increased. In an event like that, what we find is that the stock market and the real economy can be two different things.

Another example is what we’ve been seeing for several weeks now, that is, that any good news, such as the employment rate in the United States, which is good, or the level of manufacturing production, the PMI indices, which are coming out better than expected, even if they show a slowdown that is not as sharp as expected, well, for the markets, this news is perceived negatively because it suggests that interest rates are likely to rise even higher, or stay higher for longer.

So there’s a gap between the real economy and what we see in the markets, and that can really create a dichotomy.

D.R.: That’s the more international perspective. Max, we know that Canadian markets are less diversified and more concentrated in certain sectors. Do you see the same kind of trend, that is, the way consumers are affected and the impact that can have on the Canadian stock markets?

M.D’A.: We see it in terms of real estate because Canada is a less diversified country, as you mentioned. We’re really focused on natural resources and real estate, which are the two big sectors of the economy.

In real estate, we see it in everything related to the sector. It’s not just home sales, but also renovations and everything that revolves around the mortgage market. We really see that home sales are starting to slow. Prices haven’t really moved yet, but we see fewer and fewer homes for sale on the market. Prices are slowly starting to fall as well, and we see this slowdown because of rising interest rates.

We know that many people use their lines of credit, so it’s instantaneous: when the Bank of Canada raises its rates, the rate on home equity lines of credit will automatically increase. That means, basically, less money in consumers’ pockets. Gasoline prices have come down lately and yes, lower prices at the pump, in a way, put some money in consumers’ pockets. But overall, the fact remains that consumers have less money to spend today.

So we expect economic growth to weaken over the next few months and that’s also partly why we think inflation will continue to slowly fall here, in Canada, over the coming months.

D.R.: Returning to the examples we talked about, I understand that I don’t necessarily have an impact on the stock markets because of how often I eat out or go to the cleaners, but that it’s all the small actions of all consumers, the sum of all these actions, that has an impact on savings and, ultimately, on corporate profits. And more specifically, it is not a direct impact, but rather a more long-term impact that we see.

M.D’A.: There are very few restaurants or restaurant chains listed on the stock exchange, but there are suppliers of these restaurants that are listed. So, yes, it will have an impact, but it happens over a longer period of time, because this kind of movement takes time.

D.R.: Gentlemen, you are regularly exposed to the financial market. Have you noticed any changes lately in how the markets react or behave?

Y.F.: I could say that what has been causing market movements for a little over a year now is really inflation. It’s global. Just about every market trades macroeconomically on what central banks do, and what central banks do in relation to each other.

On the one hand, we have the Bank of Japan, which is keeping its interest rates at rock bottom levels, while all the other central banks are raising their rates. The markets are reacting to, for example, the Fed’s announcements of rate hikes. They are also reacting to the rumor that rates are going to be higher than expected, that is, if the chairman of the Federal Reserve says that rates are going to go even higher, that has a negative impact on the markets. And all markets feel this negative impact.

So I would say that the markets are reacting less and less in silos, but rather in an overall way. At least that’s what we see in the equity markets.

M.D’A.: The other thing I would add is that today, we see very big players in the markets. There are many firms that have consolidated the market and now have very large asset bases. These players today are able to move the market one way or the other, up or down. That’s one of the things that’s really changed over the last few years, the size of the players, and it’s creating a lot more volatility in the market today.

Now, we often see rises of 1% or 2%, or declines of 2%, and we’re not talking about a particular stock, but really about the whole market. This situation is directly attributable to the players in the market. We also see this happening in Canada, where some players have become very, very big. So when one of these players moves, the market feels it and it can go one way or the other depending on what they’re trying to do.

D.R.: Very interesting. So if you had any sound advice to give our investors watching this video, what would it be? Do you want to start, Max?

M.D’A.: It’s always difficult to try to time the market, to try to always sell at the top and buy back at the bottom. We know that when an investor sells, the most difficult thing is to buy back because you never know when the market has bottomed.

The best advice we can give is to stick to your investment policy, your investment horizon, and continue to invest monthly, quarterly. Some purchases you make will be at higher levels and others at lower levels, but in the end, with our investment horizon, which is generally over a long period, you will end up with a good return. Timing the market is the most difficult thing. And with the volatility we see in the markets today, it may be precisely the wrong thing to do.

Y.F.: To add to what Max was saying, we could add that the geopolitical risks we’re experiencing today don’t help time the market. It already wasn’t easy, but with geopolitics, it’s even more difficult. I would like to add that investing systematically, following a plan, allows you to take the emotion out of investment decisions. That means that sometimes you’ll buy at higher prices, and other times you’ll buy closer to the bottom. But buying regularly and systematically, historically, generates good returns over time and it removes the emotional component.

D.R.: That’s very good advice. Trying to time the markets with technical analysis is already very difficult, if not impossible, and it’s also very difficult when you’re swayed by emotions. So when you combine the two, you’re ultimately better off sticking to your investment policy. Staying the course, as they say, is the best thing to do.

Thank you very much, Yann and Max, for sharing your expertise and opinions.

Yann and Max closely monitor the markets, along with the other members of our investment team. We want you to know that we have very good, very competent people who are monitoring the markets.

All of you at home, thank you for watching this video. Until next time.