A few topics our newsletter touches on this month:
- Our Thoughts: Upswing
- E-Switch Notice
- Other Links: Disruptors podcast, Global Insight (monthly & mid-year outlook)
Our Thoughts: Upswing
July was a good example of how the markets are forward looking beyond current earnings. While first quarter earnings were good but markets declined out of concern about the future. Now earnings are less favourable but markets rose on perception that inflation and its negative impacts may be cresting as we enter 2023. This month we include comments on central bank moves and a mixed earnings season.
Update on central banks (EU & USA): The European Central Bank (ECB) recently raised its deposit rate by 0.50%, more than the 0.25% that was expected. This marked the first increase in interest rates in the region in over eleven years. The ECB also borrowed a term from the Bank of Canada by indicating that it was “frontloading” its rate hikes in hopes of not having to raise rates as much in the future. As with other jurisdictions, there may be more to come, though future decisions will be “data-dependent”. The ECB and its policy makers are undoubtedly facing a tricky situation given their reliance on Russia for natural gas which could keep inflationary pressures elevated.
On this side of the Atlantic, the U.S. Federal Reserve raised rates by 0.75%, the second consecutive such increase. Equity and bond markets responded reasonably well to the decision as it was in-line with expectations. In contrast to earlier this year, there appears to be some growing comfort that policy makers in the U.S. have caught up to inflation and have a credible plan in place to combat pricing pressures. Moreover, while Fed Chairman Jerome Powell acknowledged that another “unusually large” rate increase could be appropriate when the Fed next meets in September, he also suggested the pace of rate increases could slow in the event inflationary pressures recede. Unsurprisingly, that message was well received by the markets which now believe the Fed is closer to the end of its rate hiking cycle than the beginning.
Earnings season: Meanwhile, the second quarter earnings season is now more than halfway complete. In absolute terms, the results have not been great, with aggregate earnings outside of the energy sector expected to have fallen year over year once the season wraps up over the next few weeks. Moreover, despite some companies offering constructive outlooks, guidance in general has been soft, with many companies acknowledging the economic headwinds. But, investor sentiment has been very weak in recent months and expectations heading into the reporting season were understandably low. Overall, it’s fair to say that the results and guidance have not necessarily been as dire as expected.
We continue to see risks to the earnings outlook through the remainder of the year given tightening financial conditions and a deteriorating economic backdrop. But, that is a rather ordinary concern that tends to come and go, just as economic and market cycles do. Our financial plans are built with this in mind. Encouragingly, we are most comforted by the decline in longer-term inflation expectations. That is a development that leaves us more reassured about the longer-term prospects of asset classes and our ability to deliver against the needs of our clients.
By the numbers (July): The TSX was up 4.7% while S&P 500 was up 9.2% (up 8.6% in Canadian dollars). The Europe, Australia & Far East index (EAFE) was 4.3%, while the Emerging Markets index was down 1.3%. The Canadian bond universe was up 3.9%.
eSwitch Notice
As operations return to some pre-pandemic norms, we are asking clients to reflect on whether they want to continue receiving reports and statements by mail or if they are comfortable switching to digital. Please reach out if you are interesting in switching your mail-outs to e-delivery.
Interesting Listening/Reading
- Disruptors (Season 4) - A dynamic ~30 min RBC podcast co-hosted by John Stackhouse and Trinh Theresa Do about reimagining Canada’s economy in a time of unprecedented change.
- To check out our Global Insight Monthly for July find the link here
- Global Insight’s Midyear outlook is a great read for more analysis on inflation’s ongoing impact on capital markets and an update to the U.S. recession scorecard.
Summer is a great time to review you long-term goals and retirement plans – give us a call anytime to book a consultation.
Mark, Sarah, Peter, Corinne & Nathalie
Gallivan Wealth Management Team
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