A few topics our newsletter touches on this month:

• Our Thoughts: Consumer Strong, Earnings on Track
• By the numbers: Broad market pullback in October
• Tax-free first home savings account (FHSA) - Deadline
• Other Links: Disruptors podcast, Global Insight (monthly), Soirée Salus event

Our Thoughts:  Consumer Strong, Earnings on Track

The markets in October were in cautious retreat over worries about the path of interest rates and their economic impact. In contrast, global equity and bond markets have started the month of November positively on the heels of the U.S. Federal Reserve holding interest rates steady in its policy update this past week. The general message from global policy makers has been consistent: they are trying to balance the risk of over-tightening financial conditions with the need to ensure policy is sufficiently restrictive for long enough to bring inflation sustainably under control. Below, we share some takeaways from the third quarter earnings season which is well more than halfway complete.

Overall, corporate earnings results have been solid, particularly when compared to expectations that remain cautious. The better-than-expected U.S. earnings results come on the heels of similarly better-than-expected U.S. economic data. The most recent U.S. GDP figures, which represent the most common measure of economic growth, grew at an annualized pace of nearly 5% for the July-through-September period. That was not only higher than expected but represented the highest rate of quarterly growth since late 2021. The strength was driven by an ever-resilient consumer, which continues to surprise to the upside. It’s worth noting the data hasn’t been as inspiring on the Canadian side, where comparable GDP figures have been weaker.

Despite positive headlines around the U.S. economy and corporate earnings results, the overall tone of the outlooks and commentary from management teams has been more guarded. This reflects the concern that businesses have over the elevated level of uncertainty with respect to the future path of the economy given high borrowing costs, inflation pressures, geopolitical risks, and pressures in some foreign markets like China and even Europe to some extent.

Some potential cracks on the consumer front have started to emerge, with delinquencies trending higher in areas like credit cards and auto loans. Nevertheless, banks continue to characterize the latter increases as being a normalization of credit trends, rather than anything particularly troubling. Meanwhile, the labour backdrop remains healthy but changes are occurring at the margin, with management teams through this past earnings season commenting on the lower levels of employee turnover and slower pace of hiring. Several companies have intensified their focus on costs and have reduced their capital spending plans as a result.

The actions noted above may be music to the ears of central banks. After all, they raised rates aggressively and quickly over the past year or so in an effort to slow inflation pressures and cool economic activity. Businesses seem to increasingly be doing their part by adapting to the environment. On the other hands, U.S. consumers seem to largely be undeterred by higher rates and the higher cost of living to this point. Nevertheless, it may just be a matter of time before they too start to adjust their behaviour in a bigger way by slowing their own spending plans, leading to weaker demand for goods and services. Admittedly, this view may continue to require some patience to see it play out.

By the numbers (October):  The TSX was down 3.2% and the S&P 500 was down 2.1% in U.S. dollars. The Europe, Australia & Far East index (EAFE) was down 2%, while the Emerging Markets index was down 1.8%. The Canadian bond universe was up 0.4%.

Tax-free first home savings account (FHSA) – why you should think about it now:

This note is particularly relevant to the children and/or grandchildren of our clients who have yet to purchase a home. To begin earning contribution room in an FHSA, the account needs to be opened (unlike TFSAs where room is accrued regardless). The lifetime maximum contribution to an FHSA is $40,000 with the annual contribution limit of $8,000. Who qualifies? Anyone over 18 that has not owned a home during part of the calendar year before you opened the account or anytime in the four preceding calendar years. There is a tax deduction (like RRSP contribution) for putting money in and funds can be removed tax free to purchase a qualifying home. More details available here, but please reach out if you are interested in discussing.

Interesting Listening/Reading

• The 10-Minute Take – podcast from RBC Economics, latest episodes are on Canadian indebtedness and the “summer of strikes”
• Disruptors - 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.
  • Soaring Toward a Greener Future with Sustainable Aviation Fuel
• To check out our Global Insight Monthly for September find the link here.

Quick shots from Soirée Salus Oct 3^rd, 2023 – Sarah (Ottawa Salus Treasurer) alongside Mark, Peter and his wife Breanne visited the French Embassy for the annual fundraising event. Ottawa Salus helps adults with mental health and substance use challenges to live independently through the organization's safe housing and community support services.

 

Regards,

Mark, Peter, Sarah, Corinne and Nathalie

Gallivan Wealth Management

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