In Markets: Though the week ended on a good note, we can’t know yet if it’s a signal or not. So far the dreary summer seems to have wilted markets in stormy sympathy. Though there’s always green after grey, we usually don’t perk up until the sun is physically out again. And so for now, we read.
Old as a Tree: Sadly, we said farewell to my mom last month, and this week my dear sweet mother-in-law turned 99, and is quickly fading. She gave a smile when her granddaughter gave her a spruce seedling to plant. To paraphrase the old proverb, may that tree will grow up mighty and strong… and then not blow down onto my truck! Or something like that. What’s a Friday without some snark?
Navigating a multi-asset price shock is like driving through a snowdrift – the best way out is keeping two hands firmly on the wheel and don’t over-correct; decelerate, but don’t jam the brakes.
Even at the macro level, there are prudent ways for policy-makers to react, and a high cost for their over-reaction. Bank chiefs beware, lest the economics textbooks of 2030 cite you as the hammer who went looking for a thumb.
A few charts tell the story graphically, touching on real estate, (yes, real estate) equities, bonds, and cash.
Yes, even Canadian home process are finally falling due to pulling back purchasing power. As the chart below from National Bank shows, “the rise in home prices from 2016 to mid-2021 has evolved more or less in line with the purchasing power of the median buyer using a 5-year fixed rate mortgage… (but) there is now a 46% gap between prices and purchasing power.”
A tough first half of 2022 for stock and bond markets is shown in the charts below. These assets usually offset each other, but not this round. (This opens a door we should discuss for taxable accounts).
And with inflation being where it is there was just no perfect hiding spot. As demonstrated in the chart below, even a moderate long-term inflation, in the 3-4% range, calibrates a serious chunk of sunk cost over time:
The bright-ish side, earnings ok. Equity valuation (like real estate) hovers in sympathy with expected earnings, and stocks have upside potential if earnings give them reason to. As we said in commercial banking – cash flow is everything. Almost.
Global (Weekly) Analysis:
- Of fissures and fault lines - As inflation soars and recession fears rise, more uncertainty is hanging over the investment landscape. We take stock of these stubborn challenges, and look at whether a retrenchment in corporate earnings may be the next shoe to drop.
- Regional developments: Bank of Canada hikes policy rate by 100 basis points; Jobs and price data point to larger Fed move; Euro hits parity with U.S. dollar; China’s consumer price index grows faster than expected.
Full Read Here: Global Insight Weekly
Lastly: A Saturday look at a Thursday story with a Friday feel. The Wall Street Journal ran a hard-hitting piece this week on the incredible price resilience of the Costco hot dog and drink deal – which has been stuck at $1.50 since 1985. I confirm this is a delicious way to fight inflation.
I had an impressive mullet in ’85. The Soviet Union was still a thing, and Putin was a junior spy. Another junior, Justin Trudeau was just 14, and already plotting his role as supreme commander.
Even Lasterly, a Dad Joke:
Daughter: “Daddddddyyy, I’m thirsty!”
Dad: “Oh, hi there Thursday! I’m Friday! Come-on over Saturday and we’ll have a sundae!”
Enjoy your weekend.
Mark