On Wednesday, the Federal Reserve decided to hike interest rates for the ninth time in the past year. While this was widely expected, some thought the Fed might leave rates unchanged at this meeting. But the Fed did what was expected and gave us another 0.25% rate hike. The Fed also signaled to investors that it’s close to the end of its rate hikes. This puts the Fed in a bind. If it continues to raise rates, then it’s telling investors that inflation is still a problem, and higher rates will eventually hurt the economy. But if the Fed forgoes rate hikes, that might signal to investors that the Fed thinks the economy is in bad shape. For several weeks the markets have been very volatile. The stock market has had a hard time gaining momentum in either direction. Every up move gets quickly pushed back, and every down move peters out. Consider that in the last 91 sessions, the S&P 500 has closed within 5% of 4,000 90 times. RBC’s Chief US Economist, Tom Porcelli, is not convinced they will hike or should hike one more time. In fact, Tom would say he thinks they should be finished the hiking cycle with this as the final raise. So, if this is indeed the final US interest rate hike, where to from here? Our strategy team’s analysis shows that stocks are volatile into the final Fed rate hikes, but are largely POSITIVE after the final hike. In fact, the median S&P 500 return in the six months following the final hike is +5.9%. Embrace inaction. Stay the course.
Should you have any questions or concerns, please feel free to reach out.
Portfolio Notes
(+) indicates a positive development, (-) indicates negative, and (~) indicates neutral
(+) Accenture (ACN-US) reported earnings this week. Non-GAAP EPS of $2.69 beat by $0.19, revenue of $15.81B beat by $220M. Accenture also announced substantial layoffs that will be implemented over the next year and a half. Although not great news for employees, the market was happy with the announcement. Owned in US Portfolio.
(++) Traeger (COOK-US) surged over 20% after a stronger than expected Q4 earnings report. The make of pellet grills notched a $0.07 per share loss for the quarter, less than half as wide as analysts anticipated. Meanwhile, $138.13M in revenue was $19.59M above the Street consensus. “We were pleased to see the consumer respond favorably to our efforts to drive demand during the holiday period,” CEO Jeremy Andrus said. “Moreover, we made demonstrable progress on our key near-term priorities in the quarter, including driving a material improvement in channel inventories and realizing the benefits of our cost savings actions.” Owned in Opportunity Portfolio.
(~) Constellation Software (CSU-T) The spin-out of Lumine Group (LMN) starts trading on March 24. Constellation’s move to spinout sub-operating groups is a natural evolution of Constellation’s decentralized M&A model and significantly improves long-term sustainability. You will see Lumine shares appear in your accounts. CSU shareholders received 3 Lumine shares per 1 CSU. We believe CSU remains a core position, but Lumine will likely be sold in the coming days or weeks. Owned in Core Portfolio.
(+) CGI Inc. (GIB.A-T) RBCCM hosted the CEO of CGI to discuss topics like organic growth and targets. They also spoke about CGI’s model, its long-term target of double-digit annual EPS growth and a doubling of the company over the next 5-7 years. CGI has been averaging 8% organic growth of the past 12 months, well above its 10-year average of 1%, and given the companies new investments and successful initiatives and synergies, RBCCM believes that organic growth can be sustained in the mid-to-high single digits going forward. CGI remains on the hunt for M&A, as acquisitions remains a priority and are the next potential catalyst to get this stock moving, in our view. We continue to view CGI has a well-positioned defensive consolidator, with a high mix of recurring revenue, large enterprise customer base, and high FCF conversion. CGI is a constituent of the Core ESG+ Portfolio.
(+) NVIDIA Corp (NVDA-US) hosted its 2023 GTC keynote highlighting the Generative AI and industrial digitalization opportunities which are accelerating demand for Nvidia’s platforms and software solutions. The event highlighted Nvidia’s pole position in AI/accelerated compute, and as the one-stop solution provider with in hardware portfolio, software/managed cloud services, hardware systems and full-stack ecosystem for training/deploying complex models. Owned in Opportunity Portfolio.
Weekend Reading
Psychological Paths of Least Resistance Being honest about the odds that your opinions and forecasts will actually come true can be so discouraging and uncomfortable that the warm blanket of denial and overoptimism becomes home to most people’s beliefs. MORGAN HOUSEL
Knock-on effects from SVB's collapse The wider implications for the U.S. economy and equity market are discussed by Kelly Bogdanova, Co-chair of the Global Portfolio Advisory Committee, and Tylar Lunke, Senior Manager of the Portfolio Advisory Group’s Managed Portfolio Strategies team. RBC
Study Reveals the Most Annoying Corporate Jargon Circle back; Work hard, play hard; Boots on the ground; Let’s table this; Synergy; Put a pin in it; Get ducks in a row; Low-hanging fruit; Reinvent the wheel; Throw it up and see what sticks PREPLY
What is generative AI? Generative artificial intelligence (AI) describes algorithms (such as ChatGPT) that can be used to create new content, including audio, code, images, text, simulations, and videos. Recent new breakthroughs in the field have the potential to drastically change the way we approach content creation. MCKINSEY
If only we could have known beforehand One has to wonder if there was a way to identify the weakness in SVB beforehand or the deception the banks pulled on investors. Turns out there may have been. KLEMENT
What’s The Cheapest Grocery Store In Canada? MONEY GENIUS
