To my clients:
Brenda is away for the next two weeks for a well-deserved holiday break. I will be working. However, given the season, I don’t intend to write a weekly update for the next two weeks unless circumstances warrant. Next scheduled update January 5th, 2024!
It was an up week for North American stock markets. Necessarily the update is being posted an hor early today, but week to date gains so far see the Canadian TSX up 1.0% (with Canadian dividend paying stocks up significantly more than this... see below for more); the U.S. Dow Jones Index up 2.6%; and the U.S. S&P 500 up 2.3%.
Well, it’s unofficially official – the U.S. Fed has finished its rate hiking cycle. While the door was left open to further increases in rates if – and only if – circumstances warrant, the greater takeaway was, as stated by Fed Chairman Jerome Powell, that initial Fed conversations have now begun about when to CUT rates. Further, the “dot plot” expectations of Fed officials show no more anticipated increases in rates, but instead now anticipate THREE cuts before year-end 2024. Markets surged on the news.
Internally here at Dominion Securities, our strategists are now debating whether it will be Canada or the U.S. to pull the trigger on the first rate cut. Although Canada did not raise rates this cycle as far as did the U.S., it’s also true that Canada has a much more pressing problem with respect to the debt servicing costs of consumers (think mostly of mortgage rates on this front) and, further, Canada’s overall economy is struggling more than the U.S. at this juncture (having recently just recorded a full quarter of negative growth). It’s a close call as to which country will be first, but the broader message is that Canada too is sure to be cutting rates in 2024.
And looming rate cuts are a boon for the dividend-centric component of client portfolios. As I’ve often conveyed to clients, I diversify equity (i.e. stock) portfolios for clients not just geographically, but also by style. More specifically, I include both a growth component in client portfolios, but also good quality dividend-paying stocks. The growth component (among others, think stocks like Amazon, Google and Microsoft) has carried the load in generating client returns in 2023, while the dividend payers (think Canadian banks, telcos and utilities) have significantly lagged. For those clients who have requested specialized mandates focusing more heavily on the income generation offered by dividend-paying stocks, this sharp divide in performance between growth and dividend-payers has led to understandable consternation and many a client question to myself. The reality is that when interest rates are high and rising, the appeal and demand for dividend-paying stocks is reduced. BUT, when rates are expected to decline, dividend-payers become proportionately more attractive. Dividend paying stocks are beginning to anticipate these looming rate cuts and there has been a nice year-end boost to the value of dividend stocks that I’m sure is welcomed by clients. I’d expect strength in dividend stocks to be a theme that continues in 2024.
Lastly, there was a portfolio adjustment made this past Monday as I sold Nike which had only recently been added to client portfolios on September 19th. However, Nike rapidly achieved our analyst target price and a nice 25.6% gain was achieved in only 7 weeks. I don’t normally hold positions for such short periods, but when stock prices achieve our analyst targets I always use this as an opportunity to at least revisit the thesis of ownership. In this case the short-term gain was too much too pass up. Proceeds have been redistributed into U.S. railroad Union Pacific. Our analyst target is $282/share, some 22% above the client purchase price 231.60/share. Attractively, Union Pacific also pays a 2.2% dividend, nearly twice the dividend that Nike paid (by the way, Union Pacific is already up 4%!).
That’s it for this week and for 2023. All the best, and Happy Holidays to all!
Nick
Nick Scholte, CIM, FCSI
Senior Portfolio Manager
Scholte Wealth Management
RBC Dominion Securities Inc. │ Tel: 604.257.7569 │ Fax: 604.235.9950
3200-1055 West Georgia │ Vancouver, BC │ V6E 3P3
Toll Free: 1.844.665.9900 │Email: nick.scholte@rbc.com
Visit Our Website: www.nickscholte.ca
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