Time to go shopping?
I apologize if the above chart seems a bit busy. The takeaway is that the Canadian market is currently valued about 15% below for average trailing earnings multiple and 22% below average forward earnings multiple. If earnings stay the same or grow (which is expectation), this seems a good place to be.
The U.S. market is more or less in line with the averages. Earnings have come out and been actually somewhat decent for the most part. You wouldn’t know it from the recent market action, however.
I won’t share the International chart - as it gets to be a lot of charts at some point. Note however that International is currently 30% below 10 year trailing average. That’s pricing in some pretty dismal news already. Global equities remain under pressure. Investors are grappling with a host of headwinds that are beginning to challenge the economic and earnings growth outlook. More recently, investors have been digesting the results from a number of consumer companies that suggest the operating environment has become more demanding.
What’s Happening in Retail?
I should start by saying that I like Costco and I like Home Depot but we don’t currently own these because valuations got a bit stretched starting in March 2020. Over the past week, a number of “big box” U.S. retailers reported quarterly earnings reports. While results varied from one to the next, there were some distinct takeaways. Reassuringly, consumer demand remains reasonably healthy, and some companies largely reiterated their revenue forecasts. However, some acknowledged a notable shift in demand from larger household and durable goods (like furniture, appliances, home improvement items) towards staples like food. You have to buy food…you don’t have to buy a couch.
It’s worth noting that some kind of change in demand mix has been anticipated. Investors have been expecting demand for goods, which grew tremendously during the pandemic, to decline to more normal levels, while demand for services was expected to return in a meaningful way as the travel and hospitality sectors reopened. Let’s refer to this as spending money on experiences vs things. This move appears to be underway. The retail industry results suggest some consumers may be starting to prioritize food and other necessities, at the expense of more discretionary items, given price inflation and higher borrowing rates.
The other important, albeit less surprising, takeaway from recent results was with respect to costs. They continue to rise. This reflects a combination of supply chain challenges and overall inflationary pressures. Companies have kept elevated inventories because of concerns over the global supply chain. Meanwhile, freight, logistics, and labour expenses have been running higher than planned, which is consistent with issues noted across other industries.
Given this, margins have started to come under pressure. Margins are a measure of profitability as they measure the difference between revenue and costs. Until recently, companies had proven to be quite resilient at navigating through a challenging supply and cost environment. But, that appears to be starting to change, at least within the retailing industry. Understandably, we expect investors to begin to question whether other industries will inevitably start to see similar challenges in the months to come.
It’s fair to say economic and earnings growth are facing some headwinds. It’s not necessarily abnormal, as economic cycles usually come and go. The question remains whether the slowdown that is underway will turn into something more serious. On that front, we continue to monitor our indicators for the U.S. economy in particular. It never feels like it at the time, however, historically these periods of volatility present opportunities. Opportunities that we are prepared to take advantage of.
I’ll leave you with this before the May long weekend:
Should you have any questions, please feel free to reach out.
Enjoy your long weekend,
J. Todd Kennedy, CIM, FCSI
Senior Portfolio Manager
613-566-4582