On Wednesday, the FED raised its target overnight inter-bank lending rate by 0.25%. This was fully expected. They also indicated they expected three more rate hikes next year instead of the two they previously “saw”. Apparently they see increased risks of inflation.
On this news, the S&P 500 fell 0.8% and Toronto fell 1.2%.
I don’t think this decline is any great surprise. Markets had already “priced in” the rate increase which was considered a virtual certainty. The news that interest rates might go up even faster than expected caused investors to re-think things and no doubt some decided to take profits and so prices fell in order to induce buyers to step in.
Toll Brothers fell 3.0% to $31.20 on fears that the U.S. housing market will cool due to higher interest rates. Maybe so. But I look at the fact that houses are still quite affordable in most of the U.S. and that there should be pent up demand after about eight years where the number of new homes built was far below the historical trend. I also look at the fact that Toll Brothers is selling at a relatively modest 27% premium to book value. We shall see how the future unfolds but I remain comfortable owning this stock. No one has ever beaten the market by always agreeing with consensus opinion. (The best way to invest based on consensus opinion would be to hold a index fund like the S&P 500). On the other hand, it is also true that a passive investors who owns the index never trails the index (other than by the amount of fees paid to hold the index).
Given the rise in interest rates and specifically the rise in the five year Bank of Canada rate we should see some recovery in the rate reset preferred shares. Their projected reset interest rates would be higher now. That, all else equal would push up the price of these shares. However, it is possible that the market yield on new rate resets will also rise and that would offset the expected gain.
In my own trading I sold about 10% of my Boston Pizza units today.
Statistics Canada released a report on new car sales in October. For Alberta the October total was down 1% from the prior year. That appears to be a weak number as September has only been down 10%. This report is probably a bit worse than expected for AutoCanada. I do recall however that October was unseasonably cold in Alberta while November was warmer than average, so perhaps that has an impact (and some sales might have migrated to November). I am inclined to add to my position in AutoCanada particularly on dips.