On Friday, the S&P 500 was down 0.6% and Toronto was down 0.4%.
Costco was down a hefty 5.6% to $219. This was after Costco announced earnings and announced that it had identified some control issues regarding the accuracy of its financial reports. This is not an issue that is easy for the market to understand. So far, it appears that certain controls are not as strong as they should be but it has not led to any actual problems in Costco’s financial reports. Costco continued to report very strong growth. However it trades at a high multiple to earnings (32 times trialing earnings) which leaves it vulnerable to a price decline if there is any reason for concern about earnings and growth. History suggests that buying Costco on dips works out well. But it is still expensive. I’d be more interested in buying gradually if it goes below $200. But even if it got down to $171 it would still be trading at 25 times earnings.
Higher interest rates are definitely pushing stock prices down. All else equal, higher interest rates pull stock and bond prices down as basically a gravitational force.
The 5 year Bank of Canada rate has recently increased rather sharply reaching 2.48% on Friday. It’s hard to imagine, but that rate got as low as about 0.6% in early 2016. Institutions were then willing to tie up money for five full years at a paltry 0.6%!
A popular opinion was that governments would not let rates rise because they and other borrowers could not afford higher rates. That was faulty logic because lenders / savers/ investors also ultimately have a say in what level of interest will entice them to lend. (Try telling your bank not to raise your interest rate on your debt because you can’t afford it!)
It may be that higher interest rates at first did not have much impact on stock prices since bond yield yields were too low to offer any kind of alternative to stocks. But gradually rates have crept up to the point where bonds, especially considering risk, can start to offer competition to stocks.
Higher interest rates can affect all stocks but usually it is higher dividend stocks that get “hit” first and hardest.
You might think that at least rate reset preferred shares, especially those at a discount like the older Enbridge issues would rise. Actually since market rates are up, they mostly do well to at least not decline (like perpetual preferred shares do) with higher rates. In addition rate resets near $25 can’t really go up much because the company can buy them back at $25 on the five year anniversaries of issue. Discounted rate reset shares are more likely to rise if the balance sheet of the issuer improves.
Canada reported strong employment growth in September. Recall that July was strong and then August was very weak and now September is strong. Again, I think this says more about the inaccuracy of the data than the true situation. However, looking at the unemployment rate at 5.9% it is clear that the Canadian economy is relatively strong. At around 6%, the unemployment rate measured in a consistent fashion is at the low end of the range over the past 50 years or so. One can argue with the accuracy of the 5.9% but the data over decades is clear that this is a relatively low unemployment rate.
In the U.S. the unemployment rate is a stunningly low 3.7%. I understand that a difference in how it is measured might mean that using the Canadian method that would be closer to 4.7%. In any case it is very low. Trump’s policies may eventually cause lots of problems but there is really no argument that under Trump the economy is doing exceptionally well.
With a strong economy, the strongest companies with attractive profitability and growth will reward investors eventually, if not necessarily in the near term.
With West Texas oil at U.S. $74 and in spite of various discounts on various grades of Canadian oil, the Canadian oil producers as a sector should be growing both activity and profits.