The Week in Review

I’d forgive you if you took a look at our first chart today and thought I’d forgotten to update it, because it looks suspiciously similar to last week’s. The major markets all started the week with declines, and then on positive news, took off. At the end of the week, the four indices that we track all ended up with gains, although given all the hype we saw following Nvidia’s earnings report, it kind of felt like the gains should be stronger.

This week the equity rally was driven by robust earnings reports, particularly in the technology sector which we saw showcased by NVIDIA's strong performance, taking the now-giant tech company past the $2T level in market cap.

Economic data for the week showed resilience in the labor market, with U.S. jobless claims coming in below expectations, indicating continued tightness. Initial jobless claims came in at 201,000, notably below the estimate of 218,000.

Also, early estimates of manufacturing activity pointed to an uptick, although services sector growth moderated slightly.

However, before we loosen our seat belts too much, some concerns remain:

• Concentration in the tech sector: The recent rally has been heavily led by technology companies, particularly those involved in artificial intelligence. This raises concerns about overreliance on a specific sector and the potential for a bubble if the trend doesn't continue.

• Full valuations: While earnings are strong, some analysts consider stock prices to be somewhat expensive compared to historical averages. This could limit further significant growth in the near future.

• Fed's policy uncertainty: The Fed's future actions regarding inflation and interest rates remain uncertain. Their ability to effectively manage both factors will be crucial for continued market stability.

A quick comment on last week’s poll question. I was very surprised at how overwhelmingly our readers leaned towards the first U.S. Fed rate cut coming AFTER its June meeting. You can see the results below. I don’t necessarily disagree with this sentiment, I was just surprised by how one-sided the results were.

I’ll wrap up this week’s commentary with this. While the concerns I just noted do exist, generally speaking, analysts remain optimistic about the market's prospects. We’re seeing very positive correlations between strong earnings and strong stock prices. It’s true that even the best markets can (and will) experience temporary pullbacks, but overall the underlying economic fundamentals and earnings support a positive outlook for continued growth.

In this Edition of The Pulse:

• Canadian Inflation Back in Target Range

• Capital One Buys Discover

• Canadian Grocery Price Growth Slows

• Dollarama Settles Class-Action Lawsuit

• Ford Cuts Prices on Mach E Electric Vehicles

• Steve Schwarzman’s 53% Pay Cut

• Market Movers | Winners & Losers

• Other News This Week

THIS WEEK’S POLL QUESTION

RESULTS IN NEXT WEEK’S NEWSLETTER

LAST WEEK’S POLL RESULTS

Will the US Fed make its first rate cut on or before its June 12th meeting, or sometime after?

S&P 500 Weekly Overview

S&P TSX Weekly Overview

Overbought

The Relative Strength Indicator (RSI) can provide a signal that suggest a stock is either overbought or oversold. A stock that has an RSI over 70 is considered to be in “overbought” territory. This might suggest that the stock is due for a pullback, however it is not a recommendation to sell. Always perform your own due diligence.

Oversold

A stock that is trading with an RSI below 30 is considered to be in “oversold” territory. This might suggest that the stock is due for a recovery, however it is not a recommendation to buy. Always perform your own due diligence.

THE ECONOMY
Canada Inflation Back In Target Range

Last week we reviewed the latest U.S. inflation numbers, and this week it’s Canada’s turn.

Statistics Canada reported that our annual inflation rate dropped to 2.9% in January, coming in below expectations and marking the first time since June last year that the consumer price index has dipped below 3%. Notably, analysts had predicted a decrease to 3.3%, so this report was very positive.

Month-over-month, the CPI remained unchanged, again defying forecasts of a 0.4% increase.

So the question is: What affect will this have on the Bank of Canada’s next interest rate decision? Will this lower inflation report give the bank a reason to start cutting earlier than expected?

One of the first things we can look at are the core measures of underlying inflation the Bank looks at. In these two critical metrics, we also saw declines last month, with CPI-median at 3.3% and CPI-trim at 3.4%, both reaching their lowest levels in over a year.

The Bank has maintained that individual data points don’t dictate its policy decisions, but the cooling inflation could move the discussions about a potential rate cut forward. Earlier, the bank had projected headline inflation to hover around 3% in the first half of 2024 before easing to 2.5% by year-end.

And, even though the Bank kept its key overnight rate at 5% in January, it also signaled a shift in focus towards potential rate cuts. Nothing imminent, nothing guaranteed, but it appears we’re moving in that direction.

In January, lower gasoline prices were the primary contributor to the headline deceleration, dropping 4% annually, while store-bought food prices rose at the slowest pace since August 2021, further easing inflationary pressures.

The Bank of Canada's next rate announcement comes in March, and of course that will be closely watched.  Market expectations are leaning towards maintaining the key policy rate at its current 22-year high of 5%.

FINANCIALS
Capital One Buys Discover

In a monumental move, Capital One announced early this week that it will be acquiring Discover Financial Services in a deal valued at $35.3 billion, merging two massive players in the American credit card industry.

Capital One, which has assets worth $ 479 billion, is among the nation's largest banks, primarily issuing credit cards through Visa and Mastercard networks.

By acquiring Discover, it gains access to a vast credit card network of 305 million cardholders, which it will add to  its existing customer base of over 100 million.

Of course there will be concerns among consumer advocates regarding potential antitrust implications. For one, Jesse Van Tol, CEO of the National Community Reinvestment Coalition, expressed his skepticism.

While the deal awaits regulatory approval, it signals a significant shift in the financial landscape, potentially consolidating lending power within fewer entities. The deal, if it’s cleared by the regulators, is expected to close later this year or early 2025.

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INFLATION
Grocery Price Growth Slows

Growth in the price of groceries has slowed in line with a drop in headline inflation rates, but the battle between Ottawa and major grocers hasn’t gone away. According to Statistics Canada, the year-over-year growth in prices for food purchased from stores decreased to 3.4 per cent in January from 4.7 per cent in December.

But, Sylvain Charlebois, director of the Agri-Food Analytics Lab at Dalhousie University, warns that the conflict between lawmakers and Canadian grocers shows no signs of slowing down.

He acknowledges the recent alleviation of supply chain pressures has led to more manageable operations and predictable margins for food companies, and he notes that consumers are benefiting from these improvements.  He cited various categories such as meat, dairy, and fresh fruit experiencing subdued price growth.

But as I mentioned, despite the encouraging signs in the CPI release, the standoff between Ottawa and grocers over high prices persists.

Charlebois highlights the growing impatience among MPs, emphasizing their push for major grocers like Loblaw and Walmart to adopt a voluntary code of conduct. So far, both companies have expressed reluctance, citing concerns that it could lead to increased prices. Charlebois disagrees and says that despite what these two grocery giants believe, he says a code of conduct would help to reduce prices.

Amidst the regulatory disputes, the behaviour of the actual consumer is also shaping the grocery retail landscape. There’s a growing trend of consumers seeking savings, which has led to increased store visits and expanded shopping habits.

Charlebois says that "People are going to the grocery store way more often. The frequency rate for grocery businesses has gone up 32 per cent in the last six years."

So, at the end of the day, while the recent data suggests a moderation in grocery price growth, underlying tensions between regulators and grocers persist.

The evolving dynamics of consumer behavior and regulatory interventions continue to shape the landscape of Canada's grocery retail sector, and this underscores the need for collaborative efforts to address challenges and ensure a fair and sustainable marketplace for all stakeholders.

LEGAL
Dollarama Settles Class-Action

Dollarama, which has stores everywhere across Canada's retail landscape, has reached a proposed $2.5 million settlement in a class-action lawsuit over pricing practices.

The lawsuit, which is spearheaded by the Montreal law firm of LPC Avocats Inc., revolves around allegations regarding Dollarama's pricing practices for products subject to an Environmental Handling Fee (EHF). The plaintiff alleged that the retailer failed to properly display prices and charged amounts higher than permitted by law.

Richard Powers, an associate professor at the University of Toronto's Rotman School of Management, noted that while the settlement amount might be a fraction of Dollarama's revenue, it underscores the importance of addressing reputational concerns.

Immediately after the lawsuit was filed, Dollarama promptly modified its pricing practices nationwide, which reflects a commitment to compliance with Quebec and consumer protection legislation. This legislation mandates the display of the full price of a product to ensure transparency for consumers, a crucial aspect in fostering trust and adherence to legal standards.

So, the big question is how rich are you going to be when the suit is settled?

Eligible customers who purchased products subject to an EHF from Dollarama during specific periods may claim a gift card with a maximum value of $15. Customers who made a purchase between December 11, 2019 and July 4, 2023 are eligible, while those in any other part of Canada are eligible if they made a purchase between May 29, 2021 and July 4, 2023. The deadline for submitting email addresses for claimants is April 5, 2024, with no proof of purchase required.

However, as Zukran cautioned, a high volume of claims may potentially reduce the gift card amount per person.

The class action also encompasses other retailers such as Shoppers Drug Mart and Pharmaprix.  Neither of these companies have filed a settlement to date.

AUTOMOTIVE
Ford Slashes Mach E Prices

Ford announced on Tuesday this week that it has significantly reduced prices on its Mustang Mach-E electric SUV models, by as much as $8,100, following a notable decline in sales throughout January.

The automaker, ranked No. 2 in the U.S., has adjusted the pricing of its lowest-priced 2023 model year Mustang Mach-E variant to $39,895, down from $42,995 previously. Similarly, the higher-end Mach-E GT will see a reduction of approximately $7,600, now priced at $52,395. And on top of that, other versions, including the extended-range premium variant, will undergo a price decrease of $8,100, now priced at $48,895.

This decision comes in response to a 51 per cent decline in Mach-E sales in the U.S. during January, with only 1,295 units sold.

The price cuts coincide with the loss of eligibility for a $3,750 tax credit for the Mach-E since January 1, following new U.S. Treasury Department battery sourcing requirements aimed at diversifying the electric vehicle supply chain away from China.

Ford and other traditional automakers have slowed their electric vehicle (EV) push, opting instead to concentrate on higher-margin hybrid and gas-powered models. This strategic shift was front and center when Ford announced in January that it would be reducing production of its F-150 Lightning pickup truck, scaling back production starting April 1.

FROM THE ‘NICE IF YOU CAN GET IT’ FILE
How to Survive a 53% Pay Cut

Hands up if you feel bad for Steve Schwarzman, the CEO of Blackstone Inc.

In 2023, he took a 53% pay cut from his base in 2022, and let’s face it, nobody likes a pay cut like that!

I scoured the internet and tried to find a photo of Mr. Schwarzman looking sad, because surely he must be upset after taking such a pay cut, but I couldn’t find one. I settled on the one above and I’d say he looks… let’s call it ‘comfortable’.

Ok, before you look up his GoFundMe page and send a few bucks his way, I guess you need to know that even after the decrease, he was still paid US$896.7 million in base pay and dividends last year, so I guess he’ll be ok.

Schwarzman’s nearly 232 million Blackstone shares paid him $777 million in dividends for the year, and his $119.8 million in base pay rounded out his package.

Not much more I can add to this story. 😅 

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