The Week in Review

Weekly Market Recap: U.S. and Canada

It was a relatively quiet week, with the U.S. stock markets closed on Wednesday in commemoration of the Juneteenth holiday. So, over only four days of trading, the Dow Jones led the way gaining 1.45%, outpacing the Nasdaq and S&P 500. The TSX, which did enjoy a full five-day week, ended just into negative territory.

S&P 500 Returns | Week At-a-Glance

TSX Returns | Week At-a-Glance

COMMENTARY

It was also a relatively quiet week for economic news, with limited releases in both the U.S. and Canada, but I will cover off a few highlights of what we did learn.

🏦 Canada Housing Starts

Housing starts in Canada jumped a respectable 10% in May, hitting 264,506 units, the highest since October 2023 and exceeding expectations of 247,000 units.

The Canada Mortgage and Housing Corporation reported significant increases in both urban and rural housing starts, with Ontario and Quebec showing the most substantial gains, while British Columbia experienced a notable decline.

A few Provincial Highlights:

• Ontario: +17.7%

• Quebec: +67.4%

• British Columbia: -15.9%

📈 Retail Sales North & South of the Border

• Retail sales here at home are projected to have dropped by 0.6% in May 2024 compared to April, marking the steepest decline since March 2023. This decrease would offset the 0.7% gain seen in April, which was the largest in a year.

  

  Canada Retail Sales MoM | April 2024

April Highlights:

• Overall sales increased by 0.7%.

• Gas station purchases jumped by 4.5%, with higher prices driving a 1.7% increase in sold volumes.

• Core retail sales rose by 1.4%, led by:

  • Grocery retailers: +1.9%

  • Sporting goods, hobby, and musical instruments stores: +3.4%

• In the U.S., retail sales edged up by 0.1% month-over-month in May, following a revised 0.2% fall in April.

All things economic pick up a bit next week, with Canadian Inflation numbers due out Tuesday, and the Core PCE Priced Index Month-over-Month release in the U.S.

THIS WEEK’S POLL QUESTION
(Results in Next Week’s Newsletter)

Most Overbought Stocks

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.

Most Oversold Stocks

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.

TAXATION
'Deeply Unfair': CFIB Pushes Against Capital Gains Tax Hike

I was chatting with a some former clients this week, and they’ve been thinking of everything they can do to take steps to mitigate the damage when the new capital gains tax rules that take effect this coming week. A question they asked me was whether this is another example of a tax ‘scare’ that the government is going to backtrack on at the last minute, a pattern we’ve seen recently. I don’t know, of course, but you have to assume the new measures will take affect and plan accordingly.

But, on the eve of the capital gains tax inclusion rate set to rise, the Canadian Federation of Independent Business (CFIB) is urging the federal government to reconsider the change, and it warns that it could severely impact thousands of small businesses and their owners.

📈 Capital Gains Tax Impact

The CFIB emphasizes that despite claims the rate would only impact the wealthiest Canadians, over half of small business owners report it will affect the sale of their businesses and private investments.

• The new inclusion rate of 66.7% will take effect on June 25.

🔍 Survey Findings

The CFIB's survey highlights widespread concern among business owners about the new tax rate's implications on their financial planning and investments. Here’s what it found:

• 55% of small business owners say the rate will affect the eventual sale of their business.

• 45% of owners indicate their private investments would be impacted.

• 41% state it would affect investments within their businesses.

🏢 CFIB's Position

• Over 300,000 Canadian corporations reported net capital gains in 2022.

• CFIB President Dan Kelly argues the increase is unfairly punitive, especially for businesses with sporadic capital gains. He stresses the long-term impact of the hike, arguing it needs to be measured over an extended period rather than any single year.

📅 Short Timeline and Legislative Criticism

The CFIB's letter to Finance Minister Chrystia Freeland emphasizes the confusion and pressure caused by the abrupt announcement.

• The change was announced only two weeks prior, leaving little time for adjustment.

• The CFIB calls the situation "deeply unfair" and criticizes the short timeline.

💼 Support for Certain Aspects

• The CFIB supports increasing the lifetime capital gains exemption from $1 million to $1.25 million.

• However, 60% of CFIB members oppose the legislation without critical amendments.

The CFIB argues that most small business owners are part of the middle class and will be significantly impacted by the inclusion rate increase, affecting both them and their employees.

The online survey, conducted from May 2-17, 2024, included 2,335 respondents, with a margin of error of +/- 2.0%, 19 times out of 20

THE MARKETS
Is it Time for Tech Stocks to Take a Breather?

Are we seeing signs that the impressive rise we’ve seen in U.S. big tech stocks might be hitting a pause and creating opportunities for other market segments that have lagged this year?

Yes, the S&P 500 is up almost 15% so far in 2024, but as we all know this growth has been heavily concentrated in tech and communications sectors.

Let’s break this down a bit:

🚀 The Tech Surge

Investors are excited about tech stocks, and rightly so. We’ve seen strong earnings almost across the board, and when you factor in the buzz around artificial intelligence, the feel-good factor makes sense.

But, in some camps, this rapid growth has sparked concerns of an overheated market. If we look back over the past year:

• Tech and communications sectors are up 34% and 33%, respectively.

• Nvidia has soared 155% year-to-date on the continued strong news of its earnings and the AI excitement.

🛑 Concerns of Overheating

Michael Purves is the CEO of Tallbacken Capital Advisors, and he warns about the risk of being the last to exit during a rapid rise.

He is concerned that the excitement around tech stocks has gotten too far ahead of itself, and sees a possible rotation out of the sector.

📉 Signs of a Cool Down

Indeed, there are signs that big tech might be cooling off, which is raising red flags for some investors.

• Nvidia's shares are down 10% from their recent peak.

• The S&P 500’s rally has been driven by just five companies: Nvidia, Microsoft, Meta Platforms, Alphabet, and Amazon.

🔄 Potential Market Rotation

If we do see the continuation of a slide in the big tech names, we could also see a shift that could benefit other areas of the market, presenting opportunities in small caps and value stocks.

📈 What does History Tell Us?

Obviously, while history won’t repeat itself exactly it can give us some guidance, and despite potential pullbacks, tech and growth stocks have a history of bouncing back quickly, and investors are often keen to jump back in after slight dips.

It’s impossible to predict exactly when a more significant correction will occur; all we know for sure is that it will happen at some point. In the meantime, following your (well thought out) gameplan should allow you to capitalize on the nice gains the markets have been offering, while at the same time structuring your portfolio such that you don’t get crushed when that inevitable turn comes.

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THE BANK OF CANADA
The Bank of Canada's Economic Juggling Act

I don’t envy Tiff Macklem and his team over at The Bank of Canada these days, as they are in a tight spot, trying to balance inflation control without tipping the economy into a recession. A recent report shows some success: inflation is easing, economic growth is back, and wages are recovering.

However, several looming risks could derail this progress.

🏠 Mortgage Renewals

Mortgage renewals pose a significant threat. The large number of households renewing mortgages at higher rates in 2025 could stifle economic activity, making it a critical watch point for the Bank’s July rate announcement.

⚖️ Interest Rate Cuts

Interest rate cuts are a double-edged sword. While they could provide relief, they might also reignite an overheated housing market, compounded by Canada's rapid population growth.

📉 Economic Timing Challenges

• Rate cuts seem inevitable, but the timing of the cuts is difficult.

• Markets anticipate multiple rate cuts this year, possibly dropping the policy rate to 4% by the end of 2024.

Economist Benjamin Reitzes reminds us of the difficulty of perfect timing in rate adjustments.

💰 Household Savings

• Household savings have increased, which may reflect consumer caution.

• The Bank of Canada also remains cautious, monitoring savings trends as an economic indicator.

Again, as we move further into the uncertain future, the Bank of Canada will need to show careful navigation of economic challenges, and manage accordingly. Not sure I’d want to tackle that challenge right now.

INVESTING
Longest Calm Streak for Stocks Since Financial Crisis

Can’t help but wonder whether we’re seeing the calm before the storm.

Wall Street has now gone 377 days without a 2% sell-off, the longest stretch since the financial crisis. We’re now well into an abnormally smooth ride.

This calmness is despite the fact that much of the market gains have been led by just a handful of companies, and focused primarily on optimism surrounding AI.

What’s been Going On:

🌟 Market Performance

• The S&P 500 has climbed over 14% this year.

• In addition to the AI excitement, optimism has also been driven by signs that inflation is edging closer to the Fed's 2% target.

Adam Turnquist, chief technical strategist at LPL Financial, highlights the positive market sentiment:

📉 Volatility Index (VIX)

The CBOE Volatility Index (VIX) recently hit its lowest level since November 2020. This suggests that investors and institutions remain comfortable with the current market outlook.

🕰 Historical Volatility Warnings

So investors are positive and the VIX says everything is ok. Should we just carry on?

Well, my take is that despite the current calm, if we understand history, we know that volatility can return at a moment’s notice and investors should stay prepared for potential turbulence ahead.

• In 2017, the S&P 500 saw minimal volatility, but the following year saw significant spikes.

• History warns that low volatility periods don’t last indefinitely.

As equity investors, Wall Street's record-breaking streak of low volatility has been a fun ride. We’ve seen confidence in tech stocks and positive economic indicators. Feels good. But, this peaceful period could be just a calm before the storm, so to all, remain vigilant.

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