The Week in Review
The major North American stock indexes all continued the impressive rally we’ve seen over the past seven weeks, buoyed by the prospects of interest rate cuts starting in early 2024.
The Dow Jones hit a new all-time high during the week, surpassing previous highs set back in January 2022, and the Nasdaq, Dow Jones and S&P 500 have now recorded their seventh consecutive week of gains, the longest since 2017.
The US Federal Reserve held rates for the third consecutive meeting, leaving the range at 5.25% to 5.50%. Indications are now showing that the Fed is preparing to shift to a more accommodative posture in 2024, suggesting three rate cuts during the year. The median projection is for a 75 basis points cuts coming in 2024.
The bond market rallied during the week, with the yield on the 10-year US Treasury bond falling below 4.00% Thursday.
Over in Europe, the ECB held its key deposit rate at 4.0%, and cut inflation and growth forecasts for the balance of 2023 and into 2024. The Bank of England also held steady, keeping its benchmark interest rate at 5.25%. Along with the announcement, however, was the reiteration by the policymakers that they remain willing to increase rates again if evidence of persistent inflation reemerge.
North American Markets
5-Day Returns | December 11 - 15, 2023
S&P 500 Weekly Overview
Week ending 12/15/23 | Market Cap >$100B
S&P TSX Weekly Overview
Week ending 12/15/23 | Market Cap >$5B
Risks & Opportunities
With Peter Lynch’s quote in mind, do you keep track of how the stocks you own have performed recently? Do you know if a company in your portfolio has entered overbought territory, or maybe one that’s been on your radar is oversold and ripe for the picking? Let’s look at this week’s most overbought and oversold 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.
Week ending 12/15/23 | Most Overbought Stocks, based on 14-Day RSI
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.
Week ending 12/15/23 | Most Oversold Stocks, based on 14-Day RSI
HOUSING & THE ECONOMY
Mortgages & Consumer Spending
A new report just out from TD Economics points to the fact that Canadians renewing mortgages at today's higher rates is affecting their spending habits.
The report suggests that high household debt is the biggest vulnerability of the Canadian economy, as renewing mortgages at higher rates leads to less disposable income.
Today, total household debt in Canada equals $2.86 trillion, and mortgages are 74% of that debt.
The result is that Canadians are now allocating 15.4% of their income to pay debts, and in a somewhat alarming comparison, Americans peak level of indebtedness just before the global financial crisis in 2007 and 2008, was 13.2%.
The report highlights the differentiation between mortgage holders who are renewing at various times. If you're a person who renewed your mortgage in 2023, you probably now have a mortgage rate of around 5 or 6%. That will be a very different experience than someone who is still locked into a mortgage rate that they set back in 2020.
Obviously, there is a contingent of the public who owns homes and don't have a mortgage. In these cases, spending over the past year increased.
Let’s break it down a bit:
For mortgage holders who reset in 2021, they have pulled back spending 0.9%. For those who reset in 2022, the pullback has been 1.04%. The last contingent in this study, those who reset in 2023 have pulled back 2.4% year over year.
The key takeaway for me of this report is the expectations of what will happen for those who are renewing in 2024. Of this cohort, there has already been a small pullback, 0.5% year over year as a precaution, understanding that expenses will go up when they do reset. It’s expected that as the 2024 group goes through a reset there will be a further spending reduction, putting further downward pressure on overall consumer spending.
The report talks about the impact that this will have on Canada’s economy in 2024. According to the Bank of Canada, 47% of all mortgages will have renewed at higher rates by the end of 2023. By the end of next year, 65% of all mortgages will have renewed. Given that the 2024 cohort looks to set new mortgages at rates roughly 200 basis points higher than they are paying now, the bank is expecting a similar payment shock to this group.
Banks, investment dealers and financial institutions in general have an obligation to report suspicious transactions to the regulator in an effort to combat money laundering.
In its second move against a major Canadian bank, Fintrac (Financial Transactions and Reports Analysis Centre of Canada) imposed a $1.3 million penalty on the Canadian Imperial Bank of Commerce (CIBC) for non-compliance with money laundering and terrorist financing measures.
This follows a $7.4 million fine announced against RBC the prior week.
The penalty against CIBC is attributed to its failure to submit a suspicious transaction report when there were grounds to suspect it was related to money laundering or terrorist activity, as well as failures to report information regarding large money transfers from outside Canada.
CIBC has stated that the administrative matters are related to a relatively small number of transactions, and the bank remains committed to identifying, investigating, and deterring financial crimes.
The latest US inflation reports are mixed, with prices up marginally on a month-over-month basis, but from an annual perspective, the inflation rate slowed.
US Inflation MoM | November 2023
Month over month, consumer prices in the US were up by a marginal 0.1% in November when compared with October. Some of the highlights were the price of shelter up 0.4%, and used cars and trucks rising 1.6%, which breaks a streak of five consecutive monthly decreases.
Food rose 0.2%, compared with 0.3% in October.
US Inflation YoY | November 2023
On an annual basis, the inflation rate came in at 3.1% in November, which is now the lowest level in five months. The rate was 3.2% in October.
Energy costs dropped 5.4% (vs -4.5% in October), with gasoline declining 8.9%, utility (piped) gas service falling 10.4% and fuel oil sinking 24.8%.
Prices increased at slower pace for food (2.9% vs. 3.3%), shelter (6.5% vs. 6.7%)
Prices rose faster for medical care commodities (5% vs 4.7%) and transportation services (10.1% vs. 9.2%).
The federal government has announced there will be a consultation process starting next month with the goal of developing a catalog of preapproved home designs which should help in the effort of solving the current housing crisis.
In an announcement, Housing Minister Shaun Fraser said that this is a reboot of a federal policy from the post second world war era where CMHC worked to develop straightforward blueprints that can be used to help speed up construction. This was used when there were thousands of soldiers returning home from war, which resulted in a housing shortage.
The new program envisions mostly low rise buildings, such as small multiplexes, student housing and seniors’ residences, with the goal of having plans in place so that approvals can be fast-tracked.
The preapproved home designs will be in line with the current national building code and will not require scrutiny from local jurisdictions.
⚖️ Tesla Troubles
There are a couple of stories out this week that aren’t good news for Tesla.
First off, the company is recalling more than 2 million vehicles in the US and 193,000 sold in Canada over lack of safeguards to its Autopilot driver assistance system. The company will be installing new safeguards after the National Highway Traffic Safety Administration said the system posts safety concerns. The NHTSA has been investigating Tesla for more than two years, looking at whether Tesla vehicles go far enough to ensure that drivers pay attention while they're using the Autopilot system while driving.
The company does admit that the software system controls “may not be sufficient to prevent driver misuse” and could increase the risk of a crash.
It’s “really important that driver monitoring systems take into account that humans over-trust technology."
Acting NHTSA Administrator Ann Carlson told Reuters in August
Tesla says that it doesn't agree with the regulators analysis, but nevertheless will deploy an over the air software update that will: “Incorporate additional controls and alerts to those already existing on affected vehicles to further encourage the driver to adhere to their continuous driving responsibility whenever Autosteer is engaged.”
In other Tesla news, a Swedish Court has ruled against the company as it relates to its ongoing labor dispute in which PostNord, owned by the Swedish and Danish states, has stopped delivering license plates to Tesla in consolidation with a Postal Service workers strike.
Also, a transport worker union in Finland, aKT, decided that it would join the sympathy strike against Tesla and it said it would start blocking all Tesla vehicles that are destined to Sweden, starting December 20.
"That means Tesla vehicles or components destined to Swedish markets are not loaded by dockers.”
This new action piles onto the similar decisions made by Swedish, Danish and Norwegian dockworkers. In effect, it means that all cars destined to be shipped to Sweden will be held up.
Last year, Norway was Tesla’s fourth biggest market by number of new car sales and Sweden was its fifth biggest. The Tesla Model Y is the most sold car in Sweden this year.
The jury at a US federal court deliberated just three hours following a four week trial, and came back with a unanimous decision Monday. This was in a lawsuit that was filed three years ago by Epic Games, maker of the popular Fortnite video game, alleging that Google had been abusing its power and shielding its competition. The jury agreed that Google’s Android App Store had implemented anti-competitive barriers that damaged smartphone consumers and software developers.
Now that this phase of the trial is completed, it will be up to the judge to figure out what steps Google has to take to change this illegal behavior in the Play Store. Hearings on the matter are scheduled in the second week of January.
As you might expect, Google is planning to appeal the verdict.
"Android and Google Play provide more choice and openness than any other major mobile platform,"
Wilson White, Google Vice President of Government Affairs and Public Policy
Depending on the judge’s enforcement decisions, Google stands to lose billions of dollars in profits generated from its place store commissions.
Now before you go out and dump your Alphabet shares, it’s important to note that Google’s main source of revenue, digital advertising tied mostly to its search engine, isn’t expected to be materially affected by this outcome.