Nasdaq down over 5%, Market Sentiment has Shifted, Tesla is laying off 10% of Workforce

The Week in Review

One word pretty much sums it up for tech investors this week. Ouch.

Following what has been a strong rally since October of last year, we’ve no doubt seen a shift in market sentiment recently with major stock indices seeing further declines this week.

You can see the five-day returns on this chart, with the Nasdaq leading the way down.

The big question is, are we seeing the start of a bear market? Too early to tell, but I’ll note that this type of pullback isn’t that strange following the strong gains over the past six months. It could be a turn, but it could also just investors letting a bit of the pressure off of the rally.

Here are a few of the main factors that are contributing to the recent market volatility;

1. Repricing of Federal Reserve Rate Cuts: Expectations for U.S. Federal Reserve rate cuts have been adjusted, with markets now anticipating only one rate cut in 2024. This shift is largely due to persistent U.S. inflation, which has remained higher than expected, with recent readings showing inflation at 3.5% compared to last year's peak of 9.1%.

2. Geopolitical Tensions: Rising tensions in the Middle East, particularly involving Israel and Iran, have escalated, influencing commodity markets and adding to the volatility. These tensions have pushed crude oil prices higher, although there has been some recent pullback in prices.

3. Earnings Season and Corporate Outlooks: The first-quarter earnings season has started, and while some companies are beating forecasts, the overall corporate outlooks are softer than expected. Major technology companies like Microsoft, Google, and Meta are of particular interest as they prepare to report their earnings, with the market closely watching for any signs of weakness.

Overall, the economic backdrop remains strong in the U.S. and Canada, with both economies showing resilience.

Long-term investors are probably well advised to consider this volatility as reminder of how important having a well balanced portfolio is, and it may be an opportunity to rebalance and diversify their portfolios to make sure they fit your investor profile.

Major Stories of the Week

📈 Canadian Inflation On the Rise: The annual inflation rate in Canada rose to 2.9% in March, up from 2.8% in February. Full details on these inflation numbers are in an article later in this newsletter.

🏠 Federal Budget 2024: Canada’s Finance Minister delivered the 2024 federal budget this week, with plenty of spending and a focus on housing initiatives. Full details below.

In this Edition of The Pulse:

• Canada’s 2024 Federal Budget

• March Inflation Report

• What Do Tesla’s Layoffs Say About the EV Market?

• CRA Allegedly Scammed for $37 Million

• Have the Markets Stalled?

• Shake Up with RRSPs and TFSAs.

• Market Movers | Winners & Losers

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

LAST WEEK’S POLL RESULTS

S&P 500 Weekly Overview

S&P TSX Weekly Overview

Most 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.

FEEDBACK ALERT! ⬇️

Most 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
2024 Budget’s $53 Billion Spend

The 2024 federal budget unveiled this week by Finance Minister Chrystia Freeland addresses a wide range of issues. Let’s have a look at a few of the key elements of the budget:

New Spending: The budget outlines $53 billion in new spending over five years. A significant portion of this funding, $19 billion, is allocated to housing and affordability measures, and this is part of the ongoing effort to address the housing crisis in Canada.

Revenue Generation: To finance the increased spending, the government plans to raise revenue through tax increases on top income earners and corporations.

This includes raising the inclusion rate on capital gains realized above $250,000 and on all capital gains realized by corporations and trusts from one-half to two-thirds.

Deficit and Debt: The budget forecasts federal public debt charges to increase to $64.3 billion in 2028-29, up from $35 billion in 2022-23.

The budget projects continued deficit spending, with the smallest projected deficit at $20 billion in 2028-29. According to the government’s projections, the debt-to-GDP ratio is projected to improve slightly over the coming years.

Housing Initiatives: The government plans to utilize federal public land for housing construction, aiming to build 3.87 million new homes by 2031.

• Additionally, there's a plan to reduce federal office space by half and prioritize the land for student or non-market housing.

• The budget proposes increasing the capital cost allowance rate for apartments from 4% to 10%.

• First-time homebuyers may benefit from the extension of mortgage amortization to 30 years.

Some experts believe these measures may not adequately address housing supply issues. Personally, I fall into this camp, and although I’d love it if the housing shortage issues are fixed, I’m sure not holding my breath. As with all government programs, it’s not just a matter of throwing money at the problem. Hopefully, the new initiatives will be rolled out and managed effectively to actually provide some positive changes.

Pension Changes: A new federal working group, led by former Bank of Canada governor Stephen Poloz, will explore ways to attract Canadian pension funds to invest domestically, particularly in areas like digital infrastructure and airports.

Carbon Price Rebates for Businesses: After years of pressure, the government will provide carbon price rebates to small and medium-sized businesses, totaling $2.5 billion. This measure aims to offset the carbon pricing costs borne by these businesses.

Disability Benefit: A new federal benefit for people with disabilities will be launched with $6.1 billion in funding over six years, providing up to $2,400 a year to eligible individuals.

Pharmacare Program: The budget allocates $1.5 billion over five years for the first phase of a national Pharmacare program, which will initially cover cost-free contraception and diabetes medication.

Other Highlights Include:

• Increased funding for research, advertising of climate change policies

• A budget boost for the Canadian Security Intelligence Service (CSIS)

• Additional funding for Indigenous health & education

• A loan program to facilitate Indigenous equity ownership in natural resource and energy projects.

• The budget allocates over $800 million over five years to support energy efficiency retrofits for households with low to median incomes.

• A 10% investment tax credit is proposed for buildings used in key segments of the electric vehicle supply chain.

THE ECONOMY
Canadian Inflation Rises

Statistics Canada released our latest inflation numbers this week, and we’re moving in the wrong direction. Headline inflation ticked up to 2.9% in March, up from 2.8% in February. This came in pretty much in line with what the Bank of Canada was expecting.

Here are some of the highlights:

🏷️ Shelter Costs up: 6.5%
📈 Mortgage interest costs increase: 25.4% year over year.
📈 Average rents growth: 8.5%
🚗 Transportation inflation: 3% (up from 2.2%)
⛽ Gasoline prices increase: 4.5% (up from 0.8%)
🍽️ Food inflation: 3% (down from 3.3%)

It’s not all bad news:
A couple of metrics the Bank of Canada watches very closely as it assesses future interest rate decisions came in lower in March than in February:

📊 CPI Trimmed mean: 3.1% (down from 3.2% in February)
📊 CPI Median: 2.8% (down from 3%)

Also, Year-over-Year Core inflation dropped to 2.9% in March, down from 3.1% in February.

This decrease in core inflation suggests a potential easing in the overall inflationary pressures, and supports a BoC rate cut, possibly as early as June.

On that topic, Tiff Macklem said last week:

Overall, while we saw the slight increase headline inflation, the core inflation's decline may encourage the Bank of Canada to consider an interest rate cut in the near future. However, the decision will likely depend on the bank getting comfortable that it’s seeing a consistent trend in inflation data.

Dividend Investing, Simplified

While many investors are familiar with the benefits of dividend investing, they may underestimate the amount of time and energy it will take to build a diversified portfolio of dividend paying equities. It requires a high degree of knowledge of the financial markets, and it is challenging to screen a handful of quality stocks while tracking and analyzing their financials and earnings reports each quarter. What’s more, payouts are not guaranteed and can be suspended at any time, especially if company financials deteriorate. Therefore, it is crucial to consistently identify companies that generate cash flows across market cycles, allowing them to grow their dividends over time. 

Fortunately, there is a solution: exchange traded funds (ETFs)

By investing in ETFs, like BMO's Canadian Dividend ETF (Ticker: ZDV), investors can own a diversified portfolio of professionally managed dividend stocks at a low cost and with minimal effort. This particular ETF follows a rules-based approach that focuses on dividend growth and sustainability. By ensuring the dividend is growing and is being funded by current operations, the portfolio is positioned to provide you access to mature and stable blue-chip companies.

This content is sponsored by BMO Exchange Traded Funds.

Beavis Wealth is compensated under this arrangement by BMO Exchange Traded Funds.

This content is intended for information purposes only. This content has been prepared by BMO Global Asset Management, the manager of the BMO Exchange Traded Funds, and represents its assessment at the time of publication. The views expressed herein by BMO Global Asset Management are subject to change without notice. The content contained herein is not, and should not be construed as, investment advice to any party. Any securities described herein must be evaluated relative to the individual’s investment objectives and risk tolerance, and professional advice should be obtained with respect to the individual’s particular circumstances.

The views expressed herein regarding a particular company, security, industry, or market sector should not be considered as an indication of trading intent of any investment funds managed by BMO Global Asset Management. Any reference to a particular company is for illustrative purposes only and should not be considered as investment advice or a recommendation to buy or sell nor should it be considered as an indication of how the portfolio of any investment fund managed by BMO Global Asset Management is or will be invested. This social media network is an independent organization and is not affiliated with BMO Global Asset Management.

BMO Global Asset Management is a brand name under which BMO Asset Management Inc. and BMO Investments Inc. operate.

AUTOMOTIVE SECTOR
What is Tesla saying about the EV Market?

The EV industry is hitting a rough patch, with Tesla leading the pack in a sudden downturn. The company recently announced a significant workforce reduction of over 14,000 employees—more than 10%—due to a slump in demand and a surplus of nearly 50,000 unsold vehicles. This marked Tesla's first delivery drop in four years, signaling potential broader industry challenges.

Gus Carlson from The Globe and Mail describes this as more than just a hiccup for Tesla. It's a "reckoning" for the entire EV market, which is seeing similar struggles across other companies. Some examples of this being a broadly based issue are:

• Ford has delayed major EV projects and laid off workers, reflecting waning confidence in immediate EV profitability.

• Fisker is teetering on bankruptcy, significantly devalued and delisted from the New York Stock Exchange.

• Rivian faces serious quality issues, affecting its reputation and future production plans.

The root causes of this industry-wide slowdown include:

- High EV Prices: Electric vehicles generally cost more than their gas or hybrid counterparts.

- Range Anxiety and Infrastructure Woes: The lack of sufficient charging stations remains a major hurdle.

- Maintenance Costs: Companies like Hertz have found maintaining and insuring EVs more expensive than expected, leading to scaled-back adoption plans.

As we move forward, investors interested in the EV space might be wise to recalibrate expectations and update their strategies around electric vehicles. If you take this report to heart, it would be a good idea to balance the enthusiasm that EVs bring with the practical realities facing the industry.

TAXATION
Scammers Raked in $37 Million

According to an affidavit obtained by The Fifth Estate, the Canada Revenue Agency (CRA) has been duped into paying out $37 million to scammers. At the center of this scandal is Gold Line Telemanagement, a Toronto-based company accused of participating in "sham" transactions to exploit tax refunds.

This affidavit, what has been fiercely protected by KPMG from public scrutiny for nearly ten months, claims that Gold Line engaged in misleading practices on their tax returns.

Despite vehement denials from Gold Line, which has asserted their legitimate involvement in the telecom industry, the CRA paints a different picture, suggesting a calculated orchestration of fraudulent activities dating back to 2016.

In this alleged case, "carousel schemes", which involve intricate networks of fictitious companies and fabricated invoices, designed to mislead and manipulate tax systems, were used.

Tax fraud analyst Mike Cheetham criticizes the CRA's vulnerability, suggesting that a simple legislative amendment, a "reverse charge mechanism," could shield Canada from such exploitation—a strategy already proven effective in Europe.

Gold Line stands firm in court, arguing their tax claims were justified, setting the stage for a contentious legal showdown. As the battle unfolds, we’ll see the federal government’s plans to strengthen its defenses against sophisticated tax evasion strategies like the ones we’ve allegedly seen in this case.

INVESTING & THE MARKETS
Have the Markets Stalled?

The stock market rally in 2024, which has been fueled by economic optimism, seems to have come to a halt amid concerns about rising inflation and the timing of potential Federal Reserve actions.

If you read a sampling of the opinions of what’s causing this, you’ll see a few similarities that the experts say are having the biggest impact on the market momentum. Let’s look at a few:

• Strong economic data, including robust job growth and increased consumer spending, have raised concerns about the Fed's timeline for interest rate cuts, impacting investor expectations. As a result, traders have adjusted their projections for rate cuts, now anticipating a later start and fewer cuts compared to earlier forecasts.
  

• The IMF's upgraded forecast for US economic growth reflects confidence in the economy's strength but highlights the challenge of managing inflationary pressures.
  

• Bond yields have once again surged, and investors are bracing for an extended period of elevated interest rates, which is negatively influencing investment decisions across various asset classes.
  

• Despite positive corporate earnings reports, investors remain cautious amid broader economic uncertainties and geopolitical tensions.
  

• Escalating tensions between Iran and Israel have added to market volatility, underscoring geopolitical risks that could impact global markets.
  

• While initial reports of Middle East tensions pushed oil prices higher, subsequent reassurances tempered the market's reaction, reflecting the complexities of geopolitical dynamics.
  

• Gold futures have seen increased demand as investors seek to hedge against geopolitical instability and inflationary pressures, highlighting the appeal of safe-haven assets in uncertain times.

These are just a few of the factors that are having this current negative impact on the markets, and it’s a reminder of how complex and fickle the markets can be. As I always like to say, investing is a journey, and these are the types of conditions we’ll see on a regular basis. With a properly constructed portfolio, we’ll all be ok!

INVESTING
Changes to Registered Plans

The Canadian government is looking to shake things up with the investment rules for registered plans like RRSPs and TFSAs.

The Department of Finance has floated the idea of modernizing what counts as a "qualified investment" for this type of plan, and they’re looking at ways of making the rules clearer and more consistent, which could mean lower costs for us all. As of now, it’s a very murky issue.

But here’s a curveball: the consultation is also pondering whether to boost Canadian-based investments, ‘just like back in the good old days’, I say sarcastically.

I grew up in the era where you were forced to have mostly Canadian holdings inside your registered plans, and I remember the relief when those foreign-content rules were removed. Going back is not the answer.

Currently, trying to figure out what investments are ‘qualified’ can be tricky. Different plans have varied rules about what’s in and what’s out, and it seems there’s little reason for these inconsistencies. Generally, it’s difficult to identify an actual policy reason that makes sense.

Also, as part of overhaul, the government is suggesting possible changes related to crypto-backed assets, considering whether they might fit into registered plans. However, as of now, direct cryptocurrency investments remain a non-starter in these plans.

Because so many of us have registered plans, for many forming the bulk of our savings, this is a consultation you might want to keep your eye on. The deadline for feedback is July 15.

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