The Week in Review
All eyes were on the U.S. Fed this past week, as investors looked for any clue that interest rates would be heading lower anytime soon. The Fed kept its policy rate steady at 5.25%-5.50%, and tamped down any expectations of pending rate cuts. The main message coming out of the central bank was that it intends to keep rates on hold for a while longer yet.
U.S. jobs data came in strong, adding confidence that the economy is holding up well. I’ll cover this story in more detail later below.
The S&P 500 had a roller coaster week, but ended up with a another all-time high, while here in Canada, we saw the TSX retreat slightly.
5-Day Returns | Week ending 2/2/2024
There were a ton of earnings reports out this week, including several of the Magnificent 7 stocks. Microsoft, Alphabet and AMD led things off with lower-than-anticipated earnings guidance, sending the markets south on Wednesday. But not to worry, those earnings were followed by Meta, Apple and Amazon, and upside earnings surprises put the markets right back into recovery mode. We see the effect of those earnings report in the market moves Thursday and Friday.
Of interest overseas, I’ve been watching the Japanese stock market lately, and it’s moving ever closer to the record high set back in December 1989, which of course led to the now infamous multi-decade slump. I didn’t even have grey hair back in those days, it’s been so long now.
S&P 500 Weekly Overview
Week ending 2/2/2024 | Market Cap >$100B
S&P TSX Weekly Overview
Week ending 2/2/2024 | Market Cap >$5B
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 2/2/2024 | 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 2/2/2024 | Most Oversold Stocks, based on 14-Day RSI
In this episode of The Pulse:
Federal Reserve Rate Decision
U.S. Jobs Report
Auto Insurance Prices are Going Up
CIBC & Mackenzie Lawsuit Ruled OK to Proceed
Disney Cracking Down on Password Sharing
Another US Regional Bank is in trouble. Will this Spread?
THIS WEEK’S POLL QUESTION
As I was browsing the headlines this week, I happened across this “Stock Alert.” When you see “Alert”, it means something big is happening and you should pay attention, right? Well, as you can see by this screen capture, the “big news” was that shares of Tesla dropped a whopping 0.26% in a week. This absurd headline was the inspiration behind this week’s poll question:
RESULTS IN NEXT WEEK’S NEWSLETTER
LAST WEEK’S POLL RESULTS
Are Tesla's current problems just a Bump in the Road, or are they a sign of bigger problems to come?
Fed Holds Rate, Cut Hopes Drop
The Federal Reserve announced on Wednesday and it held rates steady at 5.25% to 5.50%, indicating it’s not yet prepared to begin cutting rates, making the prospects of a rate cut in March increasingly unlikely. During the two-day meeting, the Federal Open Market Committee (FOMC) updated its statement and removed language suggesting a willingness to raise interest rates until inflation was under control and heading toward the Fed's 2% target.
U.S. Fed Funds Interest Rate | January 2024
Despite the removal of language signaling further rate hikes, the statement made it clear that there are currently no plans to cut rates, as inflation remains above the central bank's target. The committee emphasized the need for greater confidence in inflation sustainably reaching 2% before it would consider rate reductions.
Fed Chair Jerome Powell echoed this sentiment during his news conference, stating that a rate cut in March is improbable, and policymakers are awaiting more data to confirm ongoing trends. Following Powell's comments, markets reacted negatively, with the Dow Jones Industrial Average falling over 300 points.
"We believe that our policy rate is likely at its peak for this tightening cycle and that if the economy evolves broadly as expected, it will likely be appropriate to begin dialing back policy restraint at some point this year.”
Jerome Powell | Federal Reserve Chair
Notably, his statement didn’t explicitly rule out further rate increases, leaving the possibility open.
A couple of separate reports suggest that inflation is still a concern, with the Fed closely monitoring core personal consumption expenditures prices.
Overall, the Fed's decision to maintain steady interest rates reflects its cautious approach amid evolving economic conditions and inflationary pressures.
It’s that time of year. Investors rush out to take care of their TFSA contributions for the year, but are you able to avoid some of the most costly TFSA errors that are made? Brandon has great video that highlights how to avoid costly mistakes. Watch it here.
United States Jobs Skyrocket
A significantly stronger-than-expected U.S. jobs report added to the uncertainty surrounding interest rate cuts by central banks, and the new data spills over to the Bank of Canada on this side of the border.
The US economy added 353,000 jobs in January, far above market forecasts of 180,000. This is the biggest employment rise in a year, and confirms the labour market remains tight.
Also strengthening the jobs story, November and December jobs data was revised higher, by a total of 126,000 jobs.
Before the release of this jobs report, there was about a 50-50 chance of a rate cut by the Bank of Canada in April. But now that this new data is out, the probability has gone down to about 25%. Looking a bit further into the future, the market now projects a 69% chance of a rate cut in June, down from 82%. There are virtually no expectations for a rate cut at the next Bank of Canada meeting in March.
Despite the tempered expectations for rate cuts in Canada, the market still expects significant cuts totaling nearly a full percentage point by the end of the year.
Just as here at home, there's also now a reduced likelihood of a rate cut by the Fed in March, and expectations for cuts in May have slipped. Analysts expect the Fed to wait until later in the year before considering easing policy.
According to the CME FedWatch Tool, the probability of a rate cut in March sits at 38% today, with current May odds sitting at 59.6%.
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Auto Insurance to Put A Dent in your Pocketbook
Auto insurance rates are set to soar in 2024, driven by a surge in auto thefts, rising replacement costs for car parts, and persistent inflation.
In Ontario, insurers have been approved for up to a 25% increase in premiums for the first quarter of 2024, a real jump from the 15% approved in 2023. The average premium in Ontario hit $1,796 in October 2023, surpassing 2019 levels. Similarly, Alberta may see significant rate hikes after years of rate freezes.
“Rates are now surpassing 2019 levels, as opposed to previous rate increases bringing things to parity.”
Daniela Ivans | Ratesdotca
The big contributor to these rate hikes are escalating costs of replacing technologically advanced car parts, like windshields with built-in displays. These factors, combined with the ever-maddening and disheartening levels of auto theft, present challenges in controlling insurance costs.
“Replacing a windshield back in the day cost around 300 bucks, but these days windshields have a heads-up display” or other technology that can increase the cost to more than $2,000, he said.
Matt Hands | Ratehub.ca Vice-President of Insurance
Although Canada's rate increases are catching up with global trends, some jurisdictions are implementing measures to shield consumers from immediate hikes. In 2023, British Columbia froze insurance rates until 2025, while Alberta is introducing legislation allowing only inflationary increases for drivers with clean records.
In response to the rising premiums, consumers might want to explore options for lowering their insurance costs, such as installing tracking apps for safer driving, anti-theft devices, or opting for insurance providers offering discounts for such measures can help mitigate expenses.
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CIBC / Mackenzie Lawsuit OK’d
In this newsletter and on our YouTube channel, we’ve covered lots of stories in recent weeks about the financial penalties that have been meted out against our big Canadian banks.
Now, two class-action lawsuits against Canadian Imperial Bank of Commerce (CIBC) and Mackenzie Financial Corp. have been given the green light by an Ontario judge. The lawsuits allege that the companies overcharged investors millions of dollars in fees for services they did not receive, specifically focusing on trailing commissions paid to discount brokerages from the assets of CIBC and Mackenzie mutual funds.
“The plaintiff alleges that the trailing commissions are improper, unreasonable, and unjustified, and were paid by the defendants in breach of their duties to the class members who held those mutual funds.”
Ontario Superior Court of Justice
Trailing commissions are fees embedded in mutual funds, typically used to compensate advisors for providing services to investors. However, investors who manage their investments independently through discount brokerages do not typically receive advice and thus should not be subject to these fees.
These rulings mark the fifth and sixth certified class-action lawsuits out of a series of seven filed on behalf of investors. The fees paid by independent investors are estimated to total about $5 billion in overcharged commissions since 1993.
The lawsuits allege that the trailing commissions were paid improperly and in breach of duties to investors. They claim that these commissions were used as incentives to encourage discount brokerages to sell the mutual funds, violating the trust obligations of the asset managers to investors.
The practice of paying advice fees to discount brokerages was banned by regulators in 2020, with the ban coming into effect in 2022.
While this crackdown on overcharged commissions progresses, it's indicative of a broader trend of increased scrutiny on financial institutions' practices, particularly concerning fees charged to investors.
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We reported in The Pulse last week that Netflix’s strategy of enforcing password sharing rules has paid off in spades, and the company’s share price has been rewarded. Now, Disney has said it is following in Netflix's footsteps by cracking down on password sharing for its streaming services. In an email to Hulu subscribers, the company announced plans to implement limitations on sharing accounts outside of the household starting March 14.
The user agreements for Hulu, Disney+, and ESPN+ explicitly prohibit users from impersonating others or sharing account information. Violators could face consequences, including account limitation or termination.
Disney CEO Bob Iger previously mentioned addressing password sharing as a priority in 2024, citing it as an opportunity to boost business growth.
“We certainly have established this as a real priority. We think that there’s an opportunity here to help us grow our business.”
Bog Iger | Disney CEO
Iger is expected to provide further details during Disney's fiscal first-quarter earnings call on February 7.
The move by Disney follows Netflix's successful crackdown on password sharing, which resulted in a surge in new subscribers. Netflix recently announced a record number of subscribers in the fourth quarter.
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Regional Banks Deja Vu?
Just when we thought the days of U.S. community bank troubles have been dealt with, shares of New York Community Bancorp took a dramatic tumble this week, plunging 38% in a single day, following the company's unexpected loss reported for the last quarter.
The regional lender reported a staggering $252 million loss, compared to a $172 million profit in the previous quarter. This sharp decline was primarily attributed to a substantial increase in loan losses, totaling $552 million, up from $62 million in the prior quarter.
The company's CEO, Thomas Cangemi, pointed to the acquisition of nearly $40 billion in assets, including $13 billion in loans, from the now-defunct Signature Bank, as a leading cause. Because of this acquisition, the bank reached the trigger point of having total assets over $100 billion, which came with heightened reporting requirements. With this higher asset total, the bank has to increase its capital reserves, which then limits its lending capacity.
Cangemi says even in light of these new challenges, however, the bank isn’t at risk of a collapse like we saw in the last crisis.
“There’s no question that this was a difficult decision as a firm, but clearly necessary.”
Thomas Cangemi | New York Community Bancorp CEO
As the market told us, concerns are still there when it comes to regional banks, and we saw that when the KBW Regional Banking index reacted to this news by dropping 6%. The jury is still out on how significant this event is, but let’s hope the sector will avoid the turmoil it saw last spring.
Top 10 Weekly Gainers
TSX, NYSE & Nasdaq Exchanges | Market Cap >$10B
Top 10 Weekly Losers
TSX, NYSE & Nasdaq Exchanges | Market Cap >$10B
In Other News this Week
💸 The top U.S. banking regulator, the Office of the Comptroller of the Currency (OCC), has imposed a hefty $65-million fine on Royal Bank of Canada's American subsidiary, City National Bank. Full Story Here
🚲️ Looks like the wheels are coming off the Peloton spin bike, with share of the company dropping 24% following guidance. More Here
🏢 Allied Properties REIT share price took a tumble after the company reported a soft earnings outlook. What might this say about the entire REIT sector? Read More
🚘️ It seems like everywhere you turn, there’s another auto recall. This time, it’s Toyota, with their warning that owners stop driving and get immediate repairs. Toyota Warning
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