TD Surprises, Kicking off Bank Earnings, Regulator warns of Real Estate and Mortgage Red Flags

The Week in Review

Weekly Market Recap: U.S. and Canada

Don’t blame it on me being back from our European vacation, but after a four-week rally while I was away, for the most part, the U.S. and Canadian markets took a pause this week. It was kind of like touring the Whisky distilleries in Scotland; you move along at a pretty good pace for a while, but at some point you need to take a breather.

Despite this week’s pause though, the Nasdaq & S&P 500 are still up over 11% for the year, and the TSX is up 6.5%. The laggard is the Dow Jones Industrials, up only 3.6% year to date. Large-cap technology stocks continued to drive U.S. market momentum, while materials and energy sectors led in Canada.

The Nasdaq Composite hit new records this week, but the Dow suffered its worst week since early April, dropping 2.33%. Meanwhile, the S&P 500 ended the week flat, and the Canadian market fell over 1%.

Inflation and The Bank of Canada

Canadian inflation numbers came out on Tuesday and showed further signs of moderating, with CPI coming in at 2.7% annually, down from 2.9% in March. Expectations are for inflation to ease further, potentially allowing for rate cuts by the Bank of Canada. Odds are currently sitting at around 60% of a cut at the Bank’s June 5th decision.

Canada Retail Sales

I’ll cover StatsCan’s most recent retail sales numbers in an article below, but in summary, March saw a dip of 0.2%, with drops in 7 of the 9 subsectors.

Economic growth appears to be softening, although the general outlook remains cautiously optimistic, with no immediate signs of a deep downturn or recession.

🚀 AI and Technology Sector

In the technology sector, particularly AI, NVIDIA once again outperformed with very impressive results when it announced earnings on Wednesday, further boosting the ongoing enthusiasm around AI. The company now trades at a market cap of $2.62T.

As noted in the chart above, the Nasdaq was the top-performing major North American index. However, there are concerns about the sustainability of this growth if the technology trade falters.

The debate continues as to whether we’re building up to another tech crash reminiscent of the early 2000s, but convincing arguments are being made on both sides of that story, with the script yet to be written.

🔮 Outlook and Strategy

The current bull market, which began in October 2022, remains strong and if it continues, will most likely be driven by:

📉 Moderating inflation
💵 Strong earnings growth
🤖 The long-term potential of AI

Historically, bull markets tend to last longer and provide more substantial gains than bear markets. As always, a properly diversified portfolio, which allows for participation in the upside while maintaining balance, is recommended as the market matures.

📊 Summary

Overall, the markets experienced mixed performance last week. Technology stocks continued to lead, but broader market gains were constrained by inflation concerns and mixed economic data.

The outlook remains positive, with expectations of continued earnings growth and the long-term potential of AI supporting market sentiment.

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

LAST 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.

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.

BANKING
TD Earnings and a Regulatory Wake-Up call for the entire industry

TD Bank has had a rollercoaster quarter, outperforming analyst expectations in trading while at the same time grappling with major regulatory scrutiny over money-laundering failures.

In its latest earnings report, TD reported strong performance from its capital-markets division, with adjusted earnings hitting $2.04 a share, beating the $1.85 analysts had predicted. The bank’s recent acquisition of U.S. investment bank Cowen Inc. helped its capital-markets unit's net income soar to $441 million.

🕵️ Regulatory Challenges Cast a Shadow

Although it’s great to see these financial wins, TD remains overshadowed by a series of U.S. regulatory probes into its anti-money-laundering practices. The bank has set aside $450 million to address these issues and has acknowledged significant procedural weaknesses that allowed criminal activities to go undetected.

CEO Bharat Masrani labeled the lapses as “unacceptable” and emphasized ongoing cooperation with authorities to resolve the matter.

Scandal and Its Fallout

As you’re probably well aware, TD has been under the microscope for the past few quarters, as the U.S. Department of Justice (DOJ) is investigating how TD was allegedly used by Chinese drug traffickers to launder over $653 million. This scandal has not only led to hefty fines but also derailed TD's plans to acquire First Horizon Corp. The bank's failure to secure timely regulatory approval due to these probes left TD with excess capital, prompting regular share buybacks.

🔍 Calls for Stronger Regulatory Frameworks

TD’s troubles may have spilled over to the entire sector, and has sparked calls for stronger regulatory frameworks in Canada to prevent financial crimes. Some experts have highlighted the contrast between the stringent U.S. oversight and Canada’s more conservative approach. Christian Leuprecht, author of Dirty Money: Financial Crime in Canada, noted, "The Americans have shown repeatedly that they are willing to ensure compliance with their laws."

Investing in Compliance

In response to these challenges, TD is investing heavily in enhancing its U.S. anti-money-laundering program, setting aside $500 million for improvements. That said, the penalties and increased scrutiny are expected to have long-term impacts on TD’s operations and expansion plans in the U.S.

TD has lost a lot of trust of Canadian investors recently, falling from grace as what was perceived as one of Canada’s premium investment opportunities. The bank's ability to get itself out of this financial and regulatory mess will be crucial as it continues to try and rebuild trust.

THANK YOU TO OUR SPONSOR
Harvest Launches New Industrial Fund

Harvest is pleased to announce the launch of the Harvest Industrial Leaders Income ETF – HIND on the TSX.

For the most part, Industrials are companies that manufacture machinery, handheld tools, and industrial products. This sector also includes aerospace and defense firms as well as companies engaged in transportation and logistic services.

⚖️ Impact of Recent Legislation

In 2023, the US manufacturing industry was able to capitalize on the momentum generated by three significant pieces of legislation that were signed into law in 2021 and 2022.

🏗️ Infrastructure and Manufacturing Legislation Impact

These laws have sought to prioritize rebuilding US infrastructure, advancing clean energy initiatives, and building out the domestic semiconductor industry. This new legislation has also aimed to foster job growth, as well as workforce development and workplace equity.

💼 Sector Impact and Investment Opportunities

The infusion of funds and tax incentives into US manufacturing has had impact across various sectors. These include semiconductors, clean energy components, electric vehicles, batteries, and the constituent parts and raw materials of these products.

📈 Harvest Industrial Leaders Income ETF (HIND)

Objective: HIND seeks to tap into the manufacturing industry as it is poised to benefit from the passing of these acts. Indeed, this legislation has already spurred record private sector investment in the manufacturing space.

Strategy: HIND will seek to provide Unitholders with the opportunity for capital appreciation and monthly cash distributions. To achieve the distributions and help lower volatility, HIND will employ a covered call writing strategy on up to 33% of the portfolio securities.

Investment Focus: The Harvest Industrial Leaders Income ETF seeks to provide investors exposure to industrial leaders that drive innovation, with steady monthly income.

The Harvest Industrial Leaders Income ETF – HIND on the TSX.

Visit www.harvestetfs.com to see how they can assist you in achieving your financial goals.

Quick reminder: Commissions and management fees and other expenses may be associated with investing in Harvest ETFs. Their values change over time and past performances may not be repeated. Please read the relevant prospectus before investing.

COMMERCE
Retail Sales in Canada Drop in March; 7 of 9 subsectors down

According to Statistics Canada, retail sales in Canada dipped by 0.2% in March 2024, and totaled $66.4 billion. This decline was broadbased, with reduced sales in seven of nine subsectors, notably in furniture, home furnishings, electronics, and appliances. Core retail sales, excluding motor vehicles and gasoline, fell by 0.6%.

The only increases came in building materials and garden equipment (+1.3%), and motor vehicle and parts dealers which saw a 1.0% rise, mainly due to new car sales. E-commerce sales bucked the trend, rising by 3.0% to $4.0 billion.

According to Katherine Judge, senior economist at CIBC, the first quarter ended on a soft note.

On a provincial level, Ontario and Saskatchewan saw notable declines, while Quebec saw a 0.6% increase in sales. StatsCan’s advance estimate suggests a rebound in April with a 0.7% sales increase.

BANKING
Morgan Stanley CEO will not rule out “Hard Landing”

JPMorgan Chase's CEO, Jamie Dimon, who is well known for his straightforwardness, shared some cautious insights about the U.S. economy at the JPMorgan Global China Summit in Shanghai.

Hard Landing Possibility?

When asked by CNBC’s Sri Jegarajah about the potential for a "hard landing," Dimon didn't hold back:

Worst-Case Scenario: Stagflation

Dimon also highlighted stagflation as a worst-case scenario for the U.S. economy—a situation where inflation continues to rise while growth slows and unemployment remains high.

(Watch my YouTube video on Stagflation)

💪 Consumer Condition and Confidence

Despite potential economic turbulence, Dimon pointed out that “the consumer is still in good shape.” The unemployment rate has been below 4% for about two years, and wages, home prices, and stock prices have been on the rise. However, consumer confidence remains shaky due to inflation.

Again, never one to hold back, Dimon critiqued the Federal Reserve's track record on inflation predictions:

“The world said [inflation] was going to stay at 2% all that time. Then it says it will go to 6%, then it said it’s going to go to four. ... It’s been 100% wrong almost every single time. Why do you think this time is right?”

While Dimon’s insights suggest a potentially bumpy road ahead, they also remind us that economic predictions are often far from perfect.

BANKING & THE ECONOMY
OSFI warns of Real Estate & Mortgages Risks

Canada’s banking regulator, the Office of the Superintendent of Financial Institutions (OSFI), has flagged real estate and mortgages as significant risks to the financial system. With higher interest rates still hanging around, mortgage holders might be in for a shock when it's time to renew their loans.

For those of you who watching our twice-weekly YouTube news videos, [Playlist] you’ll remember me talking about a couple of concerns in particular, which are highlighted in OSFI’s annual risk outlook.

The outlook highlights that many homeowners could face substantial payment increases compared to their initial loan terms. This situation could lead to more residential mortgage loans falling into arrears or even defaulting. It's a worrying scenario as higher payments might stretch borrowers' finances too thin.

OSFI also identified wholesale credit risk as a major concern. This includes risks from commercial real estate lending and corporate and commercial debt. Additionally, funding and liquidity risks are on their radar, indicating potential challenges in how financial institutions manage their short-term obligations.

But wait, there's more. OSFI is also wary of social and political conflicts. They warn that a significant geopolitical event could disrupt markets and destabilize financial institutions. Plus, rising political tensions could make Canadian institutions targets for politically motivated attacks, adding another layer of risk.

So, whether you're a homeowner or someone keeping an eye on the financial sector, these warnings from OSFI are a clear call to stay informed and prepared for potential changes in the economic landscape.

FOOD INDUSTRY
Grocery Giants investigated for Anti-Competitive Practices

Canada's Competition Bureau is taking a hard look at the parent companies of grocery giants Loblaws and Sobeys. Federal Court documents reveal that these big players are allegedly using property controls to limit competition in the retail grocery market.

📅 Probe Initiation: March 1

The probe, which started on March 1, suggests that these grocery chains might be restricting other potential tenants through lease agreements. The commissioner claims this stifles competition, making it harder for new players, both local and international, to enter the market.

🗣️ Insight from the Deputy Commissioner

This is significant because these controls can limit land use even after it changes hands, sometimes for decades.

🤝 Cooperation and Resistance

Loblaws' parent company, George Weston Ltd., is cooperating with the investigation, while at the same time defending their position.

Interestingly, Sobeys' owner, Empire Co. Ltd., isn't overly enthralled with the inquiry. They've called it "unlawful" and claim it gives the commissioner "the appearance of a lack of independence" due to ongoing public criticism from federal politicians over grocery pricing.

Empire’s lawyer argues that these property controls are common across various industries, not just groceries.

📈 Impact on Grocery Giants

As this investigation unfolds, it's clear that the outcome could have a material impact how grocery giants operate in Canada. I’m sure we’ll be covering this again in future editions of The Pulse.

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