It’s been a busy few weeks behind the scenes at Stocktrades Premium as we’re ready to make a brand new feature addition, along with a significant shuffling of our model portfolios.
We were set to kick off our model portfolio reviews this week, but we had a ton of feedback regarding some additions to the model portfolios that people want to see.
Because members come first within the Stocktrades Premium community, we decided to put potential additions to a vote. The consensus among Premium members is that not many people follow our Conservative or Moderate style portfolios.
To better serve Premium members, we will be archiving our Conservative and Moderate portfolio models over the next while. They’ll still be available to members, just not updated anymore.
And, in their place, we will be bringing you brand-new “income” model portfolios that should adhere more to an income seeker’s strategy.
What about our Aggressive models? These fit the mold of a “growth” style portfolio perfectly, and as such, they’ll be called just that. We are moving towards having 3 growth portfolios heavily directed towards total return and 2-3 income portfolios heavily directed towards yield/dividend growth.
Next week, we’ll be updating the Aggressive model portfolios, and over the next few months, we’ll be releasing our income-based portfolios periodically.
As always, if you have any questions or concerns about this change here at Premium, feel free to reply to this e-mail and let us know.
Our new screener is close to completion
We’re nearing the completion of development and testing with our brand new excel stock screener, which will add significant functionality compared to our previous screeners. We’re also happy to announce that we are also working on a web application that will be right on the Premium website for those who do not have excel or do not like excel.
This screener will allow members to compare numerous companies in a single snapshot glance on over 50+ metrics, and it will also allow them to screen over 800 companies (and counting) here in North America on all of these metrics.
This stock screener may be the most time-saving tool we’ve ever implemented here at Stocktrades Premium, and we’re pumped to be able to release it soon.
As always, every feature we add to Premium is at no extra cost to Premium members.
What’s moving the markets this last while
While the markets didn’t deliver anything special, this time of the month is usually a big one from a macroeconomic perspective. This past week, the Bank of Canada announced another interest rate hike, and this coming week we will see the release of June’s Consumer Price Index (CPI). The United States released its CPI numbers last week, and it wasn’t pretty. We expect much the same here.
Let’s start with this past week’s hike
It seems like ever since the pandemic began, we’ve been frequently using the terms “unprecedented” or “once in a lifetime.” While periods of high-interest rates are not uncommon, we are currently experiencing rate hikes not seen in decades.
This past Wednesday, the BoC announced a 100-basis point (1%) hike. The event was a notable one and makes Canada one of the first major global economies to announce such a significant raise. For Canadians, it is the highest rate hike since August of 1998 (24 years).
Canada’s overnight interest rate now sits at 2.5%, up from 1.5% previously and the raise was higher than the 75 basis-point forecasts.
Whether you agree or not, it was a bold move and one the BoC felt was necessary to curb inflation rates. Inflation rates that are the highest they’ve been in 40 years.
According to the Bank’s Governor Tiff Macklem “Inflation is too high, and more people are getting more worried that high inflation is here to stay. We cannot let that happen. Restoring price stability—low, stable, and predictable inflation—is paramount.”
Also worth noting, there was another factor that played into the higher-than-expected hike
The BoC believes the economy is “overheated” and that doesn’t mesh well with a supply chain that has been in disarray for the better part of the past two years. Macklem went on to say “Demand needs to slow so supply can catch up and price pressures ease”.
So, what does this mean for investors? For starters, we know that interest rate hikes will mean consumers with high debt loads will be impacted. This may mean higher delinquency rates and it will most certainly mean less disposable income for Canadians.
That is likely to lead to pressure on the Financial, Technology, and Consumer Discretionary sectors. All of the major banks almost immediately raised prime rates which are likely to impact the housing market. There is almost no doubt we’ll see fixed-rate mortgages exceed 6% in the near future.
Which sectors are likely to outperform?
Think stocks that fill the must-have bucket. Stocks in the Consumer Staples (Defensive) and Healthcare industries typically do well in this environment. Don’t expect huge gains, but they tend to outperform the broader markets. Historically, gold stocks have also been a haven in this type of environment.
Now, we know what you might be thinking – gold stocks haven’t exactly lit up the lamp this year. This is true, however, they have outperformed the Index in a material way.
The S&P/TSX Composite Index is down by 13.32% this year and yet gold and our Foundational Stocks pick Franco Nevada (FNV) are only down by 3.75% and 5.62% respectively. On a side note, our Foundational Stocks are performing exceptionally well through all of this, sitting on losses of 2.75% versus the indexes 13.3%.
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Remember, just because particular sectors do better than most in an environment of rising rates, doesn’t mean they also aren’t going to struggle. They should, however, outperform the broader index.
The reality is, that investing in this type of environment is difficult and we could see a period of lower returns. Is this reason to panic? Absolutely not. While many investors are experiencing this type of environment for the first time, those who have been around for a while know what it’s like.
It is why we also stressed a good foundation before venturing into high-growth stocks. A solid foundation that builds and compounds over time may not deliver the ‘sexy’ returns of various prospects in a strong bull run, but you’ll be extremely thankful for that solid foundation when we hit a bear market – like we are experiencing today.
We could also argue, that now is the time to accumulate and strengthen those foundational positions. There will be ample time to take advantage of depressed prices in various growth stocks.
This coming week, all eyes will be on the CPI announcement which is coming on Wednesday, July 20
Simply put, the CPI is a measure to reflect changes in price over time. It calculates what a typical basket of consumer goods would cost someone, and compares it to a prior time period. In May, the reading was 151.90, up 7.7% over the past year.
The CPI in Canada is expected to be 154.33 in June, which would amount to the highest on record dating back to 1950 – eclipsing May’s high.
The key with the CPI is that it is a lagging indicator. We know June was a tough month but thus far in July, oil prices and other commodities have been dropping. Therefore, it’s possible that June’s reading could signal the peak if energy prices continue their downward trend. And with that, let’s discuss inflation.
Why we think inflation is at its peak
Inflation is currently at significant levels right now. However, when we look at it objectively, it becomes clearer that this may be the highest level of inflation we see. While this perspective is certainly not a guarantee, the falling of many core commodities over the past few months should put a damper on rapid inflation.
Although still expensive, the price of oil has fallen by over 21% since its highs in March, lumber is down a whopping 58% since its peak in late 2020, and copper is down more than 33% from April 2022 highs.
Core commodities like this, ones we wouldn’t think factor into everyday inflation, certainly do. Rising oil causes fuel prices to surge, causing increases in shipping costs, which in the end are marked up by stores to maintain margins.
Skyrocketing lumber and copper prices had material impacts on home prices due to the rising cost of materials. Even the cost of particular products like fertilizer ultimately has an impact on what we pay for goods at the stores.
However, it’s important to understand that we likely haven’t witnessed the pricing benefits of these falling prices just yet.
Core inflation in the United States, which is a measure of inflation that does not include energy and food costs is certainly cooling. Supply chain difficulties are easing and policymakers raising rates at a rapid clip are even further positive signs that inflation should cool going into the back half of the year.
As mentioned of course, nothing is ever guaranteed. A change in the situation over in Ukraine and Russia, more supply chain issues, or recovering commodities could cause inflation to continue at the pace it’s at.
But if we were to make a prediction, we feel that this may be the highest level of inflation we see.
Will that stop the volatility in the markets?
Unfortunately, that’s doubtful. The reality of it is, there isn’t a singular headwind right now, there are multiple headwinds. If fears of rapid inflation tame, it is likely the concerns will shift towards a recession. We’re seeing this right now in our banks.
In 2020 and 2021, the markets were very “risk-on”. It seemed like nothing could go wrong, and concerns were pushed aside. The pendulum had swung to full-blown optimism. Now, the market is the complete opposite. It is “risk-off” and any subsiding headwind will just be replaced with the next one in line. These are ultimately the emotional swings of the market, and ones individual investors need to try and ignore.
The overzealousness in the bull markets, and the constant fear in the bears. Having a level head in both situations is extremely important to the long-term success of your portfolio.
So what should we as investors do?
There is no question that if we do enter a recession, it will be one of the strangest on record. Retail data is strong, and consumer spending is still abundant. No matter how high the price of gasoline is or how expensive dining out is, consumers don’t seem to care.
This is likely the result of a two-year lockdown, which is not only spurring activity due to extended periods of inactivity but also because of excessive savings.
Someone with a bullish outlook on the economy may say this will continue regardless of interest rates and inflation. And, someone with a bearish outlook will say the enthusiastic consumer will only last so long until they tighten down their spending.
It’s impossible to know which direction we will go in. Yes, we can speculate as to the drop-off in consumer spending, but until we start to see indications of it, it’s just that, only speculation. Many members are asking us how they should prepare their portfolio for the “upcoming situation.”
A well-constructed portfolio should be something that is set up for multiple environments. For example, our Foundational Stocks, which are the bulk of Mat and I’s portfolios, are stocks we’d have absolutely no problem holding through a multi-year bear market and recession.
In reality, if we knew for certain what was going to be happening in 6 months, it would be relatively easy to come up with an answer. But for now, if your time horizon is long, the best strategy is to stay invested, dollar cost average into your holdings, and lower your adjusted cost base.
