Good morning. School has begun and while that doesn’t affect many of us, other than shepherding any kids we may have out the door, this time of year often brings a sense of optimism. The dog days of summer are behind us — and hopefully the heat and wildfires will be, too — hockey season is almost here and a big turkey dinner is in the cards. Investors in general have also been pretty optimistic, or perhaps hopeful is a better word, in figuring that a recession can be avoided and high-flying stocks will justify their altitude-challenging valuations. Too much so, say some.
“At current prices, markets are now expecting a meaningful re-acceleration in growth that we think is unlikely this year, especially for the consumer,” Morgan Stanley’s staunch bear Michael Wilson said in a note on Tuesday. “Potentially softer September and October data is not priced into many stocks and expectations.” And JPMorgan Chase & Co.’s Mislav Matejka says there is no more safety net to cushion equities despite the complacency of equity markets in the United States. It should be noted that the buy side of those two firms have more positive outlooks.
Either way, the U.S. economy is still showing signs of life, unlike Canada, where second-quarter gross domestic product contracted by 0.2 per cent due to drops in housing investment (hello, high mortgage rates), slower exports and depressed household spending (hello, inflation). That worse-than-expected figure gave the Bank of Canada enough reason on Wednesday to hold interest rates at five per cent, though it left the door open to future hikes if inflation doesn’t drop to its coveted range of one to three per cent.
Things do seem better in the U.S. on the surface, but economist David Rosenberg says the data suggests that corporations are yet to feel the full impact of the 525-basis-point increase in the United States Federal Reserve’s rate since March 2022. “The continued investor optimism and belief that defaults will not pick up kept spreads low, but this will ultimately reverse,” he notes in Tuesday’s Breakfast with Dave newsletter. That was echoed by Oaktree Capital Management LP co-founder Howard Marks, who expects more companies to default on their debt as higher interest rates increase the difficulties of raising capital. And Bank of America Corp. strategist Michael Hartnett, who predicted the U.S. stock slump last year, has remained bearish even as U.S. indexes have soared because he believes more indications of a so-called hard landing will soon become apparent.
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Another reason to feel pessimistic is that some of the best-performing stocks look really expensive based on their price-to-earnings multiple. For example, artificial intelligence poster child Nvidia Corp. is trading at 113 times earnings, “a textbook story of a Big Market Delusion,” says Rob Arnott, founder of Research Affiliates LLC. “Overconfident markets paradoxically transform brilliant future business prospects into even more brilliant current stock price levels,” he says. “Nvidia is today’s exemplar of that genre: a great company priced beyond perfection.”
Tesla Inc., meanwhile, is still trading at 71.4 times its earnings despite being well off its pre-crash high of US$407 in November 2021. Rivals Ford Motor Co. and Toyota Motor Corp. are trading at 11.6x and 11.9x, respectively. Another highly valued (overvalued?) electric-vehicle pure play is Vietnam’s VinFast Auto Ltd., which in late August was worth more than Ford, General Motors Co. and Volkswagen AG combined despite being expected to only produce 50,000 cars this year. By comparison, GM sold 5.9 million vehicles last year and Tesla sold 1.3 million. But VinFast has a small share float, which distorts its market value because any investor demand quickly boosts the price, and vice versa. VinFast subsequently lost about 80 per cent of its market cap. A short float makes a company easy to spot as an outlier when it comes to high multiples, but that can be more difficult with other stocks.
Even in Canada, however, investors seem optimistic, as evidenced by a study by Ortec Finance BV of 50 wealth managers, financial advisers and planners, 70 per cent of whom say their clients’ risk profile has increased in the past 12 months. But since Canadians are typically more reserved, just two per cent of those surveyed say their clients’ risks have dramatically increased. Nevertheless, it seems clear we’re chasing returns to make up for last year’s losses, and trying to do it quickly before the screw turns again. Let’s hope the next turkey we see is on a plate, not our investment statement.
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Andy Holloway, editor of the FPI and Financial Post Magazine, and senior features editor of the Financial Post. If you have any quips, queries or comments, get in touch at [email protected].
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Good news (perhaps) for U.S. company shareholders in general: The S&P 500’s rally this year is strong enough to withstand higher bond yields, according to Bloomberg’s latest Markets Live Pulse survey, with losses expected to be less than 10 per cent if yields rise.
Bad news for Apple Inc. shareholders: Shares in the iPhone maker tumbled again on Thursday, putting them on track to wipe out US$212 billion of market value in just two days. One reason: China plans to expand its ban on the use of Apple’s phones to include government-backed agencies and state companies.
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Bad news for U.S. bank shareholders: The KBW Bank Index fell 8.8 per cent in August, its worst month since the spring regional banking crisis. Credit agencies downgraded a swath of lenders and expectations around the U.S. Federal Reserve’s rate path became increasingly uncertain.
Good news for homeowners in some cities: Homeowners in 15 major housing markets who bought properties in July 2018 have on average watched their equity grow quite a bit over the past five years, according to a new study by Zoocasa. Greater Toronto Area homeowners gained an average of $401,700, but condo owners in Edmonton experienced a $27,300 drop.
Bad news for oil investors: Brent oil topped US$90 a barrel after Saudi Arabia and Russia extended their supply cuts to year-end, but it is now trading in overbought territory on its relative strength index, leaving traders braced for a technical correction.
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