Investors’ enthusiastic vice, Big Tech’s price and some ChatGPT advice

Good morning. You asked for it and now it’s back. We’re pleased to announce that our Family Finance column is returning to help solve your money issues. Worried about having enough for retirement? Wondering how to make ends meet? Need to adjust your portfolio? Just drop us a line at [email protected] with your contact info and the general gist of your problem and we’ll try to find some experts to help you out while writing a story about it (we’ll keep your name out of it, of course). Now, on with the show.

Don’t fight the Fed. It’s a tried-and-true investing strategy, yet that seems to be what investors are doing by throwing caution to the wind and getting back into speculative growth plays such as technology and dodgy schemes like cryptocurrencies. On a more micro level, every statement by a United States Federal Reserve official is dissected for hints that the war on inflation is over and rate cuts are imminent. For example, chair Jay Powell on Feb. 7 said he was winning the inflation war, so U.S. stock indexes initially started rising. He also said interest rates will still rise. Investors panicked, and indexes predictably dropped. Oops.

But Powell didn’t say anything new that day. He even expressly told investors on Feb. 1 that markets should “reflect the tightening that we’re putting in place,” all but writing in stone that more rate hikes are coming. Investors didn’t believe him. The next day, they were projecting a 97.2-per-cent chance that rates will be five per cent or less by December, according to the CME’s FedWatch tool. Given the current rate is 4.5 to 4.75 per cent, that pretty much means no more increases or a quick succession of raises and then cuts. Incidentally, Bank of Canada governor Tiff Macklem has indicated he won’t be cutting rates anytime soon, despite what Bay Street thinks, and he’s ready to raise them as need be.

We all know the Fed is the world’s most powerful economic force, and can move markets with a single word, as Powell did with Canadian mortgage rates last week. But all this dipping in and dropping out is just making markets more volatile than they need to be, and likely delaying a longer-term rally based on fundamentals, rather than wishful thinking that’s happening in abundance.

S&P 500 companies whose earnings missed estimates this year have outperformed the index in the five days following their results, according to a Bank of America Corp. analysis. And the most shorted stocks have outperformed the least shorted by about 14 percentage points in 2023. The lowest-quality stocks for some perverse reason are doing the best, something Jim Smigiel, chief investment officer at SEI Investments Co., has dubbed a “junk rally.”

Fear of missing out, of course, is a big reason why investors are so bullish, which is understandable given many probably lost 20 per cent or more last year. But economist David Rosenberg crunched some numbers to show such fears are somewhat misplaced. The S&P 500 rises an average of 47 per cent in the first year after a “fundamental recessionary bear market low,” but if you moved in one month too quickly, your gain is only 25 per cent. If you were three months too early, you gained just 17 per cent. But if you’re one month late, your gain is 28 per cent. “The fact of the matter is that it is wise and prudent to wait for the tests and retests and to understand that it is better to be a tad late than a tad early,” he says, adding that we likely haven’t reached such a low yet.

Rising index charts may look like they’re telling us to invest now, but recent earnings and corporate guidance aren’t — in Rosenberg’s words, they “truly suck” — and valuations still aren’t particularly compelling except relative to the highs of the 2021 bubble. “I didn’t bother chasing any of last year’s eight bear market rallies, and I’m not chasing this one either,” he says.

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]

5 investing red flags from ChatGPT put under the microscope

Three giant companies — Microsoft Corp., Alphabet Inc. and Baidu Inc. — all had significant news on the so-called next big thing, artificial intelligence, this week. In keeping with that theme, investment adviser Peter Hodson asked ChatGPT for five red flags when it comes to investing. The chatbot’s answers were pretty good, though not perfect.

SMART BUT NOT THAT SMART

Big Tech is back, but be careful about going all in on rate-sensitive sectors

Investors should have some exposure to those sectors such as technology with sensitivity to interest rates, but portfolio manager Martin Pelletier says you should be careful if you’re only doing it to get in on the recent rally. He points out that inflation protection has become much cheaper, so take a look at those bread-and-butter areas of the economy that can make money right now.

RATE YOUR CHANCES 

FOMO fuels market rally as investors assess risks of a recession are receding

The fear of missing out is raising its head again, fuelling a rally that is boosting the riskiest asset classes despite continuing inflation and a possible recession. “Markets are pricing in the end of the inflation problem and … very heavily discounting the risk of a tail event,” says equity researcher Nitin Saksena. “The risk of a severe recession, a policy mistake, or a second wave of inflation is becoming an afterthought.”

ROSE-COLOURED GLASSES?

The year’s emerging-market rally is already in danger of slowing

China’s reopening and hopes for looser global financing conditions fuelled a rally in developing-economy assets in early 2023, but it’s already beginning to lose steam. As new risks arise, Goldman Sachs Asset Management and JPMorgan Chase & Co. are among those touting more selective strategies.

EMERGING THREATS

FP 500 — The most authoritative survey of corporate Canada: The 2022 FP 500 is the only national ranking of the country’s public, private and Crown corporations, making it an indispensable research tool with vital data on Canada’s top companies across all sectors. Order your copy here.

Investors often view layoffs in a positive light, sending those cost-cutting companies’ stocks upwards. Not Canopy Growth Corp. The cannabis producer’s stock sank 16.6 per cent on Thursday after it announced it was laying off 800 people and closing some facilities. Is that pipe dream going up in smoke? More typical was Walt Disney Co.’s stock rising as much as 7.8 per cent after the entertainment company announced it was laying off 7,000 employees as part of a US$5.5-billion cost-cutting plan though the stock did lose its momentum later. Oh boy.

How investors can ride the EV boom without betting on Elon Musk

Few investors should ignore the electric-vehicle market given it’s expected to grow to US$1.3 trillion in 2028 from US$287 billion in 2021. But there are plenty of potholes to be wary of, as market leader Tesla Inc.’s troubles attest, including concerns about range anxiety, raw material shortages and a geopolitical push to establish western supply lines independent of China.

NAVIGATING A BUMPY ROAD

New Flyer, the Canadian Tesla of public transit, looks to turn bus around

NFI Inc. has endured a couple of harsh years because the pandemic snarled the Winnipeg-based busmaker’s supply lines, backed up orders and jammed its stock price at around a sixth of its value from five years ago. But long-time chief executive Paul Soubry is optimistic he can steer the business back to profitability, rewarding investors for their patience in the process.

THE DRIVE AHEAD

What’s the best way to invest RESP money for a grandchild?

Setting up a registered education savings plan for a young grandchild is a great idea, but now you must select from what may seem like endless investment options. Certified financial planner Doug Robinson says a good place to start if you’re a do-it-yourselfer is to contribute $208 per month to a low-cost, global stock exchange-traded fund so you can get the maximum government grant of $500 per year. But there are other options, too.

GET THE ANSWER

If you have an investing or personal finance question, hit us up at [email protected].

CRA denies transit employee’s costs from working away from home, gets taken to court

The Canada Revenue Agency generally considers the cost of driving back and forth between home and work a non-deductible personal expense. But can you write off the cost of your lodging and meals if you’re temporarily living at a place near your work that isn’t your home? One Ontario taxpayer tried, but the CRA challenged him and the matter ended up in court. Tax expert Jamie Golombek has the details on what the judge decided.

COME FROM AWAY

5 steps to stop feuding financially with your partner

Couples who argue about money put so much stress on their relationship that it can lead to dissatisfaction or worse. Given Valentine’s Day is around the corner, debt counsellor Sandra Fry offers a handful of simple steps that people can take to get on the same page financially. Maybe a romantic weekend getaway is in your future as a result of the money you’ll save.

FAMILY FINANCIAL FEUD

Still suffering a holiday finance hangover? Personal finance educator Kelley Keehn tells the Financial Post’s Larysa Harapyn that it’s time to weigh in, count your calories and get help if you need it. That is, open those credit-card and banking statements to see where you’re at, start eliminating expenses you don’t need and consolidate your debts at a lower rate. And if you have a bit of money lying around, take another look at how you’re using your tax-free savings account.

GET THE VIDEO

Good news if you like commodities: China’s thirst for commodities as it reopens could guide Canada into a soft landing if there is a contraction since the country’s major exports include oil, natural gas, grain, cereals and other goods. Traders have already bid up Canadian stocks and the Canadian dollar as a result.

Bad news if you like Big Tech companies: Apple Inc., Amazon.com Inc. and Alphabet Inc. all posted poor financial results late last week, because an economic slowdown is throttling demand for everything from electronics and e-commerce to cloud computing and digital advertising.

Good news if you like old school energy: China’s economy is showing “first indications” that its growth will accelerate faster than previous expectations, which will further boost demand for oil and natural gas, according to International Energy Agency executive director Fatih Birol. “This may be even stronger if the Chinese economy advances stronger than we assume,” he says.

Even more good news for oil and gas: The global market for oil and gas contractors will rise to a peak of US$1 trillion by 2025 and remain there for several years, according to researcher Rystad Energy. “All signs point towards 2022 being the start of another super cycle for the energy services sector,” says head of energy service research Audun Martinsen.

Bad news if you’re planning to retire: Canadians believe they will need to save $1.7 million to retire, up 20 per cent from 2020, according to a study published by BMO Financial Group, but only 44 per cent are confident they will have enough to retire as planned, a 10 per cent decrease in the same timeframe.

Good news if you’re a Brookfield Asset Management Ltd. shareholder: Brookfield Corp.’s spinoff alternative asset manager raised a record US$93 billion last year for investment purposes and earned US$569 million, up six per cent from the prior year. Its stock rose 2.8 per cent on Wednesday following the release of the company’s first-ever quarterly earnings report.

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