Market Update: August 15th, 2023

Inflation in both Canada and the US ticked up in the month of July. On both sides of the border, this increase was led by Gasoline, Utilities, Food, and Shelter all moving up this month. Also, both sides saw a decrease in the more Consumer Discretionary items such as Footwear/Apparel and Durable Goods (Cars, Furniture, and Appliances). 

Many retailers have reported seeing a “trading down” in their consumers. Wal-Mart saw an increase in $100,000 income per year shoppers and Dollar General has reported some of their shoppers are moving to food banks.

The Good

There is some good news, Core Inflation (excluding gasoline and food) is steadily decreasing on both sides of the border, the central banks do pay more attention to this number vs. the headline number. Gasoline and Food prices are volatile based on global events and there is very little governments can do about the price.

The Bad

There is more bad within this read than good. The bad news is prices of items where consumers cannot curtail spending continues to increase. We have to eat, heat, drive to work, pay the rent/mortgage, etc. and those things are rising in price. This does represent a more stretched consumer as this decrease’s disposable income.

If the Bank of Canada or the US Federal Reserve were to increase here it would most likely drive most of those costs higher, which could push inflation even higher. 

The markets prefer a consumer that has money to spend as opposed to a consumer that is tightening their wallet.

The Ugly

There really isn’t any ugly right now in these numbers but it felt right to complete the phrase of the good, the bad, and the ugly. The ugly would be if these trends continue and we also get some job loss. If the central banks decide to increase rates again to an obviously weaker consumer that could get ugly. But on both sides, this decision will not happen until September, and we receive more data throughout August and the first week of September. 

Right now, it does appear the consumer is holding in there and the market is giving a 10% chance of a rate increase in the US and a 30% chance in Canada for September.

Mega Cap 8 Valuation (Continued from the previous Update)

Valuations of the Alphabet, Amazon, Apple, Meta, Microsoft, Netflix, Nvidia, and Tesla took a step back over the past couple of weeks. Falling faster than the broad market, while earnings remain very strong for these companies’ revenue growth for all (except Nvidia) has slowed below 20%. While these valuations have come down, they remain elevated vs. the current rate environment. 

Summary

Overall, slightly negative as inflation came in higher than expected but the mix is the key in both Canada and in the US. Hopefully, they recognize the tightening of wallets across the broad consumer base and pause on rate increases.

Thanks,

Justin, Konrad, and Merriel

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More articles and information are available at www.lkwealth.ca

Content Sources: Bloomberg, Trading Economics, Yahoo Finance, BCA Research

Disclaimer: This newsletter is solely the work of Justin Lim and Konrad Kopacz for the private information of their clients. Although the author is a registered Investment Advisor with Echelon Wealth Partners Inc. (“Echelon”) this is not an official publication of Echelon, and the author is not an Echelon research analyst. The views (including any recommendations) expressed in this newsletter are those of the author alone, and they have not been approved by, and are not necessarily those of, Echelon.

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