Market Update: October 10th, 2023

September was once again the worst month of the year. The positive news is that the next three months are historically the best-performing months of the year.

Last four Septembers for the S&P 500:

2020: -3.92%

2021: -4.76%

2022: -9.34%

2023: -4.85%

Last three Q4s:

2020: 11.69%

2021: 10.65%

2022: 7.08%

2023: ?

Topics

1. September Issues
2. Recession Looming?
3. Possible end-of-year turnaround?

September  Issues

There were numerous factors that contributed to the negative returns in the market that all seemed to pile on at once. 

Federal Reserve Comments

The US Federal Reserve did pause interest rates but were looking at an increase in either November or December. On top of that they stated rather than 4 cuts next year, they are now expecting 2 cuts. This was the biggest change and the market needed to adjust for “higher for longer”. This caused a spike in rates hurting both bonds and equities.

Debt Issuance

Governments and Companies issued a lot of debt during COVID at very low rates. That debt is now coming due and needs to be reissued, the problem is the market wants higher and higher rates. This is pushing rates even higher and hurts bonds and equities.

Debt Ceiling

Once again, the US avoided a default on its debt but had to come up with a short-term 45-day fix to come up with an agreement. The fear of them not coming to an agreement pushed rates up further, once again hurting bonds and equities.

Big Tech Problems

With all this Big Tech companies that have been propping up the market all year fell about 7% in September. They are about 27% of the S&P 500 therefore, this hurts quite a bit when something so large drops.

These are just 4 larger issues that drove investments down, as optimism was sucked from the market.

Recession Looming?

We are trending towards an inflation/fed-induced recession. Like the 80s and 90s.Consumers are being stretched and the job market is showing cracks, with higher prices on everything and increased debt costs this is not a recipe for success. 

Current Restrictive Levels

In our minds, the current level of “restriction” placed on businesses and consumers is sufficient to bring down inflation.

Inflation has increased Canadian prices by 14.1% since the start of 2021 and income has increased by about 4.5% over the same period. This means Canadians have about 10% less disposable income than before. Therefore a 10% strain on their wallets.

To add on top of this borrowing rates have gone from 1% to 5% within about 1.5years. Debt is always a leveraging factor; it creates more rapid movements up and down. The average mortgage payment in March of 2021 was $1,289 and in August of 2023, the average was $1,984. This is a 54% increase! This is just a simple example of how the increased interest rates and debt levels amplify the effects of both inflation and rates. Where 10% might be average but for someone with higher debt this number could be 20-30%.

The fear in the investment world is that while it’s restrictive right now the federal government has indicated that this needs to become more restrictive by raising rates further.

Job Market Showing Cracks

Jobs continue to be added in both the US and Canada. But looking deeper into the numbers they have not been the best and do come with question marks.

Canada

In September, Canada added 64,000 jobs. 66,000 of these jobs were in the educational services sector. You can draw your own conclusions there. Finance and real estate lost 20,000 jobs and Construction lost 18,000 jobs.

United States

336,000jobs in September! Which is very resilient but the job growth in the “high school diploma or less” requirement represented the entire gain whereas the “some college degree or higher” requirement was negative. These may not exactly be high-quality jobs but adding none the less.’

Canada Holding and US Increasing

Unemployment in the US remains at 3.8% highest since March of 2022 and in Canada, the unemployment rate remains at 5.5% the highest since February of 2022. At the beginning of 2022, the government finally released its COVID-19 restrictions. Canada has added more jobs since reducing COVID restrictions, but the percentage of people employed across the population has decreased. Total jobs are increasing but only because we are adding so many immigrants, Canada is holding onto the employment rate of 62%.

In the US, they are performing better and have been increasing their percent of employed across the populations they are doing better even if the jobs are not quality ones. At 60% they are slightly less employed than Canada and have been increasing over the same period.

Possible end-of-year turnaround?

There is a good possibility of an end-of-year turnaround. The obvious seasonal historical data suggests a turnaround, but more than that this is a very rapid overreaction in our opinion. We are seeing a once-in-a-multi-year opportunity to purchase some long-term stable assets right now. While this may not be the bottom some investments are too cheap to ignore. Below are three investments that are presenting a drop that has not been seen in years:

Utilities- ex. XLU - Utilities ETF

Over the past 20 years Utility companies have seen a drop of this magnitude only 3 times. Once in 2008 (Financial Crisis), then again in 2020 (COVID), and finally right now. We believe this represents an opportunity too great to ignore.

Real Estate - ex. XRE - iShares S&P/TSX Capped REIT Index ETF

Once again, a drop of this magnitude has happened in three occurrences. In 2008,2020, and now. This correction right now represents a 35% drop in real estate overall, we are happy to grab real estate at this discount. 

Fixed Income - ex. TLT - iShares 20+ Year Treasury Bond ETF

We have seen 3 years of sharp declines in bonds. This is rare, but we also have not seen rate increases like this since the 70s/80s. The reverse is when rates start to get cut there is a very rapid rise in the price of bonds. Represented in 2008 and 2020, while this time around it will most likely not be as rapid there is potential for it.

We understand these are the areas that are painful, but these are three areas that have been very consistent over time and are presenting very low buying opportunities. This does represent well for a year end run in the market, these value areas have quickly sold off and in the zone for a bump.

Summary

In all, we are due for a year end run because of the drastic overreaction in the market to the recent events. It is difficult to get many major issues all at once, but a resolution for the debt ceiling over the next 45 days, the federal governments potentially not raising rates, and Big Tech just holding firm could add relief to this market. There are catalysts to move the market higher over the next 90 days. We would say a recession in Canada is very likely over the next year and it could get worse given the fragility of the job market here. In the US, is holding in well and if they have a recession, it most likely would be soft.

Justin, Konrad, and Merriel

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.

Echelon Wealth Partners Inc. is a member of the Investment Industry Regulatory Organization of Canada and the Canadian Investor Protection Fund.

Forward-looking statements are based on current expectations, estimates, forecasts and projections based on beliefs and assumptions made by the author.

These statements involve risks and uncertainties and are not guarantees of future performance or results and no assurance can be given that these estimates and expectations will prove to have been correct, and actual outcomes and results may differ materially from what is expressed, implied or projected in such forward-looking statements.

 The opinions expressed in this report are the opinions of the author and readers should not assume they reflect the opinions or recommendations of Echelon Wealth Partners Inc. or its affiliates. Assumptions, opinions, and estimates constitute the author’s judgment as of the date of this material and are subject to change without notice. We do not warrant the completeness or accuracy of this material, and it should not be relied upon as such. Before acting on any recommendation, you should consider whether it is suitable for your particular circumstances and, if necessary, seek professional advice. Past performance is not indicative of future results.

 These estimates and expectations will prove to have been correct, and actual outcomes and results may differ materially from what is expressed, implied or projected in such forward-looking statements.

‍