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CA-EN Institutional

When the Fed Speaks, Listen

April 17 to 21, 2023


When the Fed Speaks, Listen

April 17 to 21, 2023

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Weekly Commentary

Market Recap

  • Equity markets rose this week, helped by softer headline inflation and solid bank earnings.
  • The S&P 500 rose 0.8%, with banks jumping almost 6% as some bigger-cap names in the sector topped earnings expectations. Industrials and energy were also strong, while utilities and tech lagged.
  • The TSX added 1.9%, with higher oil prices driving a 2.8% advance in energy.

Corporate Profits

Earnings season is here again, and expectations for corporate profits continue to be low. This can be chalked up to several factors: interest rates have gone up; the consumer has started to weaken somewhat; and across the board, inflation is still impacting earnings. The bar has been set so low that we could see some firms beat their guidance. But in absolute terms, we don’t expect to see good results this quarter, and it’s likely that we’ll see a continuation of companies lowering guidance due to the likelihood of a recession and further consumer weakness down the road.


There should also be margin declines as inflation revenue starts to erode. There will be some sector-based differences, however. Energy has had strong price movement, but it’s also coming off higher numbers the previous quarter. Tech perhaps looks a bit better—it was one of the first sectors to be affected by the downturn and could be primed for a rebound. But much of the positivity around firms like Meta and Amazon was based only on job cuts, which decrease expenses and potentially increase margins—none of it was based on revenue growth. The optimism was due to a one-time reduction of costs, and investors will be asking what other story they’re able to tell beyond just streamlining their workforce.


Financials will be interesting, with a lot of uncertainty remaining. The big question is—how will the big U.S. banks, which benefitted from deposits after the Silicon Valley Bank (SVB) situation, fare versus the regional banks, which may have to cut dividends? Even within sectors, there may be some divergence in results based on quality.

Bottom Line: We don’t expect good results this quarter, though there will be some variation between and within sectors.

Rate Forecasts

The latest monthly U.S. CPI print came in below the previous months’ numbers, prompting some analysts to revise their interest rate expectations. But is this warranted? Investors are constantly going back and forth between what markets are expecting and what analysts are saying. We prefer to listen to the U.S Federal Reserve (Fed)—and the story they’ve been telling is of data dependency. In other words, as long as inflation is higher than the target, they’re going to keep their foot on the gas, or at least avoid rate cuts.


Our expectation is that there will be a rate hike at the Fed’s next meeting, and perhaps another one at the meeting after that, because while inflation has come down, it’s still not anywhere near 2%. If the financial fallout from the SVB crisis had been more damaging, that could have wiped out one of those rate increases. But in reality, equity markets, bond markets, and investors’ wealth have all gone up since that situation emerged. Credit conditions will continue to tighten, but in our view, it hasn’t been enough to deter the Fed.


We’ll have to wait and see what the Fed says at its next meeting to know for sure whether they’re staying true to their mandate, which has been to bring down inflation even if it induces a recession. But we expect them to stay the course, which would mean one or two more rate hikes before a pause.

Bottom Line: When it comes to interest rate expectations, take the Fed at their word.


With the SVB situation fading into the background, what’s the outlook for North American banks? In the U.S., we expect the strong to become stronger, as the big banks will benefit from inflows. In our view, you want to own quality companies that can withstand the impacts of higher interest rates and inflation, and firms like JPMorgan as an example fit that bill. You saw that in their recent earnings, as well as with Citigroup. The outlook for regional banks is less rosy as a result of the ongoing fallout from SVB—we don’t think that story is completely over just yet.


Mergers and acquisitions are still possible, and as a result, there’s still some uncertainty around lower-quality banks. North of the border, it’s a time when Canadian banks should shine. They aren’t as affected by the SVB situation as their U.S.-based counterparts, even though some do have operations down south. Overall, they remain well-structured and well-capitalized with very secure dividends and a chance for further inroads in the U.S. as assets become better priced. In our view, the recent hit to Canadian banks due to the financial crisis has been an overreaction, which means that there may be opportunities to buy the dip.


That being said, the credit environment is still going to tighten, mortgage rates remain high, and the consumer is starting to weaken; it’s not all sunshine and rainbows. Given the cloud hanging over banks in the U.S., we may not see much upside immediately. But generally, Canadian banks remain relatively sound.

Bottom Line: For safety in Financials, look to the large U.S. banks and Canada’s Big Six.


We recently held our monthly meeting to determine our house view, and we’ve made a few adjustments. Our equity vs. bond vs. cash allocation remains unchanged—we’re slightly overweight fixed income, slightly underweight cash, and neutral on equities. This is predominantly because the economy is slowly weakening but a recession continues to move further out, and the Fed is likely approaching a pause. There are negatives and positives, and in that environment, you want to stay relatively balanced, not taking on or taking off too much risk.

That being said, we are being a bit more cautious in our more conservative portfolios, in view of what investors experienced in 2022. We’ve also added to our gold positions across most of the portfolios. Regionally, there were no changes—we’re underweight U.S., underweight Canada, neutral on International (EAFE), and still bullish on Emerging Markets (EM), particularly China. We moved our positioning on the CAD to slightly bullish based on optimism relative to the USD. And in terms of styles and factors, we’re slightly bullish on Quality and neutral on Growth and Value.

In an environment where the economy is going to gradually weaken—or worse, if there’s some kind of surprise—you want to remain focused on Quality. We don’t see a particularly benefit to being overweight Growth or Value, though Tech likely has some upside from here if we’re approaching the end of a rate-hiking cycle. As always, we will continue to revisit our positions and revise as warranted.


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