The US Federal Reserve just gave the markets the gift they have been waiting for: potential cuts to the US interest rate next year! That was enough to get the bulls attention. Investors are cheering, confidence is surging, and it might just be the start of the Santa Claus Rally. Let us dive into what the Fed’s signal means for the portfolios and whether this means we are officially in for a holly jolly market ride.
Items that may only interest or educate me ….
Canadian Economic news, US Economic news, Federal Open Market Committee rate decision, Benchmark rates elsewhere, ….
Canadian Economic news
This past week’s key economic data that the Bank of Canada (BoC) considers when deciding whether to raise or lower the interest rate.
Canadian market volatility
The Canadian Volatility Index (VIXC), represented by the TSX 60 VIXI, ended the week at 10.35, up slightly from last week’s reading of 9.66. This slight increase suggests heightened volatility; however, investors remain optimistic in light of the US Federal Reserve’s projected interest rate cuts in 2024.
The uptick in the VIXC likely stems from BoC’s announcement that Canadian benchmark rates will not see a decrease anytime soon. This divergence in monetary policy (interest rates) stances between Canada and the US could be causing some concern among investors, as divergent economic trajectories or a longer period of high Canadian rates could create uncertainty and potential market fluctuations.
In the context of the VIXC, a reading above 20 is considered high, while below 20 is deemed low.
US Economic news
This past week’s key data points that the Federal Reserve (Fed) considers when deciding whether to raise or lower the interest rate.
Consumer Price Index Inflation Report
November Consumer Price Index (CPI) data revealed that headline CPI, which measures the change in prices of all goods and services consumers purchase, increased by 0.1% in November compared to October. This is the smallest monthly increase since January 2023. On a year over year basis, CPI climbed 3.1%, inline with expectations. This is down from 3.2% in October and the lowest level since January 2023.
On a monthly basis, the biggest drop was in the cost of gas, down 6.0%, while the biggest increase was in the cost of piped gas services, up 2.8%. Annually, the biggest decline was in fuel oil, down 24.8%, while the biggest increase was in transportation services, up 10.1%
Headline inflation fell thanks largely to a significant drop in gas prices in November, however, core inflation is proving more difficult to bring down. Core inflation, or core CPI, which excludes the volatile food and energy components, rose 0.3% in November, slightly higher than the 0.2% increase in October. Again, this is the smallest monthly increase since January 2023. On an annual basis, core CPI maintained a 4.0% growth rate. Both numbers were in line with analysts’ expectations.
In the core sectors, the biggest monthly decline was in apparel, down 1.3%, while the largest increase was in used vehicles, up 1.6%. Annually, the biggest drop was in used vehicles, down 3.8%, and the largest increase was in transportation services.
The CPI report was generally seen as positive news for the economy as it will likely lead to increased consumer spending and business growth. The stock market rallied on the news, as investors viewed it as a sign that the Fed, which views it as one of the key indicators of inflation, was close to ending its series of interest rate hikes.
American market volatility
Wall Street’s “fear gauge,” the CBOE Volatility Index (VIX), fell to 12.28 at the end of the week, after registering 12.65 the previous week. That is the lowest levels in nearly four years. The minor decrease in the VIX suggests investors remain optimistic in the American stock markets. The main reason for the slight decline in the ‘fear gauge’ is the Fed signalled they were done with raising the rates. The VIX is a measure of the market’s expectation of short-term volatility based on S&P 500 options prices.
Retail Sales
The Commerce Department’s retail sales report brought good news for the holiday season: November sales surged 0.3%, exceeding the expected drop of 0.1% and October’s revised decline in sales of 0.2%. Year over year, sales were up 4.1%. This strong start suggests the economy remains robust despite inflationary pressures, with resilient consumer spending offering a welcome sign against recession fears.
Black Friday further fueled this optimism, with healthy sales figures contributing to the overall November increase. Excluding the gas and vehicles categories, retail sales climbed a 0.6% monthly and an impressive 5.2% annually. Even amidst inflation, consumer remained strong, particularly in the ‘electronics and appliances’ category, which saw a remarkable 12.0% year-over-year jump.
Food and beverage establishments also thrived, with a 1.6% monthly increase, while gasoline stations, as expected, saw a decline due to lower gas prices both on a monthly and annual basis. While it is still too early to predict the complete holiday season performance, the fast start fueled by Black Friday provides a positive outlook for the crucial shopping period.
This continued rise in retail sales, even in the face of economic challenges, increases the American economy’s chances of a gradual slowdown rather than a full-blown recession. Good news all around! 😊
Federal Open Market Committee rate decision
Good news for borrowers and us investors! The Fed held the benchmark interest rate at 5.25-5.5% at their final meeting of 2023, as everyone expected. While Fed Chair Jerome Powell cautioned that the fight against inflation is not over, he provided an early Christmas present, suggesting rate cuts were coming in the new year!
While everyone was glad that rates did not climb higher, it was the suggestion of future cuts that really got investors attention. The FOMC released its economic projections, hinting at a 0.75% reduction in rates spread throughout 2024. This signals a gradual shift towards a more relaxed monetary policy, which means lower borrowing costs for everyone.
Think lower debt payments! This is especially good news for companies in sectors like technology, energy, and mining, which often carry hefty amounts of debt. No wonder the market erupted in cheers, with stocks, particularly in interest-rate sensitive sectors, enjoying a triumphant rally.
While the market reaction was understandably upbeat, remember, the Fed is not ready to declare victory just yet. A Fed official cautioned that they have yet to talk internally about rate cuts. In the meantime, they will be keeping a close eye on the economic data and are ready to raise the rates if inflation reverses course and moves higher.
This announcement of lower rates next year is a positive step, a sign that the Fed sees progress in the fight against inflation. But it is not a fait accompli. Keep in mind the Fed’s cautious optimism and focus on future data.
Benchmark rates elsewhere
Canada and the USA were not the only countries to maintain a pause on their benchmark rates hikes. However, the BoC said it was too early too even discuss cutting interest rates, while the Fed signalled they were finished raising rates and planned to start lowering the US benchmark rate in 2024.
Here is a quick look at what other western central banks have done.
Australia: At their last meeting in December, the Reserve Bank of Australia kept the Australian rate at 4.35% as inflation in that country dropped to 4.9% in October. The bank said they expect to be able to start lowering rates at the end of the second quarter in 2024.
European Union: The European Central Bank (ECB) kept their rate at 4%, a record high for the ECB. However, unlike the Fed, they said the benchmark rate will remain high as long as necessary to bring inflation down to the 2% target. European inflation currently runs at 2.4%. Analysts believe rates could start to drop at the end of the first half of 2024.
Great Britain: The Bank of England (BoE) kept their key rate at 5.25% and said there was “still some way to go” to get inflation down to their 2% target. At the BoE’s Monetary Policy Committee meeting, a few members even voted to raise the rate to 5.5%. Inflation was running at a pace of 4.6% in October, considerably higher than their target.
New Zealand: The Reserve Bank of New Zealand held their key rate at 5.5%, a 15 year high, at their meeting in November. However, when talking about future interest rate movement, the bank suggested the rate could go higher. I am sure that was not what New Zealanders wanted to hear.
Norway: The Norges Bank, Norway’s central bank raised its benchmark rate by 0.25% to 4.5% at their last meeting. It also said rates could be higher for longer as they attempt to drive inflation down from its current pace of 5.8%.
Sweden: Riksbank, Sweden’s central bank, kept their key rate at 4% at their November meeting. Swedish inflation was at 3.6% in November.
Switzerland: The Swiss National Bank maintained the current 1.75% rate as inflation remained in the target range of 0% – 2%. Even at that low rate, analysts forecast the bank to lower the rate as soon as March.
So far, the Fed is the only central bank that has indicated it has pivoted to rate cuts, while many others are sticking with the ‘higher for longer’ mantra. I hope the BoC follows the Fed rather than the other central banks and lower the rate sooner rather than later. 😊
Reading about the various central banks plans, how did the Swiss keep inflation low enough that they barely had to raise their benchmark rate? Hmmm. As you ponder that, let’s see what happened this past week….
Weekly Market Review
Monday: the markets, and therefore the indexes, got off to a shaky start but the US indexes – the S&P 500 Index (S&P), the Dow Jones Industrial Average (DJIA), and the Nasdaq Composite Index (Nasdaq) – recovered to end slightly higher, while the Toronto Stock Exchange Composite Index (TSX) was unable to fully recover. Investors hedged their bets, waiting for tomorrow’s US CPI report that will provide another update on the fight against inflation going into the Fed’s meeting on Wednesday. The price of oil edged higher.
In Canada, despite oil prices moving upward, the energy sector edged downward, preventing the TSX from ending in the green. In trading, the Technology and Financials had the biggest gains of the Canadian sectors while Consumer Cyclicals and Basic Materials (mining companies and fertilizer manufacturers) suffered the biggest declines.
In the USA, all three American indexes set new highs for the year as investors anticipate the Fed will signal the end of rate hikes at the end of their meeting. In trading, Industrials and Consumer Staples recorded the biggest gains. Telecommunications Services and Energy were the only sectors to end lower.
Tuesday: another good day for the American indexes with all three hitting their highest points since January 2022. The news was not so good for the TSX, which once again fell into negative territory early and never was able to pull itself out. The big news today was the US inflation report for November showed prices barely higher than they were in October. That is good news going into tomorrow’s meeting of the Fed where they will decide what to do with the US interest rate. Oil prices continued their descent as investors are worried there is a global oversupply of oil.
In Canada, the TSX was dragged lower by falling oil prices that spread into a wider sell off. In the Canadian sectors, only the Industrials and Consumer Staples sectors were able to end in the green. Basic Materials and Energy dropped the deepest in the red.
In the US, it was the third day in a row that the indexes hit highpoints for 2023 as investors are confident the Fed will maintain the pause on interest rates. In trading, the Technology and Healthcare sectors posted the biggest gains while Energy and Telecommunications Services declined the most.
Wednesday: all four major North American indexes were flat before surging upward following the Fed’s post-meeting press conference. In their statement, the Fed maintained the pause on the US interest rate and, more importantly, projected interest rates cuts in 2024. Oil prices inched upward due to concerns about the security of oil stockpiles in the mid east and a larger than expected weekly draw on US crude oil supplies.
In Canada, following the news from the Fed, the TSX closed the day at a ten-month high. All the Canadian sectors ended the day higher, led by Basic Materials and Utilities, each up over 3%. Trailing the pack were Consumer Cyclicals and Industrials.
In the US, it was a broad-based rally that saw all three indexes up over 1%. The DJIA broke the 37,000 barrier to close at its highest ever level, while the S&P and Nasdaq hit new closing highs for the year. In trading, today’s rally produced gains across all American sectors with Utilities and Financials leading the way, while Telecommunications Services and Technology brought up the rear.
Thursday: all four indexes continued to rally on the optimism generated by yesterday’s Fed announcement that the benchmark interest rate should start easing off in 2024. This time the rally has been caused by broad based strength in small and mid cap companies, rather than pulled higher by the heavyweight technology companies. Oil prices were higher for a second straight day as the demand forecast for next year was raised.
In Canada, the TSX reached its highest closing point since June 2022. In trading, the interest sensitive Technology and Consumer Cyclicals sectors led all gainers, while Consumer Staples and Telecommunications Services were the only sectors to end lower.
In the US, the DJIA set a record high close for the second straight day and the S&P is approaching its record close from January 2022. In trading on Wall Street, Energy and Basic Materials were the big winners on the day, while the Consumer Staples and Utilities sectors fell the most.
Friday: the day ended with mixed results as the TSX and S&P ended in the red (OK, the S&P was barely in the red, down only 0.01%), while the DJIA and Nasdaq ended in the green. The indexes stumbled after a Fed official said the bank was not ‘really talking about cutting interest rates right now.’ Oil prices were barely higher but enough to provide oil prices with their first weekly gain in seven weeks.
In Canada, the TSX had its worst day in two months after the BoC Governor said the bank has not even discussed lowering the interest rate. On Bay Street, every sector ended lower. Healthcare and Technology fell the least while Telecommunications Services and Consumer Cyclicals suffered the largest decline.
In the US, ongoing investor optimism lifted the DJIA to a third straight record high close. In trading, only the growth-oriented Technology and Consumer Cyclicals sectors were able to end in positive territory, while Utilities and Telecommunications Services suffered the biggest losses.
Weekly Market and Portfolio Review
For the week, the TSX (SPTSX) rose 1.0%, the S&P 500 (SPX) advanced 2.5%, the DJIA (INDU) surged 2.9% and the Nasdaq (CCMP) gained 2.8%.
| Index | Weekly Streak |
| TSX: | 1-week winning streak |
| S&P: | 7-week winning streak |
| DJIA: | 7-week winning streak |
| Nasdaq: | 7-week winning streak |
The S&P started the week at its highest level of the year, and then promptly went higher, as you can see in the chart above. Last week’s promising jobs report fueled hopes of a “soft landing” for the US economy, where inflation cools without a recession. This week, we got more good news: inflation continued its downward trend in November, followed by the Fed’s final policy announcement of 2023.
The big news was not that the Fed kept rates steady, as expected, but that it is likely done with rate hikes and is expecting to pivot to cuts in 2024. This dovish pivot breathed new life into the rally that started in November and jumpstarted the “Santa Claus rally”.
With big gains across the market and the portfolios increasing in value, it is hard not to get excited. 😊 The Fed’s shift sent US indexes soaring. Despite trailing the S&P and Nasdaq year-to-date, the DJIA had its best day since January 2022, on its way to setting three consecutive all-time closing highs. Not bad for an index that is composed of mostly ‘old economy’ stocks! Following the Fed’s announcement, technology companies re-joined the rally, pushing the Nasdaq to close the week at an all-time high. The S&P, while not breaking its record close, reached within 2% of it (set in January 2022) and notched its longest winning streak since November 2017 (seven weeks!). Both the S&P and the Nasdaq reached their highest levels since January 2020.
For most of the year the markets have been lifted by the Magnificent Seven. However, this week, they mostly took a breather, while small cap companies, which range in value from $300 million to $7.1 billion, and mid cap companies, which range in value from $7.1 billion to $17.7 billion surged. It is a good sign that the rally is broadening rather than focused on a handful of companies.
As for the TSX, it too got a lift from the investor enthusiasm. However, falling oil prices (reaching a six-month low before a slight rebound) weighed on the index. Additionally, the index stumbled at the end of the week after the BoC Governor said interest rates in Canada were not coming down soon, diverging from the Fed’s stance.
Its great to see the markets rise and the rally broaden, but if the markets get irrationally exuberant, to paraphrase Alan Greenspan, the Fed could decide to hold the rate longer to avoid inflation creeping higher. Still, overall, it has been a stellar week for stocks, setting the stage for a potentially merry end to the year.
As for the portfolios, it was another good week as they hitched a ride on the Santa Claus rally. As shown in the chart below, Portfolio 3 posted the biggest percentage gain thanks to gains of 10% or more in Unity Software (NYSE: U) and Cloudflare (NYSE: NET) and no significant drops by the other companies in the portfolio. Portfolio 2 generally had a good week with strong performances from Chorus Aviation (TSE: CHR) and Mitek Systems (NASD: MITK) offsetting a 10% drop by Dollarama (TSE: DOL). Trailing the pack was Portfolio 1. It had a number of significant gains from companies like Lattice Semiconductor (NASD: LSCC), Innovative Industrial Properties (NYSE: IIPR), Global-E Online (NASD: GLBE) and Rivian Automotive (NASD: RIVN).
Another good week for the portfolios. Hopefully, the Santa Claus rally will continue for the rest of the year and lead into a New Year’s rally. 😊
Companies on the Radar
No new companies came on my radar list this past week. However, I decided my Radar list was getting a bit crowded so I removed MTY Food Group Inc. (TSE: MTY) and e.l.f. Beauty, Inc. (NYSE: ELF). MTY had been on the list at least 6 weeks and it never really motivated me to spend more than a few minutes looking into the company. ELF was a similar situation. ELF sounded interesting at first, but it never sparked enough excitement to pursue further research. So, I removed both from the list.
The radar list is back down to a more manageable five companies:
- PHX Energy Services (TSE: PHX) a small Canadian company that provides drilling technology and services to oil and natural gas exploration companies throughout the world, but mainly in North America.
- McDonald’s (NYSE: MCD), the large cap American fast-food chain.
- TFI International Inc. (TSE: TFII), a mid-sized Canadian transportation and logistics company operating across North America.
- Celestica Inc. (TSE: CLS), a medium sized Canadian company that manufactures electronic products and provides supply chain services to companies around the world.
- Decisive Dividend Corporation (TSXV: DE), a small cap Canadian company involved in several manufacturing areas. They typically acquire existing profitable manufacturers from owners/founders who are looking to retire and sell their company to someone who will continue to grow and build the business.
The Radar Check was last updated December 15, 2023.
Portfolio Update
Portfolio 1
Portfolio 1 for the week ended December 15, 2023: UP 
- Lattice Semiconductor won two awards at the 2023 Global Semiconductor Alliance (GSA) Awards: ‘Most Respected Public Semiconductor Company’ for the fourth consecutive year, and ‘Best Financially Managed Semiconductor Company’.
- The US Department of Commerce confirmed Nvidia (NASD: NVDA) “can, will and should sell artificial intelligence (AI) chips to China because most AI chips will be for commercial applications.” They just cannot sell their most sophisticated, highest processing power AI chips. Nvidia is working with the Government to ensure they only ship the appropriate semiconductors to China.
- Alphabet’s (NASD: GOOGL) Google lost the antitrust case initiated by Epic Games. Epic accused Google of using their Android operating system to create an antitrust market for its Google Play app store which was used to extract money from developers. Google plans to appeal the verdict. If this verdict holds up it could be a serious dent in Google’s US$10 billion in revenue generated by their app store.
- More heads rolled at General Motors’ (NYSE: GM) Cruise division as a result of an accident involving one of its driverless cars. Nine more employees were let go following a review of how Cruise managed an incident that seriously injured a pedestrian. Previously, the Chief Executive Officer and the Chief Product Officer, both co-founders of the company, had resigned following the incident.
Separately, GM announced reduce its Cruise workforce by 24% as it attempts cut expenses to lessen losses. - Another automaker is addressing safety concerns. Tesla (NASD: TSLA) has recalled over two million of its electric vehicles in the US and 193,000 in Canada. The largest ever recall was to install safeguards in its Autopilot advanced driver assistance system. Tesla was responding to concerns from the National Highway Traffic Safety Administration (NHTSA) that the system did not adequately ensure drivers paid attention while driving.
A bit of good news for Tesla, Netherlands’ vehicle authority said they would not issue a recall for European Teslas. The agency said there are differences in specific features of Tesla’s driver assistance system in the two markets. - Costco (NASD: COST) announced a special dividend of US$15 per share to shareholders of record as of the close of business on December 28, 2023. That is an unexpected, but appreciated, Christmas present. 😊
- Amazon (NASD: AMZN) won a six-year legal battle with the European Commission (EC), the European Union’s (EU) antitrust regulator. The EU’s top court ruled Amazon does not have to pay back €250 million of alleged back taxes. The EC claimed Luxembourg, the home of Amazon’s head office in the EU, provided the company with illegal tax benefits allowing the company to avoid taxes on 75% of its profits between 2006 – 2014.
Activity
Sold: Algonquin Power & Utilities Corp (TSE: AQN) I sold the shares in Algonquin back in January. However, the shares were sold after the cutoff point (ex-dividend date) for receiving the next dividend payment. The stock had been part of a Dividend Re-Investment Plan. Even though I no longer owned any shares in Algonquin, when it came time for the dividend payout, I received a few shares. This sale involved getting rid of those few shares and concluding the investment in Algonquin.
Dividends
Dividends Received this week for the following companies:
Companies followed by DRIP (Dividend Re-Investment Plan) indicate additional shares were purchased with the dividend. Any cash leftover was added to the cash balance.
Canadian $
Cameco Corporation (TSE: CCO)
Dream Industrial Real Estate Investment Trust (TSE: DIR.UN)
Yellow Pages Ltd (TSE: Y)
US $
BSR Real Estate Investment Trust (TSE: HOM.U)
Skyworks Solutions Inc (NASD: SWKS)
Home Depot Inc (NYSE: HD)
General Motors Co. (NYSE: GM)
Quarterly Reports
Costco Wholesale Corporation
All currency listed in millions of US dollars, except for per share data.
Selected highlights from their first quarter 2024 financial results on December 14, 2023
- Revenue of $57,799 for the 12 weeks ended November 26, 2023, compared to $54,437 for the 12 weeks ended November 20, 2022. An increase of over 6%.
- Net income of $1,589 for the 12 weeks ended November 26, 2023, compared to net income of $1,364 for the 12 weeks ended November 20, 2022.
- Diluted earnings per ordinary share of $3.58 for the 12 weeks ended November 26, 2023, compared to earnings of $3.07 per share for the for the 12 weeks ended November 20, 2022.
Portfolio 2
Portfolio 2 for the week ended December 15, 2023: UP
- Airbnb (NASD: ABNB) has agreed to pay the Italian Revenue Agency US$620 million to settle outstanding income tax obligations for the period 2017 – 2021. In Italy, Airbnb typically withholds part of the money generated by property owners, or ‘hosts,’ and in return pays the taxes generated from the rentals. Airbnb does not plan to attempt to recover any of the money from its hosts.
- The Bank of Nova Scotia (TSE: BNS) plans to focus on building its business in Canada, Mexico and the Caribbean while leaving underperforming regions, such as Columbia and other Central American countries. The money that would have been spent in in underperforming areas will be re-invested in the above mentioned markets.
- Canadian Natural Resources (TSE: CNQ) said it plans to ramp up production in the new year. The company believes there will be increased demand for oil-based products.
Activity
No significant activity to report this week.
Dividends
Dividends Received this week for the following companies:
Companies followed by DRIP (Dividend Re-Investment Plan) indicate additional shares were purchased with the dividend. Any cash leftover was added to the cash balance.
Canadian $
SmartCentres Real Estate Investment Trust (TSE: SRU.UN)
Hammond Power Solutions Inc. (TSE: HPS.A)
iA Financial Corporation Inc (TSE: IAG)
US $
Microsoft Corp (NASD: MSFT)
Quarterly Reports
Dollarama Inc.
All currency listed in thousands of Canadian dollars.
Selected highlights from their third quarter 2023 financial results on December 13, 2023
- Revenue of $1,477,692 for the thirteen-week period ended October 29, compared to $1,289,574 for the same period in 2022. An increase of almost 15%.
- Net income of $261,055 for the thirteen-week period ended October 29, compared to net income of $201,594 in the same period in 2022.
- Diluted earnings per ordinary share of $0.92 for the thirteen-week period ended October 29, compared to earnings of $0.70 per share for the same period in 2022.
- Revenue of $4,228,177 for the 39-week period ended October 30, compared to $3,579,518 for the same period in 2021. An increase of over 18%.
- Net earnings of $686,690 for the 39-week period ended October 30, compared to net earnings of $540,575 in the same period in 2022.
- Diluted earnings per ordinary share of $2.41 for the 39-week period ended October 30, compared to earnings of $1.85 per share for the same period in 2022.
Portfolio 3
Portfolio 3 for the week ended December 15, 2023: UP
- As part of Unity Software’s corporate reset, the company plans to close 14 offices. Employees affected by this decision will be given the option to work completely remote unless their jobs are location dependent.
Activity
No significant activity to report this week.
Dividends
Dividends Received this week for the following companies:
Companies followed by DRIP (Dividend Re-Investment Plan) indicate additional shares were purchased with the dividend. Any cash leftover was added to the cash balance.
Canadian $
SmartCentres Real Estate Investment Trust (TSE: SRU.UN) DRIP
US $
Microsoft Corp (NASD: MSFT)
Quarterly Reports
Enghouse Systems Limited
All currency listed in thousands of Canadian dollars, except for per share data.
Selected highlights from their fourth quarter 2023 financial results on December 15, 2023
- Revenue of $123,129 for the three months ended October 31, compared to $108,060 for the same period in 2022. An increase of almost 14%.
- Net income of $25,122 for the three months ended October 31, compared to net income of $36,949 in the same period in 2022.
- Diluted earnings per ordinary share of $0.45 for the three months ended October 31, compared to earnings of $0.67 per share for the same period in 2022.
- Revenue of $454,022 for the twelve months ended October 31, compared to $427,585 for the same period in 2021. An increase of over 6%.
- Net earnings of $72,248 for the twelve months ended October 31, compared to net earnings of $94,498 in the same period in 2021.
- Diluted earnings per ordinary share of $1.31 for the twelve months ended October 31, compared to earnings of $1.70 per share for the same period in 2021.