Since I have been doing this investing blog, I have often read of various central banks’ target of a 2% rate of inflation. This is the figure that the Bank of Canada, the US Federal Reserve, European Central Bank, and other central banks often site. It got me to wondering why 2%? Was it arbitrary or was there some logical rationale? So, I decided to investigate it.
The 2% inflation target became widely adopted by central banks in the 1990s and early 2000s for several reasons:
- Stable Prices: Aiming for a 2% inflation rate helps keep prices rising moderately. This stability is crucial because it allows businesses and consumers to plan for the future without worrying about sudden price increases (inflation) or decreases (deflation).
- Economic Predictability: When inflation is around 2%, it signals a healthy economy where businesses can invest and grow, and consumers can confidently spend. This predictability reduces uncertainty, which is beneficial for long-term investment planning.
- Impact on Interest Rates: Central banks such as the Bank of Canada and the US Federal Reserve adjust interest rates based on inflation. If inflation is too low (close to or below 0%), it can lead to deflation, where prices fall, and economic activity slows down. To prevent this, central banks might lower interest rates to encourage borrowing and spending. On the other hand, if inflation is too high, they might raise interest rates to cool down the economy and prevent excessive price increases.
- Investment Strategy: Knowing that central banks target 2% inflation can help investors make informed decisions. For example, during periods of low inflation, interest rates might be lower, making borrowing cheaper and potentially encouraging investment in assets like stocks and real estate. During high inflation, investors might look for assets that historically perform well during inflationary periods, such as commodities or inflation-protected bonds.
- Global Consensus: The fact that major central banks worldwide aim for a 2% inflation target creates a framework that investors can rely on. It fosters stability in financial markets and encourages global economic cooperation, which can impact international investments and trade.
Understanding why central banks target 2% inflation can really help you see how economic policies shape market conditions and investment opportunities. It highlights why keeping an eye on inflation trends and central bank actions is key to a solid investment strategy. That is why these ‘Weekly Update’ posts kick off with Canadian and US economic conditions – even if they seem a bit dry 😊 – to give you insight into what central banks watch as they work to maintain that 2% inflation target.
Since we are talking about economic news, let’s see what happened this past week….
Items that may only interest or educate me ….
Canadian Economic news, US Economic news, How do I get started investing in publicly traded companies? …
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.
BoC Monetary Policy meeting minutes
With inflation remaining a top concern, the Bank of Canada’s Governing Council met on June 5th to decide the fate of Canada’s interest rate. The minutes revealed that after four consecutive months of easing core inflation (a measure of inflation that excludes food and energy prices), the Bank opted for a rate cut. April’s data showed headline inflation at 2.7%, staying below the upper end of the Bank’s target range for the fourth month.
The global economy also factored into the decision. While overall growth was healthy at nearly 3%, a slowing American economy was balanced by increased growth in Europe and China. Inflation concerns remain globally, with core inflation measures rising in both the US and the Euro zone despite expectations of a gradual decrease. Back in Canada, the economy grew at a solid pace of 1.7% in the first quarter of 2024, but employment indicators showed easing pressures. Annual wage growth, however, remained around 4%, a potential future risk for inflation but also a sign of a healthy economy.
The higher interest rates appear to have dampened inflation, with both the overall and core inflation rates dipping in April. The Bank is aware of the potential for future inflation spikes due to factors like wage growth, but also recognizes the benefits of a strong labour market.
Overall, the Bank of Canada remains cautious, emphasizing a data-driven approach to future rate decisions. Officials agreed that any further rate cuts would be gradual and based on incoming data, with the next announcement scheduled for July 24th.
Canadian market volatility
Canada’s Volatility Index, the VIXC, tracked by the TSX 60, jumped 18% this week, rising from 9.56 to 11.31. This is a noteworthy increase, but despite the VIXC’s rise, the markets remain relatively stable overall, likely due to the lack of major economic news this past week. Investors are still hoping for another BoC rate cut in July and a potential follow-up by the US Federal Reserve in September.
The VIXC reflects anticipated market volatility, with lower values indicating less uncertainty and a calmer investor mood.
Retail Sales
Statistics Canada reported that in April, retail sales in Canada increased 0.7%, bouncing back from a 0.2% decline in March. This marks the largest increase since September 2023. Here are some of the highlights:
Sector Highlights:
- Gasoline Stations and Fuel Vendors had the biggest gain with a 4.5% increase, primarily driven by higher fuel prices.
- Motor Vehicle and Parts Dealers faced the biggest drop, down by 2.2%.
Yearly Performance:
- Retail sales climbed by 1.8% compared to last year.
- Health and Personal Care Retailers led all sectors with a 6.2% rise.
- Sporting Goods, Hobby, Musical Instrument, Book, and Miscellaneous Retailers experienced the steepest decline, down by 3.7%.
Core Retail Sales: Excluding gasoline stations, fuel vendors, motor vehicle, and parts dealers:
- Monthly Growth was up by 1.4%.
- Annual Growth Increased by 1.5%.
- Food and Beverage Retailers (which accounts for 19% of total retail sales) was up by 1.9%.
- Building Material and Garden Equipment and Supplies Dealers recorded the biggest monthly drop, down by 1.4%.
The report highlights ongoing cautious consumer spending, influenced by rising inflation and higher interest rates, reducing disposable income. Until these economic pressures ease, consumer spending is expected to remain cautious.
Preliminary data for May indicates a potential 0.6% drop in retail sales, which, if confirmed, would be the steepest decline since January. This could offset much of April’s gains.
In summary, while April brought a welcome boost in retail sales, the outlook remains uncertain as consumers navigate inflation and higher interest rates.
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.
American market volatility
he CBOE Volatility Index (VIX), known as the market’s fear gauge, ticked up to 13.20 from last week’s 12.66. This rise likely reflects recent economic data showing a slowdown in consumer spending and a cooling economy. Despite the increase, the VIX remains below the 20 threshold, which generally indicates market calmness. This suggests that investors are still relatively relaxed about near-term market conditions.
Retail Sales
The Commerce Department’s May retail sales report showed that retail sales grew by a lower-than-expected 0.1% in May, following a revised decline of 0.2% in April. Analysts had anticipated a growth rate of 0.2%. Annually, retail sales rose at a pace of 2.3%.
The biggest monthly increase was recorded in ‘Sporting goods, hobby, musical instrument, & bookstores,’ which were up 2.8%, while the largest decline occurred in ‘Gasoline stations,’ which fell by 2.2%. Annually, the most significant increase was in ‘Miscellaneous store retailers,’ up 7.3%, whereas ‘Furniture & home furnishing stores’ experienced the biggest drop, down 6.8%.
Excluding ‘motor vehicle & parts dealers’ and ‘gasoline stations,’ retail sales still grew by 0.1% in May, meeting expectations. On a year-over-year basis, core retail sales grew by 2.6%.
This latest report indicates that consumer spending has slowed as persistent inflation and high interest rates continue to affect consumer behavior. This week’s report is yet another sign of a decelerating economy. Analysts and, more importantly, the Fed, will be watching future retail sales reports to see if this slowdown persists. For those hoping for a cut to interest rates, this slowdown is a positive indicator. 😊
How do I get started investing in publicly traded companies?
After reading in last week’s Weekly Update that now is the best time to start investing, you are ready to start. Great! You have made the decision to start investing to meet your financial goals. Now you are wondering, “How do I get started?” Well, let us see if we can help you navigate the process.
First, ensure you have the basics covered: set aside an emergency fund, pay off high-interest debt, create an investment plan, and consult with a certified financial planner to ensure everything is in order. Once these steps are completed, you are ready to dive into investing! The first step is to open an investment account, which allows you to buy and sell shares, effectively making you a part-owner of those companies. 😊 Investment accounts can hold cash and a variety of investment products, including stocks, bonds, mutual funds, and exchange-traded funds (ETFs). This gives you the flexibility to choose investments that align with your risk tolerance and financial goals.
Step 1: Open an Investment Account Consider using a no-cost trading app like TD Easy Trade or Wealthsimple. For Canadians, you will receive both a Cash account and a Tax-Free Savings Account (TFSA), each with Canadian and US dollar subaccounts. TFSAs are a great way to grow your wealth tax free because any interest, dividends, or capital gains earned in a TFSA are not subject to Canadian income tax. Additionally, withdrawals from a TFSA are not taxed, offering flexibility as you can access your funds without worrying about additional tax implications. Remember, there is an annual contribution limit for TFSAs, so check with a financial advisor or the Canada Revenue Agency (CRA).
Step 2: Choose Your Platform Back in the early 90s, investing meant calling a stockbroker, buying shares in lots of 100, and paying a $50 transaction fee. Today, online trading is much more accessible. Fees are minimal, if not free, and you can buy as little as one share, or a fraction of a share in some cases. All you need is either a computer with secure, fast internet access or a smartphone with an appropriate app. Here are some well-known online brokers:
- Big 5 Canadian Banks: RBC Direct Investing, Scotia i-Trade, TD Direct Investing, BMO InvestorLine, CIBC Investors Edge
- Third-Party Platforms: Questrade, Qtrade, Wealthsimple
Many banks require a minimum balance to avoid maintenance fees, but these fees are often waived if you or your household have a substantial financial relationship with the bank (e.g., mortgage, savings account, etc.). Using your financial institution for your trading account simplifies money transfers and usually they offer comprehensive financial planning services to assist with overall wealth management. In addition to cash, and TFSA accounts, many financial institutions can also provide tax sheltered Registered Retirement Savings Plan (RRSP) or Registered Income Fund (RIF) accounts in both Canadian and US currencies. Additionally, you can buy and sell on major Canadian and US exchanges, as well as secondary exchanges like the Canadian Securities Exchange (CSE) and the Over-the-Counter Market (OTCM) in the US. If you are opening your first direct trading account, consider starting with your financial institution for these conveniences.
Step 3: Determine Your Needs If you do not meet the bank’s fee waiver criteria, explore other trading platforms. Consider what is important to you:
- Research capabilities to look for investments or perform your own due diligence on companies
- Low transaction fees
- Access to all North American stock markets and stocks
- Educational resources to help you understand this investing thing
- Customer support and the ability to easily talk to someone if you have any questions
Assess your investing knowledge, experience, and desired features, then choose the platform that fits you best.
Happy investing! Remember, the key is to understand what you are investing in and make decisions that align with your financial goals and ability to take on risk.
Weekly Market Review
Monday: it was a tale of two countries as far as the indexes go. Canada’ Toronto Stock Exchange Composite Index (TSX) ended lower, while the S&P 500 Index (S&P), the Nasdaq Composite Index (Nasdaq) and the Dow Jones Industrial Average (DJIA) ended higher. Oil prices rose on the prospects of increased demand during the summer.
In Canada, the TSX fell to a three-month low as investors rotate away from resource-oriented stocks in favour of high-flying technology companies. In trading, Industrials, Consumer Cyclicals and Consumer Staples were the only Canadian sectors to advance, while Technology and Utilities suffered the biggest declines.
In the US, the rally in artificial intelligence (AI) companies propelled the Nasdaq to its sixth consecutive record high, and the S&P reached a record high for the 30th time this year. In trading, Consumer Cyclicals and Technology were the big gainers, while Utilities and Healthcare dropped the most.
Tuesday: it was a good day in the markets, with all four indexes ending in the green. Weaker US retail sales has investors hoping this opens the door for the Fed to lower interest rates sooner rather than late. Oil prices rose on supply concerns due to rising tensions in the Middle East region.
In Canada, higher oil and commodity prices pushed the TSX into positive territory. In trading, Basic Materials (miners and fertilizer manufacturers) and Energy posted the biggest sectoral gains, while Technology and Telecommunications were the biggest losers in the Canadian sectors.
In the US, technology companies associated with AI continue to extend the current bull run, sending the Nasdaq to its seventh straight record close, and the S&P to its 31st record high close of 2024. A surge in share price by Nvidia (NASD: NVDA) has pushed Nvidia into the number 1 spot as the world’s most valuable company, as measured by market capitalization (number of shares outstanding X share price). In trading, Energy and Financials were the top performers, while Consumer Cyclicals and healthcare were the only two sectors to end lower.
Wednesday: the TSX was dragged lower by seasonally weak commodity prices, while the US stock markets were closed for the American national holiday Juneteenth. The price of oil moved higher, however, all ten Canadian sectors lost ground today. The steepest declines were in the Healthcare and Industrials sectors, while Basic Materials and Utilities declined the least.
Thursday: a mixed day for the indexes with the TSX and DJIA advancing. Despite hitting record highs during today’s session, the Nasdaq and S&P ended lower when investors took some money off the table after the recent rally in AI stocks. Oil prices continued to climb as investors anticipate lower interest rates in time for the busy summer travel season.
In Canada, higher commodity prices lifted the TSX off an almost four month low. In trading, buoyed by higher commodity prices, Basic Materials was the best performing sector, while Utilities performed the worst.
In the US, the Nasdaq’s streak of record high closings ended at seven when the Nvidia rally stalled and then the share price fell 3%. In trading, Energy posted the biggest gain while Technology had the biggest drop.
Friday: the markets fluctuated throughout the day as the AI-fueled rally lost momentum. Consequently, the DJIA was the only index to end in positive territory, with investors seemingly booking profits after the AI surge. Oil prices retreated on concerns of lower-than-expected demand.
In Canada, lower commodity prices caused by oversupply and lower demand weighed on the TSX. In trading, The Technology sector gained the most while Basic Materials suffered the biggest drop.
In the US, Nvidia stock pulled back another 3%, dragging the Nasdaq and S&P into the red. In trading, Consumer Cyclicals advanced the most, while Energy fell the furthest.
Weekly Market and Portfolio Review
For the week, the TSX (SPTSX) fell 0.4%, the S&P 500 (SPX) grew 0.6%, the DJIA (INDU) rose 1.5% and the Nasdaq (CCMP) was essentially flat, adding 0.003%.
| Index | Weekly Streak |
| TSX: | 5 – week losing streak |
| S&P: | 3 – week winning streak |
| DJIA: | 1 – week winning streak |
| Nasdaq: | 3 – week winning streak |
The past week saw mixed results for the four major North American indexes. While the American indexes recorded modest gains, the TSX ended lower. The American trading week was interrupted by the Juneteenth national holiday, which fell in the middle of the week.
Nvidia and the AI-fueled rally were the main drivers for the American markets, initially lifting the S&P and Nasdaq to record highs. However, after the midweek holiday, the rally lost steam, causing the S&P and Nasdaq to give back some of their earlier gains. The DJIA didn’t get the same boost from the AI rally, but managed to maintain its upward momentum since technology companies make up a smaller portion (20%) of this index and have less influence overall. Despite the technology sector’s wobble, the three US indexes managed to eke out modest gains for the week.
In Canada, the resource-driven TSX was influenced by fluctuating commodity prices, which ultimately saw the TSX trend downward throughout the week, as you can see in the chart above.
Overall, the week started strong but lost momentum towards the end, with three of the indexes heading downward. This week reminds us that markets can be unpredictable, even after strong starts. This is not a great sign for next week, but there is plenty of economic news on the horizon. Let us hope the latest inflation and productivity reports from Canada and the US bring positive news for consumers and investors alike. 😊
| Portfolio | Weekly Streak |
| Portfolio 1: | 1 – week losing streak |
| Portfolio 2: | 2 – week losing streak |
| Portfolio 3: | 1 – week losing streak |
It’s not often that a good week for the indexes translates to a tough week for portfolios, but that’s exactly what happened this past week. All three portfolios experienced losses greater than the worst-performing index, as illustrated in the chart below.
Portfolio 1 had the toughest week among the three. Despite over half the companies in this portfolio recording gains, the overall value still dropped. This was largely due to Nvidia, the portfolio’s largest holding at 38%, falling by 6%. Additionally, significant losses from Nano-X Imaging Ltd (NASD: NNOX) and indie Semiconductor Inc. (NASD: INDI), both down 11%, added to the portfolio’s woes.
Portfolio 2 saw a majority (56%) of its companies posting weekly gains, with no significant individual gains or losses. Microsoft (NASD: MSFT) and MongoDB (NASD: MDB), the second and third largest holdings, both recorded weekly gains. However, the largest holding, the Bank of Nova Scotia (TSE: BNS), registered a loss. Despite these mixed results, the portfolio fell for a second straight week.
Portfolio 3’s decline was straightforward: more than 66% of its companies posted weekly losses. When that many companies in a portfolio decline, it’s tough to achieve a weekly gain. The situation was exacerbated by Unity Software (NYSE: U) and Lithium Americas (Argentina) (TSE: LAAC), both hitting 52-week lows.
Overall, it was a challenging week for all three portfolios. No one said investing was always sunshine and rainbows. 😊 With fingers crossed, let us hope for a significantly better performance next week.
Companies on the Radar
No new companies caught my eye this past week, but I did manage to shorten my watchlist by removing RELX PLC (NYSE: RELX). With a growth estimate of 7.1% over the next five years, RELX seemed the least promising compared to the other five companies on my list, which all appeared to have better upside potential. So, I decided to drop it from consideration.
The radar list now comprises these five companies listed below.
- Equitable Bank (TSE: EQB), a mid sized Canadian bank, considered Canada’s 7th bank, that provides financial services to consumers and businesses.
- Quanta Services, Ltd. (NYSE: PWR), a large-cap American company offering a wide range of specialty infrastructure solutions throughout the world
- Vertiv Holdings (NYSE: VRT), an American company that designs and builds infrastructure and continuity solutions to businesses around the world.
- Vistra Corp (NYSE: VST), an American company operating in the integrated retail electricity and power generation sector.
- Lumine Group (TSE: LMN), a young Canadian mid sized company that acquires communications and media software companies, and then strengthens and grows those companies.
Please keep in mind that these are only companies that have piqued my interest. This is not a recommendation or financial advice. You should do your own research or contact a professional before making any investment decisions.
The Radar Check was last updated June 21, 2024.
Portfolio Update
Portfolio 1
Portfolio 1 for the week ended June 21, 2024: DOWN 
- Apple (NASD: AAPL) announced they were shutting down their ‘Buy now, pay later’ (BNPL) service in the US as the company transitions to a successor program that uses third party BNPL companies. Existing users of Apple’s BNPL service will still be able to manage and pay outstanding loans via Apple’s Wallet app.
- The Trade Desk (NASD: TTD) announced they had expanded their partnership with Fox Corporation (NASD: FOX) to help advertisers reach their target audiences and measure the success of those campaigns.
- Amazon (NASD: AMZN) plans to overhaul its Alexa voice assistant service into two levels with a monthly fee to utilize the higher AI integrated tier.
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 $
BSR Real Estate Investment Trust (TSE: HOM.UN)
Yellow Pages Ltd (TSE: Y)
Decisive Dividend (TSE: DE) DRIP
US $
Alphabet Inc (NASD: GOOGL)
General Motors (NYSE: GM)
Quarterly Reports
No quarterly reports this past week.
Portfolio 2
Portfolio 2 for the week ended June 21, 2024: DOWN
- Alimentation Couche-Tard (TSE: ATD) subsidiary Circle K has been quietly selling stores that do not fit their business model. Despite actively purchasing convenience stores, they recently sold 110 stores across Canada and the US and are currently in the process of unloading 68 more stores.
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 $
iA Financial Corporation Inc. (TSE: IAG)
Dream Industrial Real Estate Investment Trust (TSE: DIR.UN) DRIP
Supremex Inc. (TSE: SXP)
iA Financial Corporation Inc (TSE: IAG)
US $
No US$ dividends this past week.
Quarterly Reports
No quarterly reports this past week.
Portfolio 3
Portfolio 3 for the week ended June 21, 2024: DOWN
- TD Bank (TSE: TD) has started a new business unit, called TD Innovations Partners, focused on providing banking and financial services to Canadian technology companies. The new unit will provide a full suite of services, from setting up bank accounts for new startups through to connecting companies to potential investors, board members, customers, and vendors.
- Magnite (NASD: MGNI) announced their SpringServe ad serving technology is being used by Japan’s Yomiuri Telecasting Corporation to provide video advertising for their on-demand services.
- GDI Integrated Facility Services (TSE: GDI) announced their Chief Financial Officer will retire in September, however he will serve as an advisor for the following twelve months. Charles-Etienne Girouard was promoted to senior vice president of finance operations, effective immediately. Mr. Girouard has been with GDI for the past six years.
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 $
No US$ dividends this past week.
Quarterly Reports
No quarterly reports this past week.