Investment

Why Investors Need to Accept That Higher Rates Are Here to Stay

Published

2 years ago

August 22, 2022

As investors have become comfortable with the consecutive interest rate increases from central banks, the TSX, S&P 500, and NASDAQ experienced massive rallies over the past few weeks. The TSX inflated over 10% since its year-to-date bottom, followed by the S&P 500’s nearly 18% rally, while the NASDAQ climbed over 23%.

However, some investors forget that high-interest rates are not going away anytime soon. Here’s why:

Inflation is Still Overheated

Firstly, it’s important to recognize that inflation around the world is still overheated. Canada and the United States, for instance, have inflation of 7.6% and 8.5% as of July Consumer Price Index (CPI) data. Both countries have their policy interest rate set at 2.5%, although it likely won’t be long until it moves higher.

Throughout history, inflation had to be fought with an equally as high or higher policy interest rate. Otherwise, inflation would still have the fuel necessary to continue accelerating during the short-to-medium term.

In the 1980s when inflation was nearly 15% in the United States, there were swift actions taken by the central bank to decelerate the surging prices. Back then, inflation was caused by central bank policies that enabled growth in the money supply. The parallels between now and then are striking. Except, our inflation was largely created by CERB and stimulus packages being sent to individuals in North America who were now unemployed—thereby increasing the money supply.

Macroeconomically, the fundamental conditions that led to the exponential increase of inflation in the 1980s were also lurking during 2020. Economists just wouldn’t see the effects until two years later.

Why the Incentive to Own Stocks Could Deteriorate

At the start of the year, the first companies to get punished were small and mid-cap stocks. The incentive to own low-yield dividend-focused companies is also gone. This is because the 10-year note currently yields a higher return than the S&P 500’s average dividend yield of 1.5%.

However, Canada in particular has a variety of equities paying over 3% to shareholders. If the 10-year note were to move higher—which can sometimes rise with interest rates—there would be a sudden realization across the entire market that the risk of owning equities would be too high in comparison to more risk-averse assets which pay similar rewards.

As a result, it seems investors are brutally underprepared for what could occur within the next few months as central banks continue to tighten their monetary policies to de-accelerate inflation.

Additionally, valuations are still a concern in the public markets, primarily within the S&P 500. The cyclically adjusted P/E ratio, also known as the Shiller P/E, is currently 31.1. For comparison, the dot-com bubble reached a Shiller P/E of 44.1 and crashed down to nearly 23. According to 150 years’ worth of stock market valuation data, the median is 15.8. With that being said, multiple compression can happen in a handful of ways.

If quarterly earnings across the S&P 500 begin to drop, or the price of equities within the index drop, the valuation multiple would compress. Conversely, if earnings began to soar while equity prices remained stagnant, that could also shrink the ratio. Though, the latter is rather unlikely given macroeconomic headwinds.

Overall, there is a strong possibility that investors haven’t yet recognized that high-interest rates, alongside further uncertainties, are likely to persist over the next few years.

Investment

Tesla shares soar more than 14% as Trump win is seen boosting Elon Musk’s electric vehicle company

Published

3 days ago

November 6, 2024

Anne Joseph

NEW YORK (AP) — Shares of Tesla soared Wednesday as investors bet that the electric vehicle maker and its CEO Elon Musk will benefit from Donald Trump’s return to the White House.

Tesla stands to make significant gains under a Trump administration with the threat of diminished subsidies for alternative energy and electric vehicles doing the most harm to smaller competitors. Trump’s plans for extensive tariffs on Chinese imports make it less likely that Chinese EVs will be sold in bulk in the U.S. anytime soon.

“Tesla has the scale and scope that is unmatched,” said Wedbush analyst Dan Ives, in a note to investors. “This dynamic could give Musk and Tesla a clear competitive advantage in a non-EV subsidy environment, coupled by likely higher China tariffs that would continue to push away cheaper Chinese EV players.”

Tesla shares jumped 14.8% Wednesday while shares of rival electric vehicle makers tumbled. Nio, based in Shanghai, fell 5.3%. Shares of electric truck maker Rivian dropped 8.3% and Lucid Group fell 5.3%.

Tesla dominates sales of electric vehicles in the U.S, with 48.9% in market share through the middle of 2024, according to the U.S. Energy Information Administration.

Subsidies for clean energy are part of the Inflation Reduction Act, signed into law by President Joe Biden in 2022. It included tax credits for manufacturing, along with tax credits for consumers of electric vehicles.

Musk was one of Trump’s biggest donors, spending at least $119 million mobilizing Trump’s supporters to back the Republican nominee. He also pledged to give away $1 million a day to voters signing a petition for his political action committee.

In some ways, it has been a rocky year for Tesla, with sales and profit declining through the first half of the year. Profit did rise 17.3% in the third quarter.

The U.S. opened an investigation into the company’s “Full Self-Driving” system after reports of crashes in low-visibility conditions, including one that killed a pedestrian. The investigation covers roughly 2.4 million Teslas from the 2016 through 2024 model years.

And investors sent company shares tumbling last month after Tesla unveiled its long-awaited robotaxi at a Hollywood studio Thursday night, seeing not much progress at Tesla on autonomous vehicles while other companies have been making notable progress.

Tesla began selling the software, which is called “Full Self-Driving,” nine years ago. But there are doubts about its reliability.

The stock is now showing a 16.1% gain for the year after rising the past two days.

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Investment

S&P/TSX composite up more than 100 points, U.S. stock markets mixed

Published

3 weeks ago

October 16, 2024

Anne Joseph

TORONTO – Canada’s main stock index was up more than 100 points in late-morning trading, helped by strength in base metal and utility stocks, while U.S. stock markets were mixed.

The S&P/TSX composite index was up 103.40 points at 24,542.48.

In New York, the Dow Jones industrial average was up 192.31 points at 42,932.73. The S&P 500 index was up 7.14 points at 5,822.40, while the Nasdaq composite was down 9.03 points at 18,306.56.

The Canadian dollar traded for 72.61 cents US compared with 72.44 cents US on Tuesday.

The November crude oil contract was down 71 cents at US$69.87 per barrel and the November natural gas contract was down eight cents at US$2.42 per mmBTU.

The December gold contract was up US$7.20 at US$2,686.10 an ounce and the December copper contract was up a penny at US$4.35 a pound.

This report by The Canadian Press was first published Oct. 16, 2024.

Companies in this story: (TSX:GSPTSE, TSX:CADUSD)

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Economy

S&P/TSX up more than 200 points, U.S. markets also higher

Published

4 weeks ago

October 11, 2024

Anne Joseph

TORONTO – Canada’s main stock index was up more than 200 points in late-morning trading, while U.S. stock markets were also headed higher.

The S&P/TSX composite index was up 205.86 points at 24,508.12.

In New York, the Dow Jones industrial average was up 336.62 points at 42,790.74. The S&P 500 index was up 34.19 points at 5,814.24, while the Nasdaq composite was up 60.27 points at 18.342.32.

The Canadian dollar traded for 72.61 cents US compared with 72.71 cents US on Thursday.

The November crude oil contract was down 15 cents at US$75.70 per barrel and the November natural gas contract was down two cents at US$2.65 per mmBTU.

The December gold contract was down US$29.60 at US$2,668.90 an ounce and the December copper contract was up four cents at US$4.47 a pound.

This report by The Canadian Press was first published Oct. 11, 2024.

Companies in this story: (TSX:GSPTSE, TSX:CADUSD)

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