Quick Check on Canadian Bank Stocks

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The S&P 500 in a bear market with a loss of 25% YTD. Canada’s TSX Composite is down relatively lesser with a decline of 13% year-to-date. On a sector basis, how much have Canadian banks fallen?

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Source: Google Finance

RBC (RY) is down by about 16%. The worst performer so far this year is ScotiaBank(BNS). High exposure to emerging markets in Latin America and other factors have led to a loss of 33%.

Long-term investors will find dividend yields of these banks attractive at current levels. However with the overall market still facing further declines and recession on the horizon it is wise to keep an eye on these stocks and nibble a little during big decline days.

Disclosure: Long BNS, BMO, CM, RY and TD

Stocks Perform Better When Inflation Falls

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The US equity market is in the grip of a brutal bear. The summer rally seems long ago and may have pulled additional investors who though the bear market was over. Inflation is still raging and the Federal Reserve has made it clear that they will not rest until soaring inflation is tamed. This week’s another 0.75 percentage increase in interest rates is another reminder of their plan in action.

According to the Labor Department, the consumer price index rose 8.3% in August relative to the same month last year. The actual inflation rate faced by consumers is much higher in most cases. From airfares to cars to insurance to food and everything in between we are learning how high inflation rate hurts. Up until a few years inflation was mostly non-existent in the US other than few select sectors such as college tuition or healthcare for instance. Now inflation is across the board. That has got the attention of the Fed which until recently was claiming it was just transitory.

Many investors are wondering whether inflation is good or bad for stocks. One could argue that inflation could help stocks since when companies raise prices they generate higher profits. But the problem with this argument that not all companies can jack up prices to what they want without consumers noticing it. In addition, since the US economy is a consumption driven economy consumers can also simply avoid or reduce their purchases if prices become too high. According to a research note posted by Jeffrey DeMaso at Adviser Investments, the S&P 500 has performed much better during times of falling inflation than during times of rising inflation as shown in the chart below. The average annual S&P 500 return, since its inception in 1957 to 2021 was 13% when inflation fell and just 4.3% when inflation rose.

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Source: Chart of the Week: Inflation Rates and Stock Prices, Adviser Investments

Related ETF:

  • SPDR S&P 500 ETF Trust (SPY)

Disclosure: No positions

Bull vs. Bear Market in Canadian Stocks 1924 To 2021: Chart

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Canada’s benchmark S&P/TSX Composite Index down 13% so far this year. The S&P 500 on the other hand is in a bear market with a decline of over 22%. Booming commodity markets especially oil earlier in the year benefitted Canada. It remains to be seen if the TSX Composite holds up well thru the end of the year with a global recession looming on the horizon.

As in other developer markets, bull markets have been longer than bear markets in the Canadian context also. Data from 1924 to 2021 show that the average bull market lasted for 37 months and returned 110% while the average bear market length was 14 months with a loss of 34%.

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Source: Russell Investments

Related ETFs:

  • SPDR S&P 500 ETF Trust (SPY)
  • iShares MSCI Canada ETF (EWC)

Disclosure: No positions