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Markets appear to be stabilizing after an unsettling weekend.

Geopolitical tensions rose over the weekend. Iran attacked Israel from Iranian territory in response to the Israeli attack on an Iranian diplomatic complex earlier this month. The Gaza war continues, as does the Russian/Ukrainian conflict.  The world feels fragile.

Increased conflict is putting pressure on oil prices, which is inflationary and will act as an opposing force against higher interest rates. Markets have stabilized over the weekend and have opened in positive territory Monday morning.

The Fear & Greed Index was greedy six weeks ago and now is hovering near fearful territory.

Geopolitical risk will continue to hover over global stock markets.

This is what has caught our eye recently….

The S&P posted the best first quarter since 2019, which was also the last time a year began with three consecutive positive months.  The US is proving to be economically strong, inflation is proving to be sticky and the S&P500 is priced for perfection that embeds both interest rate cuts and growth at the same time. On this side of the border, Canadian unemployment is rising, economic growth is slowing and the TSX is lagging its US counterpart.   Those looking to see a bounce in the interest rate sensitive names will have to wait a little longer as the Bank of Canada chose to hold interest rates steady last week. With all of this talk about inflation and 2% targets, it is easy to forget that in the past 100 years inflation has averaged 3.1%, which is not too far from our current figures.

1.  The Bank of Canada (BoC) left its policy decision rate unchanged at 5.0% last week for the sixth straight meeting. This was aligned with market expectations. In the press conference, Tiff Macklem indicated that inflation continued to ease gradually, slowing across most major categories. Our inflation rate has come in below 3%, but the government wants to ensure that inflation will not bounce back if they lower rates too soon.

Rising interest rates look to have both cooled inflation and negatively impacted GDP since the BoC began their rate hiking cycle.

2. South of the border, inflation came in a little hot in March. Today’s CPI came in up 3.5% year-over-year, which is higher than the 3.2% pace set in February. This will put further pressure on the Fed to keep rates where they are.

3. Fourth quarter S&P earnings were very strong with 73% of S&P500 companies topping analysts’ earnings estimates with an average of 4% earnings growth. With strong prices come lower dividend yields. The S&P500’s dividend yield has moved down to 1.35%, the lowest since Q4 2021. The all-time low was in Q1 2000 at 1.12%. All the strong economic data recently coming from the US has tipped bets toward fewer Fed rate cuts this year.  Markets are currently pricing in only two potential rate cuts this year (60 bps points compared to 150 bps at the start of 2024). Comments from Federal Reserve Bank of Dallas President Lorie Logan added to the more hawkish picture, after she said it’s too early to consider cutting rates at all. Markets are down currently as they reprice themselves against this new higher interest rate environment.

4. Eurozone inflation made progress in March, falling to 2.4% year-over-year from 2.6% previously and lower than the median consensus estimate of 2.5%.

CHART OF THE DAY
EUROZONE INFLATION CONTINUED TO TREND IN THE RIGHT DIRECTION, PAVING THE WAY FOR MONETARY POLICY EASING LATER THIS YEARSources: Scotia Wealth Management, Bloomberg, Eurostat | As at March 31, 2024

5. In addition to the encouraging signs on the inflation front, PMIs from China, Italy, U.S., UK, and globally have climbed back above 50 into expansion territory. This indication of improving global economies has sparked rallies in commodity prices.

6. Business sentiment has started to diverge as smaller companies become less confident of the business environment compared to larger companies. In Canada there is evidence of financial stress as credit monitoring agency Equifax says business insolvencies rose by 40% in the fourth quarter of last year.
   
7. Election years in the US tend to end the year with strength.
   

8. For the historians among us, April has a positive bias, having been positive with the S&P500 up 84% of the time over the past 20 years; the TSX 74% of the time. In contrast, over the past 20 years, May has historically been a better month for the TSX.
9. That Easter egg hunt may have cost you more this year as chocolate prices soar.
   

10. We’ve mentioned it before, but Canada has the highest household debt among all G7 nations. Higher interest rates have an effect on Canadian households as debt servicing crowds out other spending. The Canadian unemployment rate recently hit 6.1%, further complicating the situation for some households. This rise in the unemployment rate was not caused by layoffs as the labour force grew by almost 60,000. However, 90,000 more people were added to the population and job creation could not keep pace.
    

11. A recent quote from “Dr. Doom”, Nouriel Roubini

“I’m less worried than in the past… There is a serious possibility of what people refer to as a “no landing” – that growth remains above potential and inflation remains sticky… because of technology and other factors and the Fed doesn’t cut three times, only two, one maybe, some people say zero.”

Warren Buffet writes a letter to his shareholders annually. This latest letter was a little different, as his longtime business partner Charlie Munger passed away in November. Buffett preceded his regular letter with a tribute to Munger fittingly typed in an old-school “certificate of appreciation” style format.  I thought you might enjoy this touching eulogy.

Maybe we will end with a Buffett classic quote to guide us.
“Keep things simple and don’t swing for the fences.
When promised quick profits, respond with a quick no”.