Market Insights: Record 'Triple Plays'

Milestone Wealth Management Ltd. - Feb 19, 2021

Macroeconomic and Market Developments:

  • North America equity markets were mixed but mostly negative this week. In Canada, the S&P/TSX Composite was down 0.41%, and in the US, the Dow Jones Industrial Average was up 0.11% and the S&P 500 was down 0.71%.
  • The Canadian dollar was up about half a cent this week, finishing at 79.23 cents this Friday vs 78.75 cents last Friday.
  • Oil prices were down slightly this week on a big reversal after being up as much 4.5% just yesterday. US West Texas crude finished at $59.24, compared with $59.47 last week. The Canadian WCS price finished at ~$47.92 vs $47.55 last week for a small gain.
  • Gold prices were down significantly this week, finishing at $1781.40 from $1,824 last Friday for a 2.4% drop.
  • Today is February 19, which is a notable date in recent market history, as it ended up being the day the S&P 500 “topped” last year before dropping around 35% over the next month. The S&P/TSX Composite topped the next day, falling 37%. Since then, we have all been through a lot; though at least the stock market was “saved” and the S&P 500 is up about 15.5% (TSX Composite up 2.5%) since that high, despite all the uncertainty. We don’t know about you, but it feels as if that high was made ten years ago - not just one. The last 12 months have definitely been a trying experience, and, if anything, have reemphasized that we need to pay attention to price above all else (especially the headlines). So, Happy Anniversary?!
  • Toronto-based cleantech company Li-Cycle announced that it will be going public on the New York Stock Exchange by way of a takeover by a Special Purpose Acquisition Company (SPAC). Li-Cycle is a company that extracts and then resells component metals from battery manufacturing and used lithium-ion cells. SPACs have become a very popular vehicle in the US in which an investment company raises a large amount of capital and then looks for a target company to acquire.
  • Statistics Canada reported that the January Consumer Price Index, a measurement of inflation, increased 1.0% year-over-year vs consensus of +0.9. On a seasonally adjusted monthly basis, the CPI rose 0.4% in January. The acceleration in consumer prices was largely due to higher prices for durable goods (+1.7%) and rising gasoline prices (+6.1%) compared with December 2020. Also, this week Statistics Canada released December manufacturing sales data, which shows and increase of 0.9%, ahead of consensus estimates of a 0.6% increase.
  • Canadian e-commerce company Shopify (SHOP) released quarterly earnings this week of $1.58/share, easily beating analyst expectations of $1.21. However, shares dropped on Wednesday due to the company warning that revenue growth won’t likely be as strong as it has been. Shopify became Canada’s largest company by market capitalization in 2020, with a total value of over C$200 billion vs Royal Bank (RY) at roughly C$150 billion.
  • U.S. Retail sales rose 5.3% in January (5.0% including revisions to prior months), blowing away the consensus expected gain of 1.1%, with all thirteen sectors up month-over-month. Retail sales are up 7.4% versus a year ago. Going back to 1992, January was only the fifth month in the history of the Retail Sales report that all 13 sectors showed m/m increases in sales. The most recent was last May, while there were also occurrences in October 2018, August 2014, and March 1994
  • For some more perspective on US retails sales: from February 2020 (before the COVID shutdowns started) to the bottom in April 2020, retail sales fell 21.7%. Now, we are 7.8% higher than the February pre-COVID level, meaning retail sales have had a full V-shaped recovery. It has not been an even recovery for all major categories, though, with sectors like restaurants, clothing stores and gas stations still below the pre-COVID levels.
  • The Producer Price Index (PPI) in the US rose 1.3% in January, well above the consensus expected 0.4%. Producer prices are up 1.7% versus a year ago. Producer prices rose in January at the fastest rate since the current series began in 2009. In fact, the 1.3% increase in January marks the only time the index has ever recorded a single month increase of 1.0% or more. Since bottoming in April, producer prices are up at a 5.3% annualized rate, matching the fastest annualized pace recorded for a nine-month period, and representing a sharp rebound from the 2.0% annualized decline for the nine months ending in April. Expect inflation pressures to remain a topic of conversation throughout the year ahead.
  • Impressive debut yesterday for the Purpose Bitcoin ETF, North America’s first open-ended Bitcoin ETF, with over $250 million (CAD). We’d argue that this may very well be the most successful ETF launch in Canadian history, especially when you don’t count reallocation of internal assets.
  • Toronto ETF provider Evolve Funds received OSC approval this week for its own open-ended physical bitcoin fund - The Bitcoin ETF – the second in North America. It will trade under the ticker EBIT. With bitcoin's run to $50K, fund providers on both sides of the border have been making a renewed push to bring bitcoin ETFs to market, with several more Canadian firms currently awaiting regulatory approval. It may not be long before we see the first bitcoin ETF in the US as well.
  • Total global cases of COVID-19 finished this week at 111.2 million, with the total deaths at 2.46 million and active cases of 22.7 million. Worldwide active cases are down by close to 600,000 this week, continuing a decline from a January 31st peak. In Canada, total cases now stand at 837,497, with active cases at 32,587, down over 5,000 from last week. In Alberta, total cases are 130,030, with active cases of ­­­­­­­­­­­4,887, down over 600 from last week.

Charts of the Week:

It has been a bit of an up and down week with volatility increasing and markets closing down slightly. Although markets have remained in varying degrees of overbought status over the last couple weeks and we may see things cool off a bit, there is much to be positive about underneath the surface, especially when it comes to earnings. We have explained that we believe we are in a reflationary environment in the first two quarters this year, where both year-over-year earnings and inflation are accelerating, and the results are currently showing that. Quarterly corporate earnings season wrapped up this week where the vast majority of US companies have reported, and the results have been extremely strong, even with high expectations that were built in prior to. There is something we call an Earnings Triple Play, where a company reports quarterly results and manages to beat analyst earnings per share estimates, beat analyst sales estimates and raise forward guidance. Although the data below are related to the US market, the same connection could be made with Canada. As the first chart shows, the three-month rolling percentage of stocks reporting “triple plays” has recently been the highest in over 20 years. With the pandemic being about a year old, it is understandable how this might be high on a one-year look back right now, but the percentage has been much higher now than after any other post-recovery periods which is good to see and shows strong market breadth.


        Source: Bespoke Investment Group

Here is a chart that shows how a company’s stock price performs on average the day after they release quarterly results. Clearly, you like to see a high number of these “triple play” across the board as it shows that many companies are firing on all cylinders, with above-expectation results and improving outlooks. The last factor is an important one, because much of a stock’s price prior to an earnings release can already be factored in. When expectations are very high, however, the price reaction can be less generous, which is what we have seen this quarter as shown in the second chart below. The positive reaction to “triple plays” has only been about half as much as we have seen in the past ten years. This is not necessarily a bad thing. We mentioned that results have been very positive, and we view that with perhaps an even a higher tone this time because expectations were so high coming into Q4 and therefore a higher hurdle to clear.

         Source: Bespoke Investment Group

 

Sources: CNBC.com, Globe and Mail, Financial Post, Government of Canada, Government of Alberta, Johns Hopkins University, worldometer.info, oilprice.com, Canaccord Genuity, Tony Dwyer, The Logic, Bespoke Investment Group

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