Market Insights: Lowest Bullish Sentiment in 30 Years

Macroeconomic and Market Developments:

• North American markets were lower this week, particularly south of the border. In Canada, the S&P/TSX Composite Index was down 0.09%. In the U.S., the Dow Jones Industrial Average declined 0.78% and the S&P 500 Index dropped 2.13%.
• The Canadian dollar was down this week, closing at 79.31 cents vs 79.54 cents USD last Friday.
• Oil prices were positive this week. U.S. West Texas crude closed at $106.95 vs $98.02 USD last Friday, and the Western Canadian Select price closed at $93.96 vs $85.18 last Friday.
• The price of gold was also positive this week, closing at $1,974 vs $1,946 USD last Friday.
• The Bank of Canada announced on Wednesday that it is increasing its bank rate by 0.50%, from 0.50% to 1.00%. In a further form of financial tightening, the bank also announced that it is ending its program of reinvesting in government bonds beginning on April 25. Maturing Government of Canada bonds on the bank’s balance sheet will no longer be replaced.
• Canadian tech company Shopify (SHOP) announced a proposed 10-for-1 stock split of the company's Class A and Class B shares. In order to allow the founder Tobias Lütke to retain voting power, a new class of shares will be introduced which, when combined with the Class B shares beneficially owned by him, will represent 40% of the total voting power.
• The U.S. Consumer Price Index (CPI) rose by 8.5% in March when compared to a year ago, the fastest annual gain since December 1981 and slightly above estimates. Surging food, energy and shelter costs helped account for the gain.
• Another measure of U.S. inflation known as the Producer Price Index (PPI), which measures prices paid by wholesalers, rose 1.4% in March and 11.2% from a year ago, both records for data going back to 2010. Prices for final demand goods led with a 2.3% monthly rise, while services prices gained 0.9%.
• Shaw Communications (SJR.b) reported lower than expected earnings of $632 million vs $638.3 million expected, equating to $0.39/share vs $0.40/share expected. Revenue also came in a bit light at $1.36 billion vs $1.38 billion expected. The company also provided an update on the Rogers Transaction noting subject to receipt of all required approvals and satisfaction of all closing conditions, closing of the transaction is expected to occur in the first half of 2022.
• Before the market opened on Wednesday, JP Morgan (JPM) kicked off U.S. bank earnings season with earnings of $2.76/share vs $2.69/share estimated on revenue of $31.59 billion vs $30.86 billion estimated. In remarks, CEO Jamie Dimon said he saw “significant geopolitical and economic challenges ahead due to high inflation, supply chain issues and the war in Ukraine.”
• On Thursday, Elon Musk, who just last week disclosed that he is now Twitter’s largest shareholder, offered to take the company private for $54.20 per share in cash. The proposed deal would value Twitter at more than $43 billion.
• Here is a link to a short video from Canaccord’s chief U.S. Strategist Tony Dwyer entitled Looking at Inflation, Labor, & Productivity: DWYER VLOG

Weekly Diversion:

Check out this video of a self-driving car getting pulled over by police.

Chart of the Week:

We realize there are many news items above and likely some you just skip over, but this week we wanted to encourage you to watch the video above from Tony Dwyer titled ‘Looking at Inflation, Labor & Productivity’. We believe he is one of the best market strategists on the street, and quite often our views are aligned. There is one important aspect when it comes to inflation and the issues surrounding that at present: productivity. Yes, the current rate of inflation is extremely high and it will likely slow economic growth (although we believe economic growth will stay positive). However, the stock market already knows this and has priced that in for some time, including multiple interest rake hikes this year. We need to remember that inflation is an annual rate of change, and it appears to be peaking at present and likely to fall as the year progresses and into 2023, even if prices stay historically elevated. It is inflation expectations and the rate of change that matter more for markets going forward. What Tony notes that many don’t bring into the picture is productivity (which is currently rising) and its importance in this mix as well. We believe he is right on point in that the present environment is not like the 70’s when productivity was declining. We should always be asking the ‘what ifs’. The comments in this video are essentially asking the question, what if the rate of inflation is more transitory, primarily due to COVID, and that rates come down more than people expect later this year as the U.S. Federal Reserve is raising short-term interest rates into the slower rate of change of inflation, and they meet in the middle. If that were to occur, it would likely provide a solid intermediate-term upside opportunity for equity markets on any short-term weakness.

Every week we see an incredible number of charts and data points with both positive and negative tones to them depending on the source and perhaps the message they are trying to convey. Many of these are ones we have seen before or something similar to them, and often they aren’t that surprising to us. This morning, however, our reaction to the latest sentiment survey from the American Association of Individual Investors (AAII), a widely followed sentiment indicator, was simply “Whoa!”. The latest AAII bullish reading came in at just 15.8% from an already very low level of 24.7% last week. This is the lowest AAII bullish sentiment reading since September 1992. For those not familiar with music history, that was the same time that Boys II Men’s “End of the Road” song was enjoying a 13-week stint as #1 on the Billboard Hot 100 chart. We certainly hope that the title of that song isn’t a bad omen. When this last occurred in ’92, the stock market wasn’t enjoying the best of times with only mediocre but still positive returns. However, it certainly wasn’t the ‘end of the road’ either, as it preceded one of the greatest bull market runs in history from December 1994 to March 2000 when the S&P 500 climbed 240% over just a five-year period. A positive that one can take from this retail investor reading is that institutional investors view this as a contrarian indicator when it hits historical extremes. In other words, they become buyers when this reading is low. In times of extreme pessimism among traders and individual investors, it is often referenced that investments are transferred from ‘weak’ hands to ‘strong’ hands.

Source: Bespoke Investment Group, AAII

Sources: CNBC.com, Globe and Mail, Financial Post, Connected Wealth, BNN Bloomberg, Tony Dwyer, Canaccord Genuity, First Trust, Bespoke Investment Group