There was a flurry of earnings that came out this week, highlighting Alphabet, Meta (previously named Facebook), Apple, Amazon and Microsoft. For the most part, earnings have held up quite well and the markets reacted accordingly. It was also a big week for Canadian oil and gas companies who reported the best cash flow numbers in their history. The market reacted as you would expect, and the oil companies are looking like they may retest their old all-time highs.

 

I mentioned in my last note that it appears inflation may have peaked which should be good for the market. With the US economy slowing down and earnings holding up the chances that we have made a market bottom are improving. As I said before, we should have a good idea over the next few weeks once the rest of the companies finish reporting.

 

WE HAVE HAD A FEW QUESTIONS ON WHY WE ADDED TO THE CANADIAN BANKS LAST WEEK…

The Canadian banks may certainly face lots of headwinds over the next year with fewer mortgage applications as a result of housing market declines, and an inverted or flat yield curve. One thing that I've learned throughout the years is that the Canadian banks seem to find a way to either maintain their earnings or grow them, even through difficult times and we rarely see declines in their earnings-per-share.

 

For those who like data, I have included a chart below that takes any emotion out of how to invest in Canadian banks. As you can see, if all you did was buy the Canadian banks when their yield was above 4.5%, the average return over the next 12 months was 19.8%.

 

 

There are two things that drive the dividend yield on Canadian banks to go up:

1. The banks raise their dividend; or
2. Their stock price drops, resulting in a higher ratio of the dividend payable per share relative to its market price.

In the last six months both of those scenarios happened. The Canadian banks have increased their dividends and the stock prices have dropped, making the average yield of Canadian banks currently 4.65%. For those who remember the note that we put out in April of 2020 during the depths of the pandemic, the Canadian banks fell enough to produce a dividend yield of 6.9%, at which time we bought aggressively. We had not seen that level of dividend yield on the Canadian banks since the financial crisis of 2009. That investment worked out well. We believe the Canadian banks offer good value once again.

 

 

I've also included a piece from our CIBC Economics team entitled "Employment: How slow is slow enough?".

 

 

As always if you have any questions please feel free to give us a call at any time.

 

Have a great long weekend.

 

Milan