If you only look in the rear-view mirror, then every dip in the stock market has been a buying opportunity in recent years. Is this one of them? I’m reporter David Berman, filling in for Scott Barlow, and today we’ll be taking another look at the current bout of stock market volatility as investors ponder whether there’s worse to come. Also, we’ll look at why bank stocks are drifting after the Big Six reported big profits. And finally, is our national interest in buying Canadian goods really just a way for us to take control from Mar-a-Lago?
Danish Siddiqui/Reuters
Market selloff
Buy the dip works, until it doesn’t
During recent market selloffs, investors have done well to push aside their fears of a deeper downturn and buy the dip. Over the past three years alone, fresh record highs have followed corrections in the S&P 500 within a matter of months – and sometimes weeks.
Now that the S&P 500 is wobbling from its recent high, should investors embrace the same impulse?
That’s the question market watchers are trying to address as they weigh uncertainty from U.S. tariffs and head-spinning geopolitical shifts against strong corporate profits and a purring economy.
The S&P 500 last notched a record high on Feb. 19, when it rose to 6,147.43 during the day. It closed on Monday at 5,849.72 following an afternoon selloff – stretching the overall decline to 4.8 per cent from the February peak.
Getting nervous? The U.S. stock market has been wavering for about four months since the presidential election in November. The current downturn also carries great importance to investors already nervous about high valuations.
Lori Calvasina, a U.S. strategist at Royal Bank of Canada, said in a note that her year-end target for the S&P 500 still stands at a bullish 6,600, and it always assumed at least one correction of 5 per cent to 10 per cent along the way.
“The onset of tariffs raises the risk that this kind of drawdown, or something even deeper, has already begun,” she said in a note.
One problem that stands in the way of a quick rebound? Investor complacency.
Ms. Calvasina said that most forecasters and money managers expect that meaningful U.S. tariffs on Canada, Mexico and China were part of a negotiating tactic on the part of the new U.S. administration, rather than a real threat.
That means that the actual imposition of tariffs, if they last a long time, is a risk for U.S. equities that is not yet reflected in stock prices.
“Tariffs have also been a key contributor to mounting C-suite uncertainty, and concerns about economic growth are on the rise as investors contemplate the ripple effects of the uncertainty caused by tariffs along with the cost cutting efforts of DOGE” – the Department of Government Efficiency, led by Elon Musk – “and other disruptions to the status quo in Washington,” Ms. Calvasina said.
So, go ahead and buy the dip. But be aware that this one could be different.
Adrien Veczan/The Canadian Press
Financials
Why did investors snooze through bank earnings?
The Canadian bank earnings season has come to a close, and the consensus opinion is: No one cares.
Well, that’s not entirely true. Everyone cares about Canada’s banks, given that the sector generates massive dividends and tends to form the backbone of portfolios.
But what’s important here is that the Big Six banks’ latest quarterly financial results didn’t move the needle on share prices, which implies that investors didn’t see anything that drove them to run from, or embrace, bank stocks.
The season kicked off on Feb. 25 and concluded on Feb. 27. In this three-day blitz, the S&P/TSX Equal Weight Diversified Banks Index increased just 0.16 per cent. Add in the moves since the season concluded, which includes Monday’s selloff, and the sector is down about 0.4 per cent since the earnings season began. Which is still close to nobody cares.
You can’t pin the blame on the actual earnings.
Overall operating profits – which set aside pesky details that don’t reflect regular business operations – for the fiscal first quarter increased by 14 per cent from the year before and 21 per cent from the previous quarter, according to Meny Grauman, an analyst at Bank of Nova Scotia.
The best part: profits beat analysts’ estimates by 12 per cent, led by Bank of Montreal’s 26 per cent beat. So why aren’t bank stocks, as a group, rallying on the good news?
As Mr. Grauman explained in a note on Monday, part of the problem is that trading activity was much stronger than expected, while the banks’ credit was weaker than expected.
The bigger problem was the tariff overhang, which threatens the Canadian economy and, by extension, bank profits.
“As expected, tariff uncertainty overwhelmed any discussion of the quarterly numbers this earnings season, and was the key driver of relative share performance last week. Looking ahead we don’t expect this dynamic to change,” Mr. Grauman said in his note.
Diversions
Bye-bye, buy Canadian
During the early stages of the COVID-19 lockdowns, in 2020, I developed the eccentric habit of hand-washing dishes at home even though there was a perfectly acceptable electric dishwasher beside our kitchen sink.
I’m not even an amateur psychologist, or even self-aware, but it dawned on me that this was my brain pushing me to exert some control of my life at an uncertain time. I now wonder – I’m not qualified to say this! – if the impulse to buy Canadian goods and services in the face of U.S. threats is being driven by a similar impulse to take control.
The fact that Canadians are still flocking to the United States for ski vacations, as reported in The Globe and Mail, appears to support the idea that Buy Canadian goes only so far. It may be limited to the produce aisle, where exerting control is pretty easy.
The essentials
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Globe Investor Highlights
Rob Carrick tells us about some surprising fees when it comes to online broker accounts.
Does the takeover of Innergex suggest renewable energy stocks are a steal? I share my thoughts.
Tim Shufelt reports on the trouble brewing in the American economy, and why a little misfortune south of border is just what Canada needs right now
Think high price-to-earnings multiples are here to stay? Tom Bradley doesn’t
What’s up next
Now that 96 per cent of companies within the S&P 500 have reported their year-end financial results for 2024, and Canada’s big banks have delivered their fiscal first quarter results, a lot of attention will shift to global economic performance.
On Wednesday, we’ll get a look at the next round of PMI numbers from S&P Global, offering insights into services activity in Germany, the U.K. and Canada as major economies adjust to tariff threats and a general sense of uncertainty in the world today.
We’ll also peer into the Federal Reserve’s Beige Book, also released on Wednesday, for information on current economic conditions – essential stuff as investors navigate shifting views on inflation and interest rates.
See our full economic and earnings calendar here (You can bookmark the page - it gets updated weekly)