We are going to take you there with moving the markets answer your questions about investing.
Coming up on today show, we are going to discuss with the markets are headed amid more signs of inflation gradually easing with MorningStar's chief US market strategist, David Sekera as our guest today.
And in today's WebBroker education segment, Nugwa Haruna is going to show us how you can research specific stocks using the platform.
so here's how you can get in touch with us. Just email email@example.com. You can fill at the viewer response boxunder the video player in WebBroker.
Before we get to our guest of the day, let's get you an update on the markets.
We are going to start here at home with the TSX Composite Index, we did get that latest read on US inflation this morning. It shows the decrease continues, pretty much spot on to the market's expectation. The American market have been trying to figure out what to do with it between being positive and negativebut we are positive to the tune of 102 Points in Toronto, it's largely the commodity place, whether it's energy or mining stocks, they are getting a bit of a bid with the US dollar pulling back on inflation reports.
So first of our big names, Cenovus, want to check in on that one right now. It's up to the tune of almost 2 1/2%, 25 bucks and change per share.
Seeing some weakness in tech place today, at least earlier in the session. Shopify, nothing too dramatic, 4027, down a little bit more than a full percent.
South of the border, the markets and investors try to figure out what they want to do with this inflation report. The S&P 500 right now is back in positive territory, it's pretty modest on either side of the breakeven line today, it's been moving back and forth.
Up five points right now with more than 1/10 of a percent. The tech heavy NASDAQ, how is it stacking up against the broader market now? It's negative again, very modest, sick sticks to the downside.
And Taiwan Semiconductor, let's check in on this individual name. A chipmaker posted higher earnings for the fourth quarter. Right now it's up to the tune of 7.3%.
And that's your market update.
Inflation has been front and centre for investors for some timeand in this latest read of US consumer costs shows those price pressures are gradually easing. So what does that mean for the markets this year? Joining us nevermore is David Sekera, chief US mortgage strategist at mornings our research. David, great to have you on the program, particularly on a day like this. We are getting further indications that inflation continues to ease all the remains are comfortably high.
What you make of this as investors?
>> Well, I think today is actually a great indication of what we expect the market to look like certainly over the next couple of months. In our 2023 outlook, we titled it near term turbulence but clear skies ahead.
What I'm thinking is that this year is going to be a tale of two halves.
I think we are going to see a lot of volatility in the first half of this year but then by the second half of the year, a lot of the headwinds that we had noted in 2022 really should not only abate but start turning into a couple of tailwinds.
I think that will help the market start to recover what we think long-term intrinsic valuation for the markets are today.
>> With inflation the key obviously, and we did see that read where we are seeing a gradual pullback of the high levels, it does sound, as you are laying out your case for this year, a longer-term play. We are not going to get a dramatic shift, we are going to whittle away at it.
>> Yeah, so, in 2022, we noted that coming into the year last year, the markets were overvalued. We think that things have swung too far to the downside and the market is significant we undervalue.
Now there were four headwinds that the market had to contend with last year.
We think two of them are starting to abate so we think the preponderance of the increase in long-term interest rates that we expected is behind us at this point.
We also noted that we thought that inflation had peaked a number of months ago and it is continuing to come down.
We are looking at 2.9% average inflation for this year and in fact even getting down below 2% next year.
So really the two things that I'm watching for the first half of this year are the US economy and the Federal Reserve.
Now as far as the US economy goes, things in the fourth quarter for 2022 shaped up to be kind of okay. We do think the economy is going to be soft year for the next two quarters, pretty stagnant, even recessionary before concert to accelerate in the second half of the year.
And then as far as the Federal Reserve goes, it looks like we have at least one if not two more rate hikes before they pause.
Now part of the reason we think things will start to look better in the second half of the year is that we do think that with the reserve really starting to pause on their hiking, they can actually start shifting the focus towards their dual mandate, so not just inflation but also maximizing the economy to be able to get to full employment.
And so in the second half of the year with inflation continuing to decline, with the economy being stagnant in the first half, that will actually give them the reason to pave it and in the second half of the year, turned to an easing policy.
>> That's the great debate it seems at the start of this year between what the Fed and other central bank have been telling us, saying, listen, maybe you got a bit more ahead of us and then we are going to stay at that level for a while. But the bond market is saying, we don't think so. We think they're going to be cutting by the second half of the year. Is the bond market going to prevail in the sort of divergence of views?
>> Well, the bond market is always called 800 pound gorilla in the room so you always have to pay attention to what the bond market is pricing.
as far as long-term interest rates, we think you're pretty much at the average for what we are expecting this year at 3 1/2%. Having said that, with inflation coming down, especially in the second half of this year and coming into next year, we actually think there is room for long-term interest rates to rally.
If we can get a 2 1/2% rate for 2024, the bond market last year was essentially the worst year ever I think that we saw in fixed income.
Things are certainly looking much better and especially in the second half of this year for fixed income investors.
> So if we can get to that second half of the year where hopefully things will pan out as you are saying and things start to look better, how bumpy could the right between now and then it be?
Thinking about the volatility.
>> Yeah, and that's always hard to know.
It does look like the markets are probably putting in a bottom in the US in October of last year so I would assume that that probably should hold.
Having said that, I think we can easily see on a couple of percent swings in daily prices, up and down 5%, probably the trading range for the next few months. I think the market is going to be very, very focused on economic indicators as they are coming out.
And then over the next couple of weeks, we do have earnings season here starting and I think people are going to be focus on what 2023 guidance from a lot of companies are, especially with the banks coming out tomorrow, so depending on how that guide and shapes up, again, we could see people reevaluate what their valuations are based on those EPS numbers.
>> Let's talk a bit about that because obviously people have been warning and perhaps the more bullish argument, sorry, the more bearish arguments this market has been the fact that we haven't seen the companies fully coming out and saying, okay, here's the state of the economy, here's the change that we have seen with activity and rising rates and here's what is going to mean for the bottom line.
We have been fully priced that in you. Is there anymerit in that argument?
>> There is merit in that argument but I think you you need to think about whether you are a traitor or an investor.
I think looking at the market technicals, we can see a lot of volatility.
People trying to game the markets intraday and day-to-day based on those economic numbers.
But I think we need to take a step back as a longer-term investor and really think about what companies can generate over the long term and really think about, again, we use a discounted cash flow policy care so we are really trying to figure out what is the intrinsic value of a company worth based on long-term cash flow stream that the company can generate? So even when you do have some short-term volatility in earnings, when you think about how much I to change the intrinsic value of the company, usually an earning beat or miss, you might see a 3 to 5% move in our intrinsic value if it's different than what we expected, but really what we are looking for is the changes in the underlying business of the long term and whether that changes our projection, forecast. You will be watching and listening for that in the first half of this year with the guidance numbers. But based on what we are expecting for right now, we do think the markets are pretty significantly undervalued.
And in fact, when you look at our valuation going back to 2010, we are in pretty rare territory just as far as how much the US market is trading at a discount compared to where it has been in the past.
So again, a lot of volatility here in the short term but for those investors with a longer-term focus that can weather this period of volatility, I do think that things will is much brighter in the second half of this year and going into 2024.
>> A longer-term horizon, things looking fairly bullish.
I'm going to ask you what could trip up that thesis?
What would stop it from transpiring in the second half of this year?
>> Our base case for the US economy is again that it's going to be stagnant and potentially recessionary, and at this point, our US economic team is saying, hey, the potential for a recession is 30 to 50%. And if that recession does come about, I note that there base cases that is going to be short and shallow.
So we were to have a much deeper recession and it were a recession that lasts more than the next couple of quarters, that's certainly going to put a lot of downward pressure on earnings and downward pressure on our valuations as well.
The other part to that could be a wild card is that we do think that the preponderance of long term interest rate increases is behind us.
If we were to see the 10 year really start making a move back up again, mid yield, that certainly could play havoc on the growth stocks, see a lot of downward pressure on some of those growth mega-cap stocks that were under pressure last year. And again, because there is such a large market Percentage of the overall market, that could bring market valuations down as well.
>> Interesting stuff in a great start to the program.
We are going to get to your questions about US stocks for David Sekera in a moment.
A reminder that you get in touch with us at any time.
Just email firstname.lastname@example.org or Philadelphia response box under the video player on WebBroker.
Right now, let's get you update on some of the top stories in the world of business and take a look at how the markets are trading.
As shares of Aritzia in the spotlight today the following its latest quarterly report. While the women's fashion retailer posted record sales in the third quarter,it is slightly lowering its full-year financial outlook. Aritzia is facing higher costs and increase inventoryand says gross profit margins are expected to decrease in the fourth quarter. Algonquin Power is slashing its dividend by 40% and putting some $1 billion of assets up for sale.
The beleaguered company says that it has reached an inflection point and any cash raised from asset sales would be aimed at paying down debt and funding growth.
Algonquin shares took a significant hit in November on its third-quarter results.
American Airlines is lifting its sales and profit forecasts on strong demand for air travel.
the carrier is giving investors in early indication of its performance in the fourth quarter.
It estimates revenue climbed as much as 17% compared to a year earlier.
American Airlines is scheduled to report its full results on January 26.
We see the stock up 6%.
Check in on the main benchmark indices, we'll start here at home on Bay Street with the comm, Benefiting from a lower US buck, propping up some of our commodity names. We are up about 129 points, a little over half a percent.
South of the border, major indices spotting to this morning's inflation report. At this moment they decided to be in positive territory, S&P 500 up 13 points were third 4%.
And we are back now with David Sekera, chief US market strategist at morning Star research. We are taking your questions about US stocks.
So let's get to them.
First one here, David, what are some of the ways to play the growing EV trend?
>> Sure, so it's a really interesting area because there are a lot of different ways that you can play the trend. In fact, in our view, it's not actually the auto manufacturers that are the best way to play that trend, but some of the suppliers. So specifically we look at the lithium producers, we see a number of undervalued names they are, and over the next decade, we have modelled out how much lithium we think is going to be required in order to produce all those electric vehicles we expect to be manufactured and we see that entire market being undersupplied.
So to companies there that I would highlight that we think would be a good plan that would be when lithium America is and… And then specialty chemicals.
People don't realize it takes anywhere from 2 1/2 to 3 times as much specialty chemicals to be able to manufacture an electric vehicleas compared to an internal combustion engine. So two names I would highlight there would be Dupont and Eastman.
Lastly, those auto parts suppliers and specifically those ones that have the best product portfolio lineups in order to be able to supply EVs would be a good way to play that market as well.
And the one there that I would highlight that I know we've been watching is support order.
>> When we talk about EVs and almost electrification of everything going forward and you said there are certain areas that are going to benefit, we've got some pretty robust projections as to how many people will be driving EVs in a certain amount of time.
What would be the case against some of those were bussed projections? What we get in the way of the electrification of everything, including vehicle?
>> Yeah, well, again, it's hard for us to really model out 10 years into the future, we are making projections on a base case of how EVs will become cost competitive with internal combustion engines. So it's really a blend of trying to understand where oil prices are going over the next decade as well is understanding how much lithium prices and some of those other required metals are in order to manufacture those batteries. So I think that if oil prices were to end up changing and coming down a lot further and people were then seeing EVs become much more expensive because of the under supply and the lithium and cobalt and nickel and so forth, then you might not get so much of a transition into those electric vehicles from internal combustion engines as quickly as what we expect.
>> At this point as well, when it comes to the EV story, how important are government subsidies?
I think about political risk in terms of changing a ministration may not have the same impact on the elective occasional vehicles.
>> Government risk is always very hard to account for.
Only think about it, we are really considering much more with the actual economics are as opposed to trying to determine whether or not we think those subsidies will last and how far they will last and how much they can be.
So it's really more that fundamental point of view and thinking about what the base economics are of EVs versus internal combustion engines is how we are getting to our forecast.
>> Interesting stuff. Let's take another question now.
This one about the shift we saw in our spending coming out of the pandemic.
How's the surge in consumer spending we saw as the pandemic is come to an end, or is it still a theme that will save this year?
>> Yeah, I do think there is still some tailwind behind us.
As we know, in 2020 and 2021, there was a big shift in spending, especially here in the US. Out of services and into goods, just as people were unwilling or afraid to go out.
We do see that as the pandemic is getting further and further in the rearview mirror that that shifting back, certainly over the past couple of months. I do think that has further to go. There are a couple of different areas I would highlight. First it would just be the travel sector.
As far as the different parts of the travel sector, we think business travel is going to be coming back. It Delta Airlines is what I would highlight there that we think is particularly leveraged to the return of the business traveller.
More in the entertainment area like Carnival Cruise Lines would be one that we would highlight which we think is undervalued and has upside potential, and then hotel chains, one that we would highlight the most, in the gaming area, Caesars would be one that I would highlight.
But then also thinking to people are going back to in person shopping, so class a malls would be an area that I would focus on, Simon Property group would be one area that we think has some upside potential.
>> When it comes to that sort of movement as well, I guess we do fall into a recession, if it's shallow, I mean, those of us they get to keep our jobs, hopefully that's us, we'll keep spending.
But if we had that rough patch, would that be a threat?
I mean, obviously people start pulling their dollars closer to their chests.
>> It would be a threat in the shorter-term and again this gets back to maybe differentiating between trading and long-term investing.
So we did have a deeper recession, some of these names certainly would get heard more than what we are currently modelling our base case.
Again, it could bring some of their valuations down, but for the most part, we are thinking about these names, we are trying to make sure that we are valuing them and seeing them trading at a very large margin of safety in the marketplace so even if we do have some more downward movement, you are buying them at a low enough price so that is a long-term investor, if you can hold them through that period, on the other side when you come out, these will be names that would be leveraged to the upside.
>> Goods inflation was a big part of the inflation story and last year, we are being told or more ago that it was all transitory.
There was a shift in spending to services. I don't know if you've had the six variants but when I started getting back into the world, I flew to Britain amount a month ago, life was more expensive than I remember on the other side.
Is this olives is all of the services spending inflationary as well?
>> We do think inflation will be on a downward path overall. So the good spending has certainly come down as we have seen a lot of the supply chain problems ease up which cause some inflation in the first half of 2022.
Again, as you mentioned, the second half of 2022, spending has been more concentrated in services.
But we do think with long-term and with jobs going forward and more people coming back into the job market in the US, that will keep wage growth down, especially in the services area, so inflation should start coming down in the middle of this year to the second half of the year.
>> Let's take another question now from the audience.
Understandably, all the big mega-cap names get all the attention particularly in earnings season, but a viewers asking what's the general outlook for small-cap stocks?
>> So when we break down our valuations, again, we start off with a broad market overview. We cover over 700 stocks to trade on the US exchanges, we look at their intrinsic value versus where they are trading in the marketplace. We start with the bottom of view. We then break them down into different capitalization styles and we look at mid-cap and large-cap stocks, as a category, those are both trading pretty much in line with the broad market averages.
But those small caps are where we are actually seeing the most opportunity for investors trading at very large margins of discount today.
So there's a couple of different areas, depending on what you are looking for, I like sticking with secular growth themes in that area.
So even going back to the consumer behaviour normalization theme.
One small-cap stock I would highlight would be lift. As people are going back out more into restaurants, we expect to see a number of rides pick up there.
That could be an interesting play for some investors.
Park hotels would be one that I would highlight. I think that would be a play on the return of the business traveller as well as international travel.
And then thinking about right now with the economy in the first half of the year looking kind of dismal bids and getting better in the second half, thinking about group on would be a small-cap stock. And if you are looking for what we would consider to be a deep value stock, Haynes brand is when I think investor should look at.
>> When I think of small-cap stocks, I always think that they are the ones most sensitive to any economic bumps.
>> Exactly, and I think that's part of the reason that we see so much undervaluation in that sector today is that we think that the market is probably over penalizing these names because we do see that the economy is going to be soft, that there earnings growth certainly would be subdued for the next couple of quarters but again, when you're trying to think about the value of these companies and how much cash they can generate over their entire lifetime, and based on our underlying projections, we do think that there's opportunities for investors today.
>> As always, make sure you do your own research before you make any investment decision. We are going to get back your questions for David Sekera on US stocks in just a moment's time.
A reminder, of course coming in touch with us anytime.
Just email email@example.com.
Now, let's get our educational segment.
if you are looking to do research on a specific stock, WebBroker has tools which can help. Nugwa Haruna,Senior client education instructor with TD Direct Investing has more.
>> So investors looking to research stocks with WebBroker have different tools available to them.
So as you know, investors tend to employ different investing strategies.
So growth investors are more concerned about capital appreciation and income investors are more concerned about getting a steady stream of income. And then we have value investors who are potentially looking for stocks that they believe are trading at a discount.
so in WebBroker, investors can do a little bit more deep diving into each security by using the research tab.
So let's hop into WebBroker and take a look.
Once in WebBroker, we are going to click on research.
Under investments, we are going to go stocks.
So once here, I'm just going to use the stock I already have on screen here and while we are on the stock overview page, investors can get some additional information about the security.
I'm going to scroll down, focusing on the right side of my screen, and this is where investors would see some additional fundamental data about the security.
So for instance, if I'm an income investor, I can see if the specific stock is paying an annual dividend and what that looks like. I can see with the dividend yield is and this is essentially how much when you take the dividend rate divided by the current market price, that gives you the dividend yield. An income investor can also see information such as the ex dividend date as well as the next dividend payment is due. Now if I'm a growth investor, I may be more concerned with things like the earnings-per-share for the specific stock as well as the price to earnings ratio.
And for an investor who is more of a value investor, I might be interested in the book value of the security.
Because that would tell me if the company liquidated all of its assets today and pay back all its debts, how much would I get for owning the security? Investors might say this looks good, I seal these numbers, how do I apply them?
while investors who are not too sure how to proceed it can go ahead and use some of the experts. We have expert analysis and that is under the analysts tab.
once I click on analysts, I'm able to see how many analysts are tracking the stock. So we have 12 analyststhat are tracking the stock and out of the 12 of them, we have eight of them that say hold the stock, we have four who say by the stock, but most important, investors can see what a 12 month price projection is for the security.
Now if you want to see who these analysts are, you can scroll down to see what these analysts are rated at andwhat price target they set for the stock.
Finally, an investor might say, I want to see a little more detailed information as to why these analysts rated the stock split they did.
If you are interested in doing that, you can actually scroll up and go to the tab that says reports. So once I am on the reports tab, I have different reports here that are created specifically for the stock.
Now there are a few reports here we have like the MorningStar analyst report here that I'm going to be pulling up.
So when people of the specific report, some of the information it shows you is what the MorningStar analysts have said the fair value for the security is, just where they think the stock prices trading compares to that fair value. So an investor will be able to see if an analyst considers the specific security overvalued or undervalued.
Now finally, investors can actually proceed to take a look at some more detailed information and that information I would include a comparison of the specific companyto his closest competitors and you can just see how well those companies are trading as well.
Now, investors can use once again the overview tab within WebBroker to give them an idea what's going on in some investors who have different investing strategies will be able to find something that works for them by researching stocks in my broker.
>> Our thanks to Nugwa Haruna, Senior client education structure at TD Direct Investing.
Make sure to check out the Learning Center in WebBroker for more educational videos, live, interactive master classes and upcoming webinars.
Now before you back to your questions about US stocks for David Sekera, a reminder on how you get in touch with us.Do you have a question about investing or was driving the markets? Our guests are eager to hear what's on your mind, so send us your questions.
you can email us at moneytalklive@td.
com or you can fill at the question box under the video player here on WebBroker.
We are back with David Sekera taking your questions what US stocks. We have a viewer asking us about the future of Tesla?
>> Tesla is a great example of how sometimes the market can act like a pendulum and swing from being overvalued to undervalued relatively quickly.
so if you remember at the end of 2021, the market was definitely getting overextended and we had noted at that point in time that there were a number of growth mega-cap stocks that we thought were getting to be way too overvalued and we put that list out in the beginning of 2022, and Tesla was one of those stocks that we thought was overvalued.
Now at this point, I don't know the exact number, but I think Tesla is down 65, 70% off of its peak. We think at this point the market has become overly pessimistic on Tesla and that's one that we think now is a good opportunity. We think it's undervalued. I know our analyst team has recently taken a fresh look at their name. We brought our fair value price down a little bit because there is some software saleshere in the short term but as for our longer-term production, we think the company is going to be making over 5 million vehicles by 2031.
>> What about the competitive advantage? Of course Detroit and global automakers have to step back and say… What about the competitive landscape, is that a threat to them?
>> It is always going to be a threat to them and we do think about Tesla, we think it has a narrow economic moat.
What that means is we do think it has some long-term competitive advantages that will help keep competitors at bay.
They do have some good technology, they have some first mover advantage, so we do think that they are going to be able to generate excess returns for at least the next 10 years before they can get competed away by the traditional auto manufacturers.
> Apart from competition, what other things… I think about perhaps the importance of the Chinese market?
>> Yeah, the Chinese market, as you mentioned, is going to be very important to Tesla and is always going to be hard to be able to gauge the politics of what could potentially happen in China.
So again, depending on how things evolve over the next decade in terms of relations between us and China, that could be a downward factor for the value of the company.
>> With Tesla, we've got another question about a big name, what's your guest's view on big tech names like Apple?
>> Apple, at this point, we think it's fairly valued.
We do see Apple and their economic moat. We think they will be able to generate excess returns on invested capital for the next 10 years but we think the market has already incorporated that into its valuation.
So I expect going forward that Apple should be able to generate its cost of equity is a return.
>>is Apple becoming one of those companies… I think of the years when they introduce the products we didn't know that we want, that was Steve Jobs's thing. They're not gonna know they want to simply give it to them and then everyone will want. Is it a more mature company now?
>> It certainly less of a growth company than it has been in the past. I know when we look at our different indices here, Apple has moved from the large growth category into the large core category, so it doesn't have the same kind of growth dynamics but it's also partially just a lot of large numbers that Apple has grown so much over the past couple of years that over the next couple of years from now, it's really going to be hard to sustain those type of growth rates.
>> And they get more vulnerable, I guess, to an upstart?
Obviously they are cute, their products are everywhere including my house, but there's always someone else who thinks they've got something better. Sometimes they do.
>> Yes, but you also have to remember to with Apple, part of the reason we do assign that economic moat is that there is going to be switching cost.
So people already on the Apple platform would find it very disruptive and costly to move off the Apple platform onto other competitor platforms.
So what you find is that when people move on to Apple, they do tend to stay there.
>>I got into Apple several years back when the rest of the household was in. I was basically the family member who was out in the woods by themselves.
It I've got another question about one of the mega-cap tech names. What are your thoughts on Amazon?
>>Amazon is undervalued at this point.
you kind of have to take a step back and think about how that company has performed over the past couple of years.
There was exceptionally strong growth in 2020 and 2021, being the premier online retailer, and so now we are looking at 2022 and even thinking about 2023, you're really starting to lop extremely strong growth rates.
Year-over-year columns are going to be under pressure.
But I think the market is probably being overly negative and over extrapolating these lower growth rates when we think about what Amazon should do over the longer term. Plus there is also to other parts of the business we don't think the market is necessarily giving them enough credit for.
So we have AWS, which is their cloud growth business, again, it's been a very strong grower for them of the last couple of years as we see people move from computing into the cloud we are seeing a slowdown in the growth rate there and we do think it is a long-term secular growth trend,but again it will be growing at a slower growth rate. It then the other part of the business that I don't think a lot of people pay attention to is going to be the advertising business for Amazon.
So again when people go on to the Amazon website and they put in the search terms, the couple of top items that come up are going to be paid advertising placements. Of course, those are going to be very valuable placements because again, we know at that point what exactly someone is looking to buy and really at that point, we know is going to be a high propensity to be able to purchase.
>> Risks for this one?
>> W do start seeing a lot more multichannel retailers.
These are retailers that traditionally had been bricks and mortar retailers that are moving more and more of their business into online sales.
I think a lot of the online retailers, those bricks and mortars, they are doing a really good job of flooding together their in-store shopping as well as being able to have online pickup. And so again, I think more and more competition is going to be coming into that space from traditional retailers against Amazon, the Amazon had to compete with in the past.
>> Interesting set. Next question from the audience.
How are things shaping up for the big US banks?
I think are going to reports tomorrow morning.
> I think US banks generally speaking are undervalued at this point.
As you know, we do have earnings coming up.
So we are really going to be watching with the banks are going to be coming out with as far as may be upping their loan-loss reserves.
So in the first half of this year, we expect that the banks should be increasing the reserves just as you could have more corporate defaults and personal bankruptcies as well. But we really think that the amount that is going to be coming up is going to be more towards normalized levels as far as we've seen in the past. I think the market right now is probably pricing and higher loan-loss reserves just because of the weakening economy and going over what they've had reserved for in the past. So as long as you get more of the use of normalized reserve levels, I think that could be a good uplift for the US banks here in the short term.
Having said that, if the banks are thinking that the recession is going to be deep or it's going to be long and they do start increasing those loan-loss reserves, that certainly going to put a lot of pressure on the stocks in the short term.
In fact, I think that would put a lot of pressure on the overall markets in the short term as well.
>> That's an interesting one.
We are going to get back to your questions for David Sekera with your questions on US stocks in a moment.
Make sure you do your own research before making any investment decisions. A reminder that you can get in touch with us anytime.
Do you have a question about investing or was driving the markets? Our guests are eager to hear what's on your mind, so send us your questions.
There are two ways you can get in touch with us. You can send us an email anytime at firstname.lastname@example.org or you can fill out the viewer response box under the video player in WebBroker. Reading your question and hit send. We will see if one of our guest can get you your answer right here on MoneyTalk Live.
last year was a tough one on many fronts. There was soaring inflation, rapidly rising interest rates, geopolitical risks and stock market volatility. What's in store for 2023? Anthony Okolie, what are you seeing?
>>I think a big question on everyone's mind is, is the world heading into a recession? With inflation rate still elevated, real rates sharply higher, TD Securities is forecasting global growth that is consistent with recession levels this year.
As you can see in the chart that I brought along, they see growth decelerating from 2022 levels with global growth sitting at 1.7 this year and into next year as well.
They also see we can growth here in Canada, the United States as well as in Europe. TD Securities points to two main factors that's affecting the growth outlook across major economies in 2023 and beyond.
The first one is of course the cumulative impact of domestic policies and that's mainly central bank and fiscal policies.
We know central banks have been hiking interest rates aggressively with the intent to slow global growth and weaken the labour market in order to return inflation to target.
Of course, following the covert response from governments, they expect fiscal policies to take a much more small rule going forward. The second factor, of course, is external factors, things like the grain crisis, natural gas prices in Europe and the biggest factor of all, the US Federal Reserve. They have been hiking interest rates aggressively.
That is spilling over into other countries and that has been a big drag on growth in many countries around the world.
Now, they also expect some decline, the second question, of course, is with inflation.
Will inflation slow enough so that central banks can start focusing on growth? They expect that there will be some decline in inflation this year but it will be a slow drop across the globe. Now, according to TD Securities, once inflation declines, they expect central banks will start to ease rates.
So with respect to, you can see, I brought along a chart here, with regards to interest rates, with respect to inflation, they see the US CPI reaching the midst 3% year over year in… The fourth quarter 2023 as a result, they expect the Federal Reserve to begin cutting rates by the end of 2023.
That would coincide with the rise in the unemployment rates to about 5%.
They are also looking for the Bank of Canada to begin easing in the first quarter of 2024.
They also expect rate cuts from the Bank of England, the ECB, in 2024.
But they think that the cuts there will be less versus the Fed and the Bank of Canada, since they were starting from… There starting point was not as restrictive as it was here in Canada and the United States.
>> I understand the report gets into the gold a little bit after pretty underwhelming year for the precious metals, there's a lot of conversation in these early innings of 2023 about will.
What does TD Securities think?
> Yes, gold has been depressed for quite some time.
They still believe that gold… It's going to be a while before gold actually shines. The reason is because they see the Fed funds rate of hitting a high of mid-5% in 2023 and not easing until late 2023.
As a result, they expect the lack of investor interest in gold into the early parts of this year. But they do expect gold to rally towards the 1800 per ounce territory after it's clear that the Fed has reached the end of its tightening cycle and markets are looking for them to start cutting rates.
>> Very interesting stuff there. Thanks.
> My pleasure.
>> Money talks Anthony Okolie.
Let's take a quick look at the markets. We will start here at home with the TSX Composite Index. Inflation report came down.
It continues to gradually ease off those highs of several months back. We see a weaker US dollar, that's always good for commodities.
We are at hundred Up 179 points on Bay Street.
Here at home with Air Canada, they are up the tune of 2.6%.
also looking at Algonquin Power, we looked at that at the top of the show, they are looking to sell $1 billion in assets. Algonquin is down about 4 1/2%.
We see that big setback in November when the pressure the stock came under then on the back of the quarterly earnings report. South of the border, the S&P 500, I don't know if it's positive or negative, it's flipping back and forth, but there you go. It's up about half a percent, 24 points to the upside. Investors digesting that inflation report and what it all means for the path forward for the Fed.
We will check in on the tech heavy NASDAQ. It's starting to play a little bit of catch-up with the broader market, up 42 basis points. And then American Airlines, they have a bullish view of travel demands.
It seems to be lifting the sector, including the stock itself, 16 bucks and $0.41, it is up 7%.
We are back now with David Sekera, he is Chief US market strategist at Morningstar Research. Look back to your questions.
This is the big one on the minds of a lot of investors.
What happens to markets if we officially had a recession?
>> Well, that's one of the questions where the past is not necessarily a prologue and there is no hard and fast rule. I would also caution investors from necessarily trying to time the market too much. For the most part, for most investors, time in the market is really a better predictor of longer-term success than trying to time the market.
having said all that, to get into that question, each recession is going to be different. And I think it's different when you look at the recessions we had in the 70s and early 80s versus the recessions that we had in the 90s and the 2000's.
So in the past, depending on which recessionary. You are looking at, sometimes the market bottoms out halfway to two thirds of the way through and then begins to recover thereafter.
But then also a couple of times a scene the markets start to turn down before the recession. So thinking about it this time around, and again, thinking about if we do have a recession, it's going to be short and shallow, the market has already sold off about 20% from its highs here in the US. And with inflation still continuing to come down and getting back to our base case that we think the Fed will be able to refocus away from being solely focused on inflation back to kind of that dual mandate and probably easing in the second half of the year, I would think that as long as investors, again, are properly positioned in their portfolios, they got their risk appetite to be able to take some of the downward volatility before things recover, again, we still think that the markets are undervalued at this point and we do have a lot of good opportunities.
>> We will squeeze in one more question even though we are coming up on time.
when the viewers wants to know your outlook for oil and gas producers.
They were the winners of last year particularly in the first half. What's the story this year, do you think?
>> So it's interesting. In our 2022 outlook, we noted that energy was the most undervalued sector coming into last year.
And as you know, the energy sector just skyrocketed last year. The MorningStar energy Index was up well over 60%.
So now and we kind of think about the valuation of that sector, following that gain and thinking about where we expect oil prices to go, oil is actually now the most overvalued sector that we cover. So our longer-term forecast for oil is 55 per barrel and we have seen oil prices come down off of their peaks from 2022.
We do think that it will continue to keep trending down over the long term so that would be one area that I'd certainly recommend investors should be cautious in investing in today.
Now for investors that are looking for energy exposure, the two areas that I would highlight that we do think there is some undervalued opportunities would be among the pipeline companies like a trans or some of the services companies, those that focus on drilling.
>> That's a fairly bearish column the price of a barrel of West Texas intermediate, using the American benchmark.
What would be the flipside?
>> Geopolitical events in the short term always can cause oil to skyrocket further. Of course, if it does, I think market sentiment would rush right back into those energy names again. But from our viewpoint, even if we did see an increase in oil prices in the short term, I know we've done a very large study and looking at the supply and demand of oil curves over the next decade and we do think that with additional supply coming online over the longer term and thinking about the transition of the world in general away from fossil fuels in the next couple of years, we will see peak oil demand and it will start coming down thereafter.
Oil prices certainly will follow as demand comes down.
>> Fascinating stuff. Good to have you with us today.
Really appreciated the conversation.
> Thank you.
>> Hope to see you again soon. As always, at home, make sure to do your own research before making investment decisions.
Our things to David Sekera, chief US market strategist at mornings our research, our guest of the day. Stay tuned. We'll be back tomorrow with an update on the markets and then on Monday, Vitali Mossounov, global technology analyst with TD Asset Management will be our guest taking your questions about technology stocks.
You don't have to wait until that program hits live to get your questions in. Email email@example.com.
That's all the time we have for the show today.
On behalf of Anthony and I here at the desk, thanks for watching. We will see you tomorrow.