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[music] >> Hello, I'm Greg Bonnell. Welcome to MoneyTalk Live, brought to you by TD Direct Investing.
coming up on today show, MoneyTalk ethical he is going to have a look at what the latest retail sales report says about the help of the Canadian economy and the consumer heading into the all-important holiday shopping season. TD Asset Management Ben Gossack is going to tell us why this recent runway seen in US stocks is about more than just the so-called Magnificent Seven. And we will discuss the outlook for the auto sector with a slowdown in demand for electric vehicles.
It TD Asset Management's David Mau will tell us about that story. In today's education segment, Caitlin Cormier is going to show us data available in Advanced Dashboard's Market Pulse screen.
Today the Americans have come back for a half-day session. It volumes are pretty muted today. We will start you at home with the TSX Composite Index. A pullback of a whopping 4 1/2 points, that's two tix to the downside. Among the most actively traded names, and I use actively traded quite generously audited they like this, included Kinross Gold. We have a substantial pullback in the US trade -weighted dollar today. Some gold names in positive territory but nothing oversized.
At seven bucks and $0.61 per share for Kinross, it's up half a percent. First Quantum getting confirmation that indeed they have a temporary halt on production in Panama because of the protest they are, because of a blockade of the local port.
They are down 3 1/3% today. South of the border, after a day off from trading and 1/2 date session today, the S&P 500, the broader read of the American market, down at one point or two tix. How about the tech heavy NASDAQ, how is it pacing against the broader market? A little more to the downside but nothing too dramatic.
25 points off the table, that's good for almost 1/5 of a the percent in the red.
Earlier Ford was making some gains, the automaker a 1.7%. At 10 bucks and $0.43 per share. And that's your market update.
Just in time for the kickoff to the holiday shopping season, we have new data on how the Canadian consumers holding up.
MoneyTalk's Anthony Okolie has been going to the details and brings him to us now.
>> Thanks very much. Canadian retail sales came up .8% month over month which is the biggest jump since April and comes against stats Canada/estimate of a flat reading.
Also we heard that the August print was revised up marginally, .1% from a loss of the same size. When we adjust for inflation, volume of sales were up .8% higher on the month. The flash estimate for October points to more gains, .8%, increase in nominal sales. When we break it down by sector, we saw sales were up in four out of the nine subsectors.
The largest increase, no surprise, gas stations, also motor vehicle parts and dealers, primarily sales by new car dealers. At the same time, we saw some weakness in the used car dealer sector.
The used car market has been facing shortages recently, inflation, higher borrowing costs are prompting people to look for cheaper cars but more people actually hanging on to their vehicles for longer, leaving dealers with little inventory.
Other areas that we sell weakness, we saw sporting goods, clothing and food and beverage stores. Despite the sharp rebound in headlines, loony look into the details, the report points to some consumer weakness. September quarter sales, when we exclude gas and autos, was actually down .3% in nominal terms, .5% down adjusted for inflation. So I think the key data suggests that consumers are coming back on discretionary spending heading into the holiday season. As I believe TD Economics published a note on this today. Maria is still a Viola, who is going to be a guest on the part of next week, said they have some data that they have been monitoring, suggesting that even though these numbers are strong, we are seeing the consumer get a little more cautious considering all the inflation pressures we are living through.
>> Exactly. They look at their internal card spending which points to continued slowdown in October and one of the key themes they point he was that this holiday shopping season, expects households to focus on bargain-hunting, I'm a big bargain hunter myself, last minute holiday buying, that could drive potentially deeper discounts but clearly there is a focus on bargain-hunting, given the fact that we are still seeing relatively sticky inflation and higher borrowing costs as well.
>> I did see as part of the Black Friday sale landing in my digital device, a guitar that I've have had my eye on for the past little while, 20% off, but I don't think that's the kind of bargain my wife wants me to do.
>> I think she wants to see a deeper discount.
>> Not guitars.
Don't need to add another guitar to the stable. Thanks for that.
>> My pleasure.
>> MoneyTalk's Anthony Okolie.
Earlier this week, we had the latest read on Canadian inflation and it came in just before the Bank of Canada's target rate.
Robert Both, macro strategist of TD Securities, joined us to discuss.
>> So as you mentioned, we are just sitting right above the target range now.
So that 0.7 percentage point drop, that is a lot of good news for Canadians that are struggling with a higher cost of living.
It's also great news for the Bank of Canada, because inflation is that much closer to their end goal.
Now as with every CPI report, there are a lot of moving pieces under the headline number. And in this one, we saw a very stark divergence between energy prices and shelter prices. So energy prices were the main downward force in October. Gasoline prices fell by about 6.4% on the month.
You also had a drag from electricity and heating fuels.
So when you strip some of that out, the headline numbers look a little bit less positive.
We also saw more pressure come through the shelter channel in October.
So that is going to be something that's a little tougher to digest for those households that are a little more financially stretched.
Rents have been a key driver of CPI for the last several months.
But those accelerated further in October.
Rents saw their largest month over month increase in a few decades. So that is certainly something that speaks to the shortages across the housing market.
We also saw more pressure come through mortgage interest costs, through property taxes as well, so a much larger increase than they had last year. So you're really seeing a bit of a gap open up between shelter prices and the broader CPI basket.
I think the biggest thing that stood out to me today, though, was the improvement we saw for the Bank of Canada's core inflation measures. Those had been running at about 3.8% year over year in October-- or in September. In October, they're sitting around 3.55%.
And the Bank of Canada has been keenly focused on the three-month rates of core inflation. And those have been maintaining a very tight range over the last 12 months. But we actually saw them break below that range in October. Those three-month rates of core inflation were running at 3.7% in September. They're now at 3.0%, which is just the upper end of the Bank of Canada's target range. So we are going to need to see a couple more months of this to really make this a trend. But it should give the bank a little more confidence that its tight policy stance is helping to relieve price pressures, and that inflation does still remain on a path to 2%.
>> Because I think, we're not that far away, right? December 6, I had forgotten that December is right around the corner.
We're going to get another rate decision from the Bank of Canada. It seems like a funny time.
Because when you think about it, like are they on hold, or this is like-- well, our central bank, the States, they haven't done anything since the summer. But after what we've been through, we're all pretty much on edge as to what do they do next.
What do you think we get? What's the message from December the 6th? First, what are they going to do about rates?
>> So we don't expect the Bank of Canada to cut rates until the middle part of next year.
And I think for December, there is a pretty high bar for any sort of change in tone or signal that rate cuts might be a little bit closer. The bank has actually been more focused on the risk of hikes over the last few months, really since July. They haven't done much.
But they have kept that threat of hikes on the table, and that's helped to keep financial conditions tight.
We expect that message to remain unchanged in December.
The bank does need to see more progress on the inflation front to take the risk of hikes off the table.
But we think with a couple more months of softer core inflation, and if we continue to see progress on the headline front as well, we are getting a little bit closer to when you can expect that change in tone from the bank.
>> Is part of the sort of issue now for the Bank of Canada, not so much the data that they see coming in, because it all seems to be moving in the direction they would hope it would move in after being so aggressive with rate hikes, but how we start reacting to things? I just think back to the spring when they said, oh, we're going to stop here and see what kind of effect we've had on the economy.
And the housing market took off again. And then they came back to the table in the summer and hiked some more. That really cooled things down. Are they worried about how we're going to react in the short term to small shifts?
>> Right. So I think the bank is very aware of how its communication is interpreted by markets, by the broader financial community. And that is part of the desire to keep financial conditions tight, to keep the risk of hikes on the table until they are much closer to easing, until they have more evidence that this isn't just a one-off like we saw last spring. This is a firmer trend towards 2% inflation in a balanced economy.
I think the biggest difference between what we saw in January and where we are today is just the broader state of the economy. Back in the early parts of this year, labor markets were still very tight.
We were still in a state of excess demand.
We've seen two very weak quarters of GDP growth now. The Canadian economy contracted in the second quarter. It looks like its growth has remained pretty flat over Q3 as well. And you're starting to see that excess supply creep back into the economy.
So I think the bank still doesn't want to tip its hand until it is certain that cuts are on the horizon. But with a couple more data prints, and if we do see more progress on those core inflation measures, we could be getting closer to that point in the new year.
>> How does the new year look in terms of the economy, in terms of jobs? I mean, I think this has been a very aggressive hiking cycle. I think, perhaps, some of the effects of the rate hikes took a little longer to work through the economy.
Is next year when we sort of see the full impact of what they've done?
>> So it is going to remain a very challenging environment for growth over 2024. I think the bigger source of uncertainty is what's happening to the economy in Q3 and Q4 of this year, coming off that contraction in the second quarter. We do expect things to stabilize over Q4. We do expect to see it return to low, but positive growth. And over the course of 2024, we should get closer to those trend-like GDP numbers.
That does mean excess supply is going to continue building over the course of next year. And we don't-- well, we'll also see a bit of a tailwind when the Bank of Canada does begin to ease off of its restrictive policy stance over the second half of the year. Now, population growth is still continuing to provide a key driver of GDP growth. So that is going to keep us from tipping into a steeper slowdown.
So we look for GDP growth of 0.9% next year. We think with that population growth, you are still going to continue to see a job growth throughout the year. But job growth will continue to be outpaced by the growth of the labor force. So we can see unemployment rate move higher as the economy moves further into excess supply.
But we don't expect the type of material job losses that you might anticipate with a weaker growth outlook.
>> That was Robert Both, macro strategist with TD Securities.
Right now, let's get you updated on the top stories in the world of business and take a look at how the markets are trading.
First Quantum has suspended production at its mine in Panama due to an ongoing port blockade. The Vancouver-based miner says that it's a temporary shutdown, noting that the blockade is preventing the delivery of coal and other supplies that it needs to run the copper mine. There has been a groundswell of opposition of First Quantum's operations in Panama, that's after the company signed a new contract with the government last month.
Shares of Nvidia in the spotlight today, really all week, the company has reported that they are delaying a new artificial intelligence chip intended for the Chinese market. Earlier this week, Nvidia reported a 200% jump in sales for its most recent quarter, but it did warn that export restrictions from Washington to selling to China would affect sales going forward.
The stock today, 480 bucks off its recent all-time highs, down 1.4%.
We got some news today in the robot vacuum space. There appears to be growing optimism that Amazon is going to win regulatory approval in Europe for its $1.4 billion acquisition of iRobot.
The European commission is due to make a decision on the deal by February 14 of next year. The market is looking upon this favourably.
Quick check on the market, we will start here at home on Bay Street. It's been a late trading session, the Americans are doing a half-day after being off yesterday for thanks giving. We are a whopping one point or one take on the TSX Composite Index.
South of the border, less taken on the S&P 500, that broader read of the American market. A very light session. Basically dead flat.
Some market pundits have put the performance we seen from the S&P 500 this year down to a small concentration of big tech stocks, the so-called Magnificent Seven. But according to Ben Gossack, portfolio manager with TD Asset Management, if you dig a bit deeper, a different story emerges.
He joined me earlier to discuss.
>> I'd say several of the episodes I've been on where we chatted about stuff, that's been something I keep scratching at. We've talked about market breadth.
We've talked about different areas of the market that have been performing. And yet I still look in my inbox, and I see S&P 7 versus S&P 493.
And I still don't understand what's happening other than narratives can be very strong. We're all busy people. And when someone says, if the S&P is up 19%, and it's driven by seven stocks, and I see the seven stocks are up, I might stop my analysis there because I have more important things to do in my life.
>> But you like to dig deep.
You like to do analysis. You've done some analysis right now. And I think, from what you were sharing with us before, we can definitely see some gains in the S&P 500 that go beyond just those seven names.
>> Yes. So I decided to count all the stocks in the S&P 500 that have delivered performance better than 19.3%.
>> So it beat them or beat the broader index.
>> Right.
So I did my analysis as of last Friday. So the S&P 500 was up 19.3% year to date, which is amazing, which is more than what people had expected. And I was expecting that I'd start counting the stocks that beat the market, and I'd stop at seven.
But Greg, I stopped at 132.
>> 132-- so it's not just seven.
>> So there are 132 stocks, year to date, that have outperformed the S&P 500. What's also interesting to me is then I did the composition by sector. We have talked, other shows, about the strength that we've seen in the industrial sector, even though we're supposed to be in a recession, and how that's odd.
We've talked about the strength of homebuilders.
That's consumer discretionary. And we've thought, well, that's quite odd.
I thought rates were so high, and no one was buying houses.
So why are those stocks outperforming? So of those 132 stocks, it should come to no surprise that a good proportion of those winners came from technology.
>> Yeah, so we've got a chart now we can show the audience. The big bar is, obviously, information technology. Your seven are in there. But even then, it's more than just seven in the infotech.
>> Yeah. So it would be Microsoft and Apple and NVIDIA. There are 64 stocks that make up the tech sector in the S&P 500. 36 stocks are outperforming the S&P 500. So you had a 50/50 odds that, on January 1, if you picked one stock out of the tech sector that you would have outperformed the S&P 500. I'd say those are pretty good odds.
But yes, it's not just a select group of stocks. We see outperformance coming from hardware stocks, services, software, and the semis. So it's been broad based in technology. And the next set of winners, there's 27 stocks that are in the industrial sector that are also outperforming the S&P 500.
And we've talked about themes, such as the CHIPS Act, the Inflation Reduction Act that opened up a ton of credits and government incentives for clean energy. So those stocks are benefiting, as well. And then the other big bucket came from consumer discretionary-- again, not the typical sectors that you would think would outperform the market when we've been talking about recession all year.
>> Let's get that conversation, continue on recession, right? Because it's been hanging over us and hanging over us. You said parts of the market are performing that you wouldn't expect in a recessionary environment.
Other parts, I think, if we looked at that chart again that you would expect to be safe havens if we actually thought we were in a recession or heading into a recession have not been performing. What's with this recession story? Let's start there. What are we supposed to be thinking as this year is almost behind us?
>> And full disclosure, I don't challenge the recession thesis or the recession fear. And there are many leading indicators that are telling us we're finished a recession, in a recession, still a recession to come. But it's kind of like when we were living in caves, and we saw an enemy, we would run. And that's how we, as a society, lived.
Typically, the game plan has been, when someone says, hey, there's a recession around the corner, we run, and we hide.
And where do we hide in? We hide in fixed income, and we hide in consumer staples, and we hide in utilities, and we hide in REITs.
And we avoid certain cyclical, dangerous, areas.
>> Maybe technology stocks, maybe consumer discretionary stocks, maybe industrial stocks.
>> Maybe industrials, right. And so there was nothing wrong with the thesis of, hey, let's hide out. There is an issue when everyone shares the same thesis. And so the question I keep raising is, what do you win when you're the most bearish person in a room of bears?
And the only answer I get is, if you're an economist, you go on a book tour.
[laughing] But in the game of investing, typically, that's where people say, oh, let's be contrarian. But I'm not trying to be contrarian for the sake of being contrarian. It's just more of looking at the areas that are outperforming, then starting to ask more questions, like, why is this happening?
And it goes back to another episode that I know we did where we started talking about the market, making a bottom last year in the summer. But if you looked at everything on a market cap perspective, that was getting distorted, and you had to look at things more on an equal weight perspective to see that.
So it just-- again, I don't think we can fight narratives. But I think we, as investors, as stewards of capital, it's our job to question narratives and then look to the facts and the data to back it up. And a lot of times, that creates an opportunity.
>> Let's talk about that. I know, also, that sometimes you have a problem with this arbitrary definition of when we should be gauging our success as investors, that we've made another trip around the sun. Boom, it's January 1. But some of us think that way. The year is drawing to a close. We're almost into December. With everything that's happened so far this year and defying expectations, do we take anything from that into 2024?
>> Yes. Do not forecast.
[laughing] So I know we're getting to the end of the year. I'm already starting to see people's projections.
This financial institution thinks the S&P is going to be at 5,000 at the end of next year.
I just encourage people-- like, that's interesting. That's kind of what we want to hear.
But if you followed the forecast for last year, which was earnings cratering, which they didn't, equities following and cratering, which they didn't, yields collapsing, which they didn't, the most important thing is that you follow your process.
And for us, it's always been about secular trends. These trends can last three years, five years. And then we can avoid the demands in terms of, tell me what's going to happen in three months or six months.
I'm trying to learn how to play golf, Greg. And what I've learned is you can't start thinking of the next holes until you finish the first hole that you're on. And that's what I like to do when I apply that to investing.
>> That was Ben Gossack, portfolio manager with TD Asset Management.
Now, let's go to our educational segment of the day.
In today's education segment, we are having a look at TD's Advanced Dashboard, platform designed for active traders available through TD Direct Investing.
Caitlin Cormier, client education instructor with TD direct and has the explainer on what data is available on the Market Pulse screen.
>> One of the great features of Advanced Dashboard as you being able to create custom layouts to put in any tools and widgets that you would like to see.
However, how are you going to know which widgets you would like if you don't have time to look through them?
So let's take a peek today at our market policy layout. It's one of our pre-created layouts in Advanced Dashboard and we're gonna get a feel for some of the tools that we have. First up we have our bubble chart which gives us a visual representation of the TSX 60.
Late showing us the one-year performance of the securities. We have the heat map which is giving us up-to-date information on how the markets are trading, specifically the TSX. We can see the most actively traded securities, said this is within Canada on the TSX, you can see the top 10 securities.
We can also see how the markets are performing so different indices, both here in Canada and the US. We can see market news as it comes in, that rolling information about what is happening within the market, as well as our earnings calendar here on the left-hand side.
You will also notice that once we choose a security that we want to do a bit more research on, for example I could go ahead and click, let's just choose the one on the far left here, the right hand side of my screen is going to automatically update to represent information from that security.
So we can see a chart here from that security. I can click on news and get information about that security.
Equity analytics, which gives us pretty much all of the information we need to have as far as fundamental information on the company.
And finally, the earnings analyser.
The great thing about this linking as we are able to get this up-to-date information between these two screens, so again, if you click on most active and we choose a security within the screen, it will automatically update on the right-hand side and give us the information about that particular security.
So this is one way that you can get a little bit more familiar with the different tools that we have in Advanced Dashboard so you can really create your own custom screen.
>> That was Caitlin Cormier, Senior client education instructor at TD direct and a.
While many countries are pushing electrification is crucial to the fight against climate change, one of the big takeaways from earnings season is that consumers might not be snapping a EVs.
David Mau, portfolio manager at TD Asset Management join me earlier with his view.
>> Yeah, so I mean, we are seeing a slowdown in demand for electric vehicles,probably started since about the beginning of the year. And don't get me wrong, the EV market is still growing.
It's just not growing as fast as it used to grow.
And there's a couple of reasons for that.
But the main one is it looks like that demand has fallen off because the pool of electric vehicle buyers has maybe reached an early saturation point. So pretty much, most of the people who had intentions to buy an electric vehicle have-- in the past few years have already bought them. So that pool of potential buyers is getting smaller over time.
And we're seeing electric vehicles sitting on dealer lots for a lot longer now. So previously, an EV would reach a dealer and it might sit in inventory for 30, 40, maybe 50 days. More recently, in the past couple months, we're seeing electric vehicles sit on dealer lots for closer to 90 days. So that's a big difference.
And admittedly, we're seeing a lot more supply. So a lot more manufacturers have been rolling out new models. Production has ramped up. So there's more supply, more inventory, and less buyers. So we're seeing that slowdown in demand.
As far as what goes to explain this slowdown, there's a couple of things. I talked about the pool of buyers getting smaller. The other thing is price is still a very important consideration, price and affordability. So with an electric vehicle still costing probably 20% to 30% more than a comparable internal combustion car, consumers, especially in this high-interest-rate environment, where affordability is actually a lot harder now, consumers are just looking for a cheaper option.
>> Yeah. If you're financing that car and you're not financing at 1.5% or 2%-- >> Exactly.
>>--or not very much higher. I think Elon Musk has said that, in terms of not saying there's anything wrong with the Tesla business and the fact that in a slowing economy and higher interest rates, the buyer isn't there.
>> That's right. So I mean, if you think back a couple years ago, you could get a car loan 1%, maybe 2%, 3%. Nowadays, auto loans are going for 7%, 8%. So it is having a pretty big impact.
>> When it comes to car loans, a story I think that started percolating maybe even late last year and earlier this year and then sort of went to the wayside, this idea that you could perhaps start to see some problems with auto loans in the United States, particularly subprime.
What's happening there?
>> Yeah. So that's a good point, Greg.
We're starting to see a pretty significant tick up in subprime auto defaults. So right now, I think the most recent numbers show that subprime auto defaults are above 6%. 6% of all subprime borrowers are defaulting on their car loans. That's the highest it's been, I think, for the last 30 or 40 years. So I mean, that's even higher than the default rates that we saw during the financial crisis in 2008-2009.
So it is starting to be a little bit worrisome. And the thing is for these subprime borrowers, they usually don't have the best credit to begin with. So when the economy starts to weaken even a little bit, these guys are the first ones to be affected. And subprime borrowers are paying a lot for a car loan. They're paying somewhere between 15% and 20% for a car loan. So when things start to soften or weaken, these are where you start to see the first cracks.
>> What does that mean for the industry going forward, if you're starting to see those cracks right now with those borrowers?
And those are very high rates, I mean, much higher than hopefully a lot of people are paying for their car loans. But what does it mean for the industry going forward in the next little while?
>> I mean, it's going to be challenging for the sector. Because subprime, I mean, really only make up about, I want to say, 7% to 8% of the overall buyer pool for cars. But that 7% to 8%, if that disappears, is still pretty meaningful and could have a pretty big impact on sales going forward.
>> All right. So we're seeing a slowdown in demand for electric vehicles for various reasons. We're seeing some rising subprime defaults in the auto space. On top of all that for the autos-- it's been pretty busy for the sector in the past little while-- we had those strikes and now labor deals and pretty big pay raises in those labor deals. How does that all work towards what we're thinking about autos?
>> Yeah, so I think you're probably talking about the United Auto Workers strike that's happened over the past few months. I think they were on strike for about six weeks. And it seems like they've come to an agreement now.
I think the unions probably did a pretty good job for the employees. I think most of the agreements were for about a 25% increase in wages. And when you add in all the other benefits and improvements that the unions negotiated, their total comp is going to be going up by about 40% over the next four to five years for these unionized workers.
So it is a pretty good deal for the workers. But this adds to an increasingly difficult situation for the automakers.
Because like we already mentioned, higher interest rates are slowing demand. And now you have these labor costs that are going up.
What it all really comes down to is it's going to put pressure on margins. So profitability is going to go down. And, usually, what happens in these cases is that the automakers, when they're faced with these rising costs, they're going to try and pass some of those costs on to the consumer. So that's going to be-- >> The consumer that's already showing slowing demand at least for the electric vehicle side.
>> Exactly.
So that's going to mean higher prices for consumers. And we're not seeing that just for the big three in the US. There are other automakers in the US, some of the Asian brands, like Honda, Toyota, Hyundai, even Tesla, all of those brands are not unionized. Their plants are not unionized.
But because of this recent deal, a lot of those automakers have also increased wages for their employees. Because A, they know that they need to stay competitive on the pay front to attract and retain employees.
And B, because they don't want unions to come into their plants. So if their employees are happy with the pay, it's less likely that the unions will be able to convince the employees to join a union.
>> When we take this all together, what does it mean for the investment thesis for the auto space in the next little while?
Is there be a bit of a choppy ride, I guess, going forward?
>> I think-- yeah, for the near term, it's going to be a little bit rough. We have these rising costs, slowing demand. And then on the-- and this ties into the EV front is that a lot of automakers are spending a ton of money on building out their EV capability, investing in plants, trying to ramp up production. So there's a lot of crosswinds here that could present kind of a-- at least a challenging near to midterm for the automakers.
>> That was David Mau, portfolio manager at TD Asset Management.
Now, for an update on the markets.
Okay, we are back into Advanced Dashboard, we are looking at the heat map function here.
It gives you a view of the market movers on the TSX 60. We are sorting by price and volume. It's a bit of a late trading day.
First Quantum stands out, down 3% on the session, of saying they had to shut in production. They are calling it a temporary measure in Panama because of the opposition to their operations down there, and a blockade at a local port. They can't get the things they need to run the plant.
South of the border, I want to take a look at the S&P 100. Some of the tech stocks today are under a bit of pressure, including Nvidia, Google and Apple with some money moving towards forward and also on a maker Tesla. You can get more information on TV Advanced Dashboard by visiting TD.com/Advanced Dashboard.
Central banks appear to be done with their rate hiking cycle. Investors are increasingly considering when some cuts might come.
Earlier, we had a chance to discuss what this means for markets with Justin Flowerday, had a fundamental equities at TD Asset Management.
>> Let's think about what we've had in terms of data.
We've obviously had US and CPI and Canadian CPI, recently and it is showing a slowing trend and we are getting a cooling of inflation.
>> It's still increasing.
>> That's right.
We are getting to a point where it's becoming a little bit more palatable and so is you think about what that means for the short-term interest rates and decisions by the Fed and the BOC, it's giving them enough evidence to say, okay, maybe you will stay on hold for now and see how the data comes in. And then as that translates to the equity markets, I would just say they are following the bond market, there following yields and it becomes really tricky and can be quite volatile because you're getting days when yields are moving around 10, 20 basis points. You get 50 basis point moves in a month. And what that means for investors or any investor in risk assets means the risk-free rate that you are using is the 10 year treasury yield.
When that's moving around so much, it gets really difficult to get comfort that this is the fair value for any individual stock were on the market. I would expect volatility to remain.
>> Yeah.
Is there anything, you were just talking about the fall fiscal update, I'm not can ask you about that, but did you hear anything from a deficit standpoint that makes you pay closer attention?
>> Yes, we were actually quite pleased.
We thought it was a fairly responsible update and we didn't hear anything that scared us. I think going in there was some skip to mission scepticism that we might hear about bigger expenditures.
Nothing came out that really scared us.
>> Good. I know we are going to talk about earnings and some of the themes you've been hearing in terms of what's been coming out of companies. This term I have not heard but the challenge of the central bank is to get a stronger labour market.
The fact they keep doing what they are doing and they are not seeing unemployment numbers move out.
You talk about labour holding.
>> Yeah.
So labour holding is a thing. It became a thing after COVID so what you had was a bunch of companies that let go of employees when they saw the man fall off a cliff and then try to hire them back and it was really painful and difficult experiences >> And expensive.
>> And expensive.
And what has led to is the theory that there are some companies out there that are a little bit less sensitive to incremental changes in demand in terms of cutting costs and could that be a factor?
You there on top of that, some of the new onshoring trends that are taking place, we are building manufacturing facilities and on top of that, some of the demographic trends that are taking place, there is an argument out there, you can agree or disagree, it's probably a debate for another show, that there is maybe a structural supply and demand imbalance in terms of labour in the market.
We can debate that on another show but for now, what that means is are companies currently trying to see how demand comes down… >> Try to smooth it out themselves.
>> I'm not making that kind of rash decision saying, okay, I see demand falling so I'm going to cut. No, they are waiting around.
That causes difficulty for the central banks who are just trying to say, no, we need to get inflation down.
Inflation needs to come down and it's probably not moving as quickly as they would like to see.
>> That's interesting. What else are you hearing from companies in terms of the trends in earnings?
>> Earnings season, Q3, wrapped up.
It's always a good season. Company is always guide low and then beat, so 80% of companies beat on earnings. You had 60% of nominees beat on revenues. At a high level, earnings grew year-over-year for the first time in several quarters so that's positive.
When you take out the Magnificent Seven, earnings were actually down 4%. So they were up 4% with the Magnificent Seven, down 4% without.
Revenue didn't grow as quickly but it was still up.
And when you think about some of the trends we are hearing, I would point to the consumer and how different cohorts are doing as a trend that came out quite clearly. We heard from several management teams at the lower income cohort is weakening, and they drained down their excess savings, and they are starting to see decisions which are slowing consumption trends across a whole bunch of different sectors.
We heard from Walmart, we heard Home Depot come out and they said, purchases of over $1000 are down 6% year-over-year.
So some difficulty in terms of the low-end consumer. Other than that, some of the guidance came in a little bit weaker.
The trends for Q4 and for next year estimates are starting to trend down a little bit.
>> What about sectors?
We could talk about industrials, real estate, technology. Industrials, you think things are looking okay.
>> Yeah, so industrials is a really great sector for us because it's such a diverse group of businesses.
And you have a whole bunch of different and markets. I will go back to the onshoring and nearshoring, whatever you want to call it, there is activity that's taking place and every time and you to plant gets built in Arizona or a new air-conditioning plant to supply the CHP plant with air conditioning… >> It's all happening here.
>> It happens here.
So these industrial companies find new verticals to sell their goods into and that does present probably an opportunity that isn't just a one year kind of timeframe.
>> Real estate?
>> Real estate, there are pockets that concern us.
We would be avoiding certain areas of the retail mall space.
>> You seal the distribution centres going up in all the malls not doing so well.
>> That's right.
We would probably be avoiding some office exposure outside of the main core.
Main core office doing great. Outside, maybe you want to avoid some of that and then you mentioned technology. I think technology is the theme that has excited everybody this year and there are still exciting pockets. You think about exposures to AI, not just the chips but the productivity tools, companies that are presenting the opportunities for companies to protect margins and the data infrastructure software companies, lots and lots of good things happening there.
>> What you think about, my last question here, but about the soap opera that is OpenAI's evolution?
They fired Altman, ease back, no the board fired.
Beyond the entertainment value, is there something going on there?
>> I would say there is one big conclusion that's really positive from my standpoint which is the future of AI is in a much better spot today than it was a week ago.
And when you think about the development of, you've got this nascent technology which has been initiated by companies like OpenAI and others, and with any company like that, a very young company, it doesn't have a corporate governance structure that is super robust and then they start dealing with Microsoft which is a much larger company, they were trying to move and commercialize AI until you get some friction. And so it's happened in the last week I think is really positive because you essentially compress the timeframe which could have been about a year or two years, three years for OpenAI to mature from a governance standpoint and it happened in a week.
We've got board members leaving, Sam Altman back leading the organization.
So I am extremely excited and I think the future of AI today is probably in better hands and it was a week ago.
>> That was Justin Flowerday, head of fundamental equities at TD Asset Management speaking with MoneyTalk's Kim Parlee.
As always, make sure you do your own research before making any investment decisions.
stay tuned.
On Monday show, Jason Hnatyk, senior client education instructor with two TD Direct Investing will be our guest, he wants to take your questions about getting more out of the WebBroker platform.
A reminder that you get a head start with those questions. Just email moneytalklive@td.com. That's all the time we have for the show today.
Thanks for watching. We'll see you Monday.
[music]
coming up on today show, MoneyTalk ethical he is going to have a look at what the latest retail sales report says about the help of the Canadian economy and the consumer heading into the all-important holiday shopping season. TD Asset Management Ben Gossack is going to tell us why this recent runway seen in US stocks is about more than just the so-called Magnificent Seven. And we will discuss the outlook for the auto sector with a slowdown in demand for electric vehicles.
It TD Asset Management's David Mau will tell us about that story. In today's education segment, Caitlin Cormier is going to show us data available in Advanced Dashboard's Market Pulse screen.
Today the Americans have come back for a half-day session. It volumes are pretty muted today. We will start you at home with the TSX Composite Index. A pullback of a whopping 4 1/2 points, that's two tix to the downside. Among the most actively traded names, and I use actively traded quite generously audited they like this, included Kinross Gold. We have a substantial pullback in the US trade -weighted dollar today. Some gold names in positive territory but nothing oversized.
At seven bucks and $0.61 per share for Kinross, it's up half a percent. First Quantum getting confirmation that indeed they have a temporary halt on production in Panama because of the protest they are, because of a blockade of the local port.
They are down 3 1/3% today. South of the border, after a day off from trading and 1/2 date session today, the S&P 500, the broader read of the American market, down at one point or two tix. How about the tech heavy NASDAQ, how is it pacing against the broader market? A little more to the downside but nothing too dramatic.
25 points off the table, that's good for almost 1/5 of a the percent in the red.
Earlier Ford was making some gains, the automaker a 1.7%. At 10 bucks and $0.43 per share. And that's your market update.
Just in time for the kickoff to the holiday shopping season, we have new data on how the Canadian consumers holding up.
MoneyTalk's Anthony Okolie has been going to the details and brings him to us now.
>> Thanks very much. Canadian retail sales came up .8% month over month which is the biggest jump since April and comes against stats Canada/estimate of a flat reading.
Also we heard that the August print was revised up marginally, .1% from a loss of the same size. When we adjust for inflation, volume of sales were up .8% higher on the month. The flash estimate for October points to more gains, .8%, increase in nominal sales. When we break it down by sector, we saw sales were up in four out of the nine subsectors.
The largest increase, no surprise, gas stations, also motor vehicle parts and dealers, primarily sales by new car dealers. At the same time, we saw some weakness in the used car dealer sector.
The used car market has been facing shortages recently, inflation, higher borrowing costs are prompting people to look for cheaper cars but more people actually hanging on to their vehicles for longer, leaving dealers with little inventory.
Other areas that we sell weakness, we saw sporting goods, clothing and food and beverage stores. Despite the sharp rebound in headlines, loony look into the details, the report points to some consumer weakness. September quarter sales, when we exclude gas and autos, was actually down .3% in nominal terms, .5% down adjusted for inflation. So I think the key data suggests that consumers are coming back on discretionary spending heading into the holiday season. As I believe TD Economics published a note on this today. Maria is still a Viola, who is going to be a guest on the part of next week, said they have some data that they have been monitoring, suggesting that even though these numbers are strong, we are seeing the consumer get a little more cautious considering all the inflation pressures we are living through.
>> Exactly. They look at their internal card spending which points to continued slowdown in October and one of the key themes they point he was that this holiday shopping season, expects households to focus on bargain-hunting, I'm a big bargain hunter myself, last minute holiday buying, that could drive potentially deeper discounts but clearly there is a focus on bargain-hunting, given the fact that we are still seeing relatively sticky inflation and higher borrowing costs as well.
>> I did see as part of the Black Friday sale landing in my digital device, a guitar that I've have had my eye on for the past little while, 20% off, but I don't think that's the kind of bargain my wife wants me to do.
>> I think she wants to see a deeper discount.
>> Not guitars.
Don't need to add another guitar to the stable. Thanks for that.
>> My pleasure.
>> MoneyTalk's Anthony Okolie.
Earlier this week, we had the latest read on Canadian inflation and it came in just before the Bank of Canada's target rate.
Robert Both, macro strategist of TD Securities, joined us to discuss.
>> So as you mentioned, we are just sitting right above the target range now.
So that 0.7 percentage point drop, that is a lot of good news for Canadians that are struggling with a higher cost of living.
It's also great news for the Bank of Canada, because inflation is that much closer to their end goal.
Now as with every CPI report, there are a lot of moving pieces under the headline number. And in this one, we saw a very stark divergence between energy prices and shelter prices. So energy prices were the main downward force in October. Gasoline prices fell by about 6.4% on the month.
You also had a drag from electricity and heating fuels.
So when you strip some of that out, the headline numbers look a little bit less positive.
We also saw more pressure come through the shelter channel in October.
So that is going to be something that's a little tougher to digest for those households that are a little more financially stretched.
Rents have been a key driver of CPI for the last several months.
But those accelerated further in October.
Rents saw their largest month over month increase in a few decades. So that is certainly something that speaks to the shortages across the housing market.
We also saw more pressure come through mortgage interest costs, through property taxes as well, so a much larger increase than they had last year. So you're really seeing a bit of a gap open up between shelter prices and the broader CPI basket.
I think the biggest thing that stood out to me today, though, was the improvement we saw for the Bank of Canada's core inflation measures. Those had been running at about 3.8% year over year in October-- or in September. In October, they're sitting around 3.55%.
And the Bank of Canada has been keenly focused on the three-month rates of core inflation. And those have been maintaining a very tight range over the last 12 months. But we actually saw them break below that range in October. Those three-month rates of core inflation were running at 3.7% in September. They're now at 3.0%, which is just the upper end of the Bank of Canada's target range. So we are going to need to see a couple more months of this to really make this a trend. But it should give the bank a little more confidence that its tight policy stance is helping to relieve price pressures, and that inflation does still remain on a path to 2%.
>> Because I think, we're not that far away, right? December 6, I had forgotten that December is right around the corner.
We're going to get another rate decision from the Bank of Canada. It seems like a funny time.
Because when you think about it, like are they on hold, or this is like-- well, our central bank, the States, they haven't done anything since the summer. But after what we've been through, we're all pretty much on edge as to what do they do next.
What do you think we get? What's the message from December the 6th? First, what are they going to do about rates?
>> So we don't expect the Bank of Canada to cut rates until the middle part of next year.
And I think for December, there is a pretty high bar for any sort of change in tone or signal that rate cuts might be a little bit closer. The bank has actually been more focused on the risk of hikes over the last few months, really since July. They haven't done much.
But they have kept that threat of hikes on the table, and that's helped to keep financial conditions tight.
We expect that message to remain unchanged in December.
The bank does need to see more progress on the inflation front to take the risk of hikes off the table.
But we think with a couple more months of softer core inflation, and if we continue to see progress on the headline front as well, we are getting a little bit closer to when you can expect that change in tone from the bank.
>> Is part of the sort of issue now for the Bank of Canada, not so much the data that they see coming in, because it all seems to be moving in the direction they would hope it would move in after being so aggressive with rate hikes, but how we start reacting to things? I just think back to the spring when they said, oh, we're going to stop here and see what kind of effect we've had on the economy.
And the housing market took off again. And then they came back to the table in the summer and hiked some more. That really cooled things down. Are they worried about how we're going to react in the short term to small shifts?
>> Right. So I think the bank is very aware of how its communication is interpreted by markets, by the broader financial community. And that is part of the desire to keep financial conditions tight, to keep the risk of hikes on the table until they are much closer to easing, until they have more evidence that this isn't just a one-off like we saw last spring. This is a firmer trend towards 2% inflation in a balanced economy.
I think the biggest difference between what we saw in January and where we are today is just the broader state of the economy. Back in the early parts of this year, labor markets were still very tight.
We were still in a state of excess demand.
We've seen two very weak quarters of GDP growth now. The Canadian economy contracted in the second quarter. It looks like its growth has remained pretty flat over Q3 as well. And you're starting to see that excess supply creep back into the economy.
So I think the bank still doesn't want to tip its hand until it is certain that cuts are on the horizon. But with a couple more data prints, and if we do see more progress on those core inflation measures, we could be getting closer to that point in the new year.
>> How does the new year look in terms of the economy, in terms of jobs? I mean, I think this has been a very aggressive hiking cycle. I think, perhaps, some of the effects of the rate hikes took a little longer to work through the economy.
Is next year when we sort of see the full impact of what they've done?
>> So it is going to remain a very challenging environment for growth over 2024. I think the bigger source of uncertainty is what's happening to the economy in Q3 and Q4 of this year, coming off that contraction in the second quarter. We do expect things to stabilize over Q4. We do expect to see it return to low, but positive growth. And over the course of 2024, we should get closer to those trend-like GDP numbers.
That does mean excess supply is going to continue building over the course of next year. And we don't-- well, we'll also see a bit of a tailwind when the Bank of Canada does begin to ease off of its restrictive policy stance over the second half of the year. Now, population growth is still continuing to provide a key driver of GDP growth. So that is going to keep us from tipping into a steeper slowdown.
So we look for GDP growth of 0.9% next year. We think with that population growth, you are still going to continue to see a job growth throughout the year. But job growth will continue to be outpaced by the growth of the labor force. So we can see unemployment rate move higher as the economy moves further into excess supply.
But we don't expect the type of material job losses that you might anticipate with a weaker growth outlook.
>> That was Robert Both, macro strategist with TD Securities.
Right now, let's get you updated on the top stories in the world of business and take a look at how the markets are trading.
First Quantum has suspended production at its mine in Panama due to an ongoing port blockade. The Vancouver-based miner says that it's a temporary shutdown, noting that the blockade is preventing the delivery of coal and other supplies that it needs to run the copper mine. There has been a groundswell of opposition of First Quantum's operations in Panama, that's after the company signed a new contract with the government last month.
Shares of Nvidia in the spotlight today, really all week, the company has reported that they are delaying a new artificial intelligence chip intended for the Chinese market. Earlier this week, Nvidia reported a 200% jump in sales for its most recent quarter, but it did warn that export restrictions from Washington to selling to China would affect sales going forward.
The stock today, 480 bucks off its recent all-time highs, down 1.4%.
We got some news today in the robot vacuum space. There appears to be growing optimism that Amazon is going to win regulatory approval in Europe for its $1.4 billion acquisition of iRobot.
The European commission is due to make a decision on the deal by February 14 of next year. The market is looking upon this favourably.
Quick check on the market, we will start here at home on Bay Street. It's been a late trading session, the Americans are doing a half-day after being off yesterday for thanks giving. We are a whopping one point or one take on the TSX Composite Index.
South of the border, less taken on the S&P 500, that broader read of the American market. A very light session. Basically dead flat.
Some market pundits have put the performance we seen from the S&P 500 this year down to a small concentration of big tech stocks, the so-called Magnificent Seven. But according to Ben Gossack, portfolio manager with TD Asset Management, if you dig a bit deeper, a different story emerges.
He joined me earlier to discuss.
>> I'd say several of the episodes I've been on where we chatted about stuff, that's been something I keep scratching at. We've talked about market breadth.
We've talked about different areas of the market that have been performing. And yet I still look in my inbox, and I see S&P 7 versus S&P 493.
And I still don't understand what's happening other than narratives can be very strong. We're all busy people. And when someone says, if the S&P is up 19%, and it's driven by seven stocks, and I see the seven stocks are up, I might stop my analysis there because I have more important things to do in my life.
>> But you like to dig deep.
You like to do analysis. You've done some analysis right now. And I think, from what you were sharing with us before, we can definitely see some gains in the S&P 500 that go beyond just those seven names.
>> Yes. So I decided to count all the stocks in the S&P 500 that have delivered performance better than 19.3%.
>> So it beat them or beat the broader index.
>> Right.
So I did my analysis as of last Friday. So the S&P 500 was up 19.3% year to date, which is amazing, which is more than what people had expected. And I was expecting that I'd start counting the stocks that beat the market, and I'd stop at seven.
But Greg, I stopped at 132.
>> 132-- so it's not just seven.
>> So there are 132 stocks, year to date, that have outperformed the S&P 500. What's also interesting to me is then I did the composition by sector. We have talked, other shows, about the strength that we've seen in the industrial sector, even though we're supposed to be in a recession, and how that's odd.
We've talked about the strength of homebuilders.
That's consumer discretionary. And we've thought, well, that's quite odd.
I thought rates were so high, and no one was buying houses.
So why are those stocks outperforming? So of those 132 stocks, it should come to no surprise that a good proportion of those winners came from technology.
>> Yeah, so we've got a chart now we can show the audience. The big bar is, obviously, information technology. Your seven are in there. But even then, it's more than just seven in the infotech.
>> Yeah. So it would be Microsoft and Apple and NVIDIA. There are 64 stocks that make up the tech sector in the S&P 500. 36 stocks are outperforming the S&P 500. So you had a 50/50 odds that, on January 1, if you picked one stock out of the tech sector that you would have outperformed the S&P 500. I'd say those are pretty good odds.
But yes, it's not just a select group of stocks. We see outperformance coming from hardware stocks, services, software, and the semis. So it's been broad based in technology. And the next set of winners, there's 27 stocks that are in the industrial sector that are also outperforming the S&P 500.
And we've talked about themes, such as the CHIPS Act, the Inflation Reduction Act that opened up a ton of credits and government incentives for clean energy. So those stocks are benefiting, as well. And then the other big bucket came from consumer discretionary-- again, not the typical sectors that you would think would outperform the market when we've been talking about recession all year.
>> Let's get that conversation, continue on recession, right? Because it's been hanging over us and hanging over us. You said parts of the market are performing that you wouldn't expect in a recessionary environment.
Other parts, I think, if we looked at that chart again that you would expect to be safe havens if we actually thought we were in a recession or heading into a recession have not been performing. What's with this recession story? Let's start there. What are we supposed to be thinking as this year is almost behind us?
>> And full disclosure, I don't challenge the recession thesis or the recession fear. And there are many leading indicators that are telling us we're finished a recession, in a recession, still a recession to come. But it's kind of like when we were living in caves, and we saw an enemy, we would run. And that's how we, as a society, lived.
Typically, the game plan has been, when someone says, hey, there's a recession around the corner, we run, and we hide.
And where do we hide in? We hide in fixed income, and we hide in consumer staples, and we hide in utilities, and we hide in REITs.
And we avoid certain cyclical, dangerous, areas.
>> Maybe technology stocks, maybe consumer discretionary stocks, maybe industrial stocks.
>> Maybe industrials, right. And so there was nothing wrong with the thesis of, hey, let's hide out. There is an issue when everyone shares the same thesis. And so the question I keep raising is, what do you win when you're the most bearish person in a room of bears?
And the only answer I get is, if you're an economist, you go on a book tour.
[laughing] But in the game of investing, typically, that's where people say, oh, let's be contrarian. But I'm not trying to be contrarian for the sake of being contrarian. It's just more of looking at the areas that are outperforming, then starting to ask more questions, like, why is this happening?
And it goes back to another episode that I know we did where we started talking about the market, making a bottom last year in the summer. But if you looked at everything on a market cap perspective, that was getting distorted, and you had to look at things more on an equal weight perspective to see that.
So it just-- again, I don't think we can fight narratives. But I think we, as investors, as stewards of capital, it's our job to question narratives and then look to the facts and the data to back it up. And a lot of times, that creates an opportunity.
>> Let's talk about that. I know, also, that sometimes you have a problem with this arbitrary definition of when we should be gauging our success as investors, that we've made another trip around the sun. Boom, it's January 1. But some of us think that way. The year is drawing to a close. We're almost into December. With everything that's happened so far this year and defying expectations, do we take anything from that into 2024?
>> Yes. Do not forecast.
[laughing] So I know we're getting to the end of the year. I'm already starting to see people's projections.
This financial institution thinks the S&P is going to be at 5,000 at the end of next year.
I just encourage people-- like, that's interesting. That's kind of what we want to hear.
But if you followed the forecast for last year, which was earnings cratering, which they didn't, equities following and cratering, which they didn't, yields collapsing, which they didn't, the most important thing is that you follow your process.
And for us, it's always been about secular trends. These trends can last three years, five years. And then we can avoid the demands in terms of, tell me what's going to happen in three months or six months.
I'm trying to learn how to play golf, Greg. And what I've learned is you can't start thinking of the next holes until you finish the first hole that you're on. And that's what I like to do when I apply that to investing.
>> That was Ben Gossack, portfolio manager with TD Asset Management.
Now, let's go to our educational segment of the day.
In today's education segment, we are having a look at TD's Advanced Dashboard, platform designed for active traders available through TD Direct Investing.
Caitlin Cormier, client education instructor with TD direct and has the explainer on what data is available on the Market Pulse screen.
>> One of the great features of Advanced Dashboard as you being able to create custom layouts to put in any tools and widgets that you would like to see.
However, how are you going to know which widgets you would like if you don't have time to look through them?
So let's take a peek today at our market policy layout. It's one of our pre-created layouts in Advanced Dashboard and we're gonna get a feel for some of the tools that we have. First up we have our bubble chart which gives us a visual representation of the TSX 60.
Late showing us the one-year performance of the securities. We have the heat map which is giving us up-to-date information on how the markets are trading, specifically the TSX. We can see the most actively traded securities, said this is within Canada on the TSX, you can see the top 10 securities.
We can also see how the markets are performing so different indices, both here in Canada and the US. We can see market news as it comes in, that rolling information about what is happening within the market, as well as our earnings calendar here on the left-hand side.
You will also notice that once we choose a security that we want to do a bit more research on, for example I could go ahead and click, let's just choose the one on the far left here, the right hand side of my screen is going to automatically update to represent information from that security.
So we can see a chart here from that security. I can click on news and get information about that security.
Equity analytics, which gives us pretty much all of the information we need to have as far as fundamental information on the company.
And finally, the earnings analyser.
The great thing about this linking as we are able to get this up-to-date information between these two screens, so again, if you click on most active and we choose a security within the screen, it will automatically update on the right-hand side and give us the information about that particular security.
So this is one way that you can get a little bit more familiar with the different tools that we have in Advanced Dashboard so you can really create your own custom screen.
>> That was Caitlin Cormier, Senior client education instructor at TD direct and a.
While many countries are pushing electrification is crucial to the fight against climate change, one of the big takeaways from earnings season is that consumers might not be snapping a EVs.
David Mau, portfolio manager at TD Asset Management join me earlier with his view.
>> Yeah, so I mean, we are seeing a slowdown in demand for electric vehicles,probably started since about the beginning of the year. And don't get me wrong, the EV market is still growing.
It's just not growing as fast as it used to grow.
And there's a couple of reasons for that.
But the main one is it looks like that demand has fallen off because the pool of electric vehicle buyers has maybe reached an early saturation point. So pretty much, most of the people who had intentions to buy an electric vehicle have-- in the past few years have already bought them. So that pool of potential buyers is getting smaller over time.
And we're seeing electric vehicles sitting on dealer lots for a lot longer now. So previously, an EV would reach a dealer and it might sit in inventory for 30, 40, maybe 50 days. More recently, in the past couple months, we're seeing electric vehicles sit on dealer lots for closer to 90 days. So that's a big difference.
And admittedly, we're seeing a lot more supply. So a lot more manufacturers have been rolling out new models. Production has ramped up. So there's more supply, more inventory, and less buyers. So we're seeing that slowdown in demand.
As far as what goes to explain this slowdown, there's a couple of things. I talked about the pool of buyers getting smaller. The other thing is price is still a very important consideration, price and affordability. So with an electric vehicle still costing probably 20% to 30% more than a comparable internal combustion car, consumers, especially in this high-interest-rate environment, where affordability is actually a lot harder now, consumers are just looking for a cheaper option.
>> Yeah. If you're financing that car and you're not financing at 1.5% or 2%-- >> Exactly.
>>--or not very much higher. I think Elon Musk has said that, in terms of not saying there's anything wrong with the Tesla business and the fact that in a slowing economy and higher interest rates, the buyer isn't there.
>> That's right. So I mean, if you think back a couple years ago, you could get a car loan 1%, maybe 2%, 3%. Nowadays, auto loans are going for 7%, 8%. So it is having a pretty big impact.
>> When it comes to car loans, a story I think that started percolating maybe even late last year and earlier this year and then sort of went to the wayside, this idea that you could perhaps start to see some problems with auto loans in the United States, particularly subprime.
What's happening there?
>> Yeah. So that's a good point, Greg.
We're starting to see a pretty significant tick up in subprime auto defaults. So right now, I think the most recent numbers show that subprime auto defaults are above 6%. 6% of all subprime borrowers are defaulting on their car loans. That's the highest it's been, I think, for the last 30 or 40 years. So I mean, that's even higher than the default rates that we saw during the financial crisis in 2008-2009.
So it is starting to be a little bit worrisome. And the thing is for these subprime borrowers, they usually don't have the best credit to begin with. So when the economy starts to weaken even a little bit, these guys are the first ones to be affected. And subprime borrowers are paying a lot for a car loan. They're paying somewhere between 15% and 20% for a car loan. So when things start to soften or weaken, these are where you start to see the first cracks.
>> What does that mean for the industry going forward, if you're starting to see those cracks right now with those borrowers?
And those are very high rates, I mean, much higher than hopefully a lot of people are paying for their car loans. But what does it mean for the industry going forward in the next little while?
>> I mean, it's going to be challenging for the sector. Because subprime, I mean, really only make up about, I want to say, 7% to 8% of the overall buyer pool for cars. But that 7% to 8%, if that disappears, is still pretty meaningful and could have a pretty big impact on sales going forward.
>> All right. So we're seeing a slowdown in demand for electric vehicles for various reasons. We're seeing some rising subprime defaults in the auto space. On top of all that for the autos-- it's been pretty busy for the sector in the past little while-- we had those strikes and now labor deals and pretty big pay raises in those labor deals. How does that all work towards what we're thinking about autos?
>> Yeah, so I think you're probably talking about the United Auto Workers strike that's happened over the past few months. I think they were on strike for about six weeks. And it seems like they've come to an agreement now.
I think the unions probably did a pretty good job for the employees. I think most of the agreements were for about a 25% increase in wages. And when you add in all the other benefits and improvements that the unions negotiated, their total comp is going to be going up by about 40% over the next four to five years for these unionized workers.
So it is a pretty good deal for the workers. But this adds to an increasingly difficult situation for the automakers.
Because like we already mentioned, higher interest rates are slowing demand. And now you have these labor costs that are going up.
What it all really comes down to is it's going to put pressure on margins. So profitability is going to go down. And, usually, what happens in these cases is that the automakers, when they're faced with these rising costs, they're going to try and pass some of those costs on to the consumer. So that's going to be-- >> The consumer that's already showing slowing demand at least for the electric vehicle side.
>> Exactly.
So that's going to mean higher prices for consumers. And we're not seeing that just for the big three in the US. There are other automakers in the US, some of the Asian brands, like Honda, Toyota, Hyundai, even Tesla, all of those brands are not unionized. Their plants are not unionized.
But because of this recent deal, a lot of those automakers have also increased wages for their employees. Because A, they know that they need to stay competitive on the pay front to attract and retain employees.
And B, because they don't want unions to come into their plants. So if their employees are happy with the pay, it's less likely that the unions will be able to convince the employees to join a union.
>> When we take this all together, what does it mean for the investment thesis for the auto space in the next little while?
Is there be a bit of a choppy ride, I guess, going forward?
>> I think-- yeah, for the near term, it's going to be a little bit rough. We have these rising costs, slowing demand. And then on the-- and this ties into the EV front is that a lot of automakers are spending a ton of money on building out their EV capability, investing in plants, trying to ramp up production. So there's a lot of crosswinds here that could present kind of a-- at least a challenging near to midterm for the automakers.
>> That was David Mau, portfolio manager at TD Asset Management.
Now, for an update on the markets.
Okay, we are back into Advanced Dashboard, we are looking at the heat map function here.
It gives you a view of the market movers on the TSX 60. We are sorting by price and volume. It's a bit of a late trading day.
First Quantum stands out, down 3% on the session, of saying they had to shut in production. They are calling it a temporary measure in Panama because of the opposition to their operations down there, and a blockade at a local port. They can't get the things they need to run the plant.
South of the border, I want to take a look at the S&P 100. Some of the tech stocks today are under a bit of pressure, including Nvidia, Google and Apple with some money moving towards forward and also on a maker Tesla. You can get more information on TV Advanced Dashboard by visiting TD.com/Advanced Dashboard.
Central banks appear to be done with their rate hiking cycle. Investors are increasingly considering when some cuts might come.
Earlier, we had a chance to discuss what this means for markets with Justin Flowerday, had a fundamental equities at TD Asset Management.
>> Let's think about what we've had in terms of data.
We've obviously had US and CPI and Canadian CPI, recently and it is showing a slowing trend and we are getting a cooling of inflation.
>> It's still increasing.
>> That's right.
We are getting to a point where it's becoming a little bit more palatable and so is you think about what that means for the short-term interest rates and decisions by the Fed and the BOC, it's giving them enough evidence to say, okay, maybe you will stay on hold for now and see how the data comes in. And then as that translates to the equity markets, I would just say they are following the bond market, there following yields and it becomes really tricky and can be quite volatile because you're getting days when yields are moving around 10, 20 basis points. You get 50 basis point moves in a month. And what that means for investors or any investor in risk assets means the risk-free rate that you are using is the 10 year treasury yield.
When that's moving around so much, it gets really difficult to get comfort that this is the fair value for any individual stock were on the market. I would expect volatility to remain.
>> Yeah.
Is there anything, you were just talking about the fall fiscal update, I'm not can ask you about that, but did you hear anything from a deficit standpoint that makes you pay closer attention?
>> Yes, we were actually quite pleased.
We thought it was a fairly responsible update and we didn't hear anything that scared us. I think going in there was some skip to mission scepticism that we might hear about bigger expenditures.
Nothing came out that really scared us.
>> Good. I know we are going to talk about earnings and some of the themes you've been hearing in terms of what's been coming out of companies. This term I have not heard but the challenge of the central bank is to get a stronger labour market.
The fact they keep doing what they are doing and they are not seeing unemployment numbers move out.
You talk about labour holding.
>> Yeah.
So labour holding is a thing. It became a thing after COVID so what you had was a bunch of companies that let go of employees when they saw the man fall off a cliff and then try to hire them back and it was really painful and difficult experiences >> And expensive.
>> And expensive.
And what has led to is the theory that there are some companies out there that are a little bit less sensitive to incremental changes in demand in terms of cutting costs and could that be a factor?
You there on top of that, some of the new onshoring trends that are taking place, we are building manufacturing facilities and on top of that, some of the demographic trends that are taking place, there is an argument out there, you can agree or disagree, it's probably a debate for another show, that there is maybe a structural supply and demand imbalance in terms of labour in the market.
We can debate that on another show but for now, what that means is are companies currently trying to see how demand comes down… >> Try to smooth it out themselves.
>> I'm not making that kind of rash decision saying, okay, I see demand falling so I'm going to cut. No, they are waiting around.
That causes difficulty for the central banks who are just trying to say, no, we need to get inflation down.
Inflation needs to come down and it's probably not moving as quickly as they would like to see.
>> That's interesting. What else are you hearing from companies in terms of the trends in earnings?
>> Earnings season, Q3, wrapped up.
It's always a good season. Company is always guide low and then beat, so 80% of companies beat on earnings. You had 60% of nominees beat on revenues. At a high level, earnings grew year-over-year for the first time in several quarters so that's positive.
When you take out the Magnificent Seven, earnings were actually down 4%. So they were up 4% with the Magnificent Seven, down 4% without.
Revenue didn't grow as quickly but it was still up.
And when you think about some of the trends we are hearing, I would point to the consumer and how different cohorts are doing as a trend that came out quite clearly. We heard from several management teams at the lower income cohort is weakening, and they drained down their excess savings, and they are starting to see decisions which are slowing consumption trends across a whole bunch of different sectors.
We heard from Walmart, we heard Home Depot come out and they said, purchases of over $1000 are down 6% year-over-year.
So some difficulty in terms of the low-end consumer. Other than that, some of the guidance came in a little bit weaker.
The trends for Q4 and for next year estimates are starting to trend down a little bit.
>> What about sectors?
We could talk about industrials, real estate, technology. Industrials, you think things are looking okay.
>> Yeah, so industrials is a really great sector for us because it's such a diverse group of businesses.
And you have a whole bunch of different and markets. I will go back to the onshoring and nearshoring, whatever you want to call it, there is activity that's taking place and every time and you to plant gets built in Arizona or a new air-conditioning plant to supply the CHP plant with air conditioning… >> It's all happening here.
>> It happens here.
So these industrial companies find new verticals to sell their goods into and that does present probably an opportunity that isn't just a one year kind of timeframe.
>> Real estate?
>> Real estate, there are pockets that concern us.
We would be avoiding certain areas of the retail mall space.
>> You seal the distribution centres going up in all the malls not doing so well.
>> That's right.
We would probably be avoiding some office exposure outside of the main core.
Main core office doing great. Outside, maybe you want to avoid some of that and then you mentioned technology. I think technology is the theme that has excited everybody this year and there are still exciting pockets. You think about exposures to AI, not just the chips but the productivity tools, companies that are presenting the opportunities for companies to protect margins and the data infrastructure software companies, lots and lots of good things happening there.
>> What you think about, my last question here, but about the soap opera that is OpenAI's evolution?
They fired Altman, ease back, no the board fired.
Beyond the entertainment value, is there something going on there?
>> I would say there is one big conclusion that's really positive from my standpoint which is the future of AI is in a much better spot today than it was a week ago.
And when you think about the development of, you've got this nascent technology which has been initiated by companies like OpenAI and others, and with any company like that, a very young company, it doesn't have a corporate governance structure that is super robust and then they start dealing with Microsoft which is a much larger company, they were trying to move and commercialize AI until you get some friction. And so it's happened in the last week I think is really positive because you essentially compress the timeframe which could have been about a year or two years, three years for OpenAI to mature from a governance standpoint and it happened in a week.
We've got board members leaving, Sam Altman back leading the organization.
So I am extremely excited and I think the future of AI today is probably in better hands and it was a week ago.
>> That was Justin Flowerday, head of fundamental equities at TD Asset Management speaking with MoneyTalk's Kim Parlee.
As always, make sure you do your own research before making any investment decisions.
stay tuned.
On Monday show, Jason Hnatyk, senior client education instructor with two TD Direct Investing will be our guest, he wants to take your questions about getting more out of the WebBroker platform.
A reminder that you get a head start with those questions. Just email moneytalklive@td.com. That's all the time we have for the show today.
Thanks for watching. We'll see you Monday.
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