Over at The Reformed Broker, Josh Brown reminds us that it’s incredibly difficult to put a finger on what will drive price action in equity markets:
So anyway, does earnings growth determine the returns of the stock market?
How about interest rates? Do they drive returns for stocks?
What about inflation? Or GDP growth? Or the rate of the 10-year treasury bond? Or any of the other factors used on a daily basis to predict the markets?
Well? Which one is it? Which one works?
All of them. None of them. Some of them sometimes – but then others of them other times. And usually in all different combinations. Also, they start and stop mattering randomly and with no warning. And then sometimes no combination of any of them is indicative of anything because a president is shot or a war starts or a plane hits a building or a nuclear reactor melts down during an earthquake-caused tsunami on the other side of the world.
In other words, forecasts using any combination of any of these can only ever be nonsense – even if it’s well-meaning nonsense. None of these factors can continually keep an investor on the right side of the stock market, although ignoring them altogether also won’t be able to either…
The bottom line is that it’s great to be aware of the current trends and the ability to contextualize them in terms of historic periods is probably not harmful either. So long as you’re not betting big on the predictive power of these metrics. Because it’s not different this time, it’s different every time.
On the homefront
Oil and gold stocks diverged on Wednesday, as WTI crude oil recouped the prior day’s losses while bullion lingered near four-year lows. Suncor (SU) and Cenovus (CVE) surged, while Barrick Gold (ABX) and Goldcorp (G) got whacked. Thankfully, since energy has a much larger weighting on the TSX than gold miners, these commodity fluctuations were a substantial net positive for the index, which finished up by triple digits on Wednesday. TSX 60 futures are moving lower ahead of the open.
The Canadian dollar is softening modestly against its U.S. counterpart to trade at 0.876.
Uh-oh. Well, don’t say you weren’t warned: according to one report, business investment in the oil patch is set to decline by more than 25 per cent next year. That’s a large concern for the economy, as investment in natural resources has been a humungous driver of total capital spending since the financial crisis. “Oil sands capital expenditures could tumble by as much as $8 billion as several big-ticket expansion projects move from construction to operations, according to Wood Mackenzie Group,” writes the Globe and Mail’s Jeff Lewis. Note that this decrease would be primarily attributable the completion of projects currently under way, not the drop-off seen in crude since June. Persistently low oil prices will affect investment decisions further down the road.
Gold miner reports superb earnings. Kinross Gold (K) released a stellar set of quarterly results after the market closed on Wednesday. Adjusted earnings per share smashed the consensus estimate, while the miner made substantial progress on cost reductions. Management raised the low end of its production guidance for the year, and lowered the top end of its outlook on all-in sustaining costs. However, CEO Paul Rollinson indicated that it would be difficult for the company to proceed with the expansion of a project in Mauritania unless gold regains some of its shine.
Avigilon soars. Knockout quarterly results published after the market closed on Tuesday sent shares of surveillance equipment manufacturer Avigilon (AVO) up by more than 30 per cent yesterday. However, as the Globe and Mail’s David Milstead observes, one analyst continues to have doubts about the prudence of the company’s accounting practices.
Battle of the video streaming services. Bell Canada, Bell Aliant, and Telus (T) — basically, two of the three telcom giants — are teaming up to offer what’s currently named “Project Latte,” a video streaming service that will feature, among other things, HBO shows that are no longer on the air. This announcement pits Project Latte against Rogers (RCI.B) and Shaw’s (SJR.B) Shomi, a similar service that was launched as an alternative to Netflix.
The earnings parade continues. A bevy of big Canadian companies are posting their quarterly results today, including Air Canada (AC), BCE Inc. (BCE), Telus, (T), Canadian Natural Resources (CNQ), Saputo (SAP), AutoCanada (ACQ), and SNC-Lavalin (SNC).
UPDATE: Canadian Natural Resources’ adjusted net earnings from operations came in considerably higher than the consensus estimate.
SNC-Lavalin missed on earnings by a massive margin and announced plans to cut 4,000 jobs over the next 18 months.
Central bankers are driving economic growth, concludes IG chief strategist Chris Weston, but they can only do so much even when the pedal’s to the metal. “While we’re seeing signs that higher stock prices are driving discretionary spend around the world, it isn’t translating into the final and ultimate prize – inflation expectations,” he writes. “So, the calls have resurfaced that monetary policy can only do so much have been widely talked about and invariably this will concern investors and savers. However, the trading opportunities are abundant.”
Australia’s job growth was modestly higher than expected in October. The proximity of the actual number (24,100) to the consensus estimate (20,000) was encouraging in and of itself, as these figures have been wildly volatile in recent readings. The unemployment rate held steady at 6.2 per cent.
Central bankers across the pond will be in action today. However, neither Mark Carney’s Bank of England nor Mario Draghi’s European Central Bank are expected to make any notable change to policy, though there might be pressure on the latter to outline additional accommodative measures in light of dangerously low levels of inflation across the continent.
Germany factory orders failed to rise by as much as anticipated in September. However, a revision suggested that August’s decline wasn’t as severe as initially reported; so on the whole, this balances out.