Thoughts before the end of earnings season

Michael Rudd, CFA | President, CEO & Portfolio Manager

This week, we briefly mention 4 different topics: August preliminary Purchasing Managers’ Indices (PMIs) were released, Canadian Banks have started to publish their earnings, there was an intensely followed speech from Chairman Jerome Powell and we noticed positive commentary from US consumer companies. Thus, our Outlook is a bit of a “mixed bag” this week, but we found the items interesting (if contradictory), so we thought we would mention them.

  • Preliminary PMIs for August were released on a composite basis this week for some parts of the global economy. Other than Japan and the US, most have deteriorated below 50 which means management expectations over the short-term are negative. This is not a great development, and we are eager to see the balance of the data.
  • The Canadian banks have started to report earnings for the 2nd quarter. It appears that investors remain concerned about Provisions for Credit Losses (PCLs), which have doubled over the past three quarters from more normalized levels. The total amount of expected loss still appears to be manageable in the context of historic maximums but the trend is definitely in the wrong direction. Only two of the major banks have reported, we will update again next week after earnings season comes to an end.
  • Earlier this morning, Federal Open Market Committee (FOMC) Chairman Powell spoke and reinforced the committee’s message that, while inflation has come down from a high of 5%, it has yet to reach the FOMCs target of 2%. It remains stubbornly high and still above 4%. Chair Powell indicated that the committee will not adjust their long-term target higher (some were expecting a revision to 3%) and will remain restrictive until they are able to reach their goal. He also mentioned the increasingly difficult geopolitical environment as an ongoing risk that makes management of the process to achieve their goal more difficult.
  • We found the following quotes from large US retailers very intersting in the context of what we would consider to be the three negative points above:
    • “… fears of a recession or at least a severe recession have largely subsided…” – The Home Depot ($HD), Executive Vice President, Edward Decker
    • “… the customer, with moderating inflation, is feeling a little bit more room to spend money… ” – Ross Stores ($ROST) CEO, Barbara Rentler
    • “We like our level of inventory right now. We feel very good about it. And it’s not just our inventory, our in-stock levels…” – Walmart ($WMT) CFO John David Rainey

“This means that” we remain cautious. Last week, we noted that most of our mandates have excess cash. We have continued to raise cash this week where opportunities have presented themselves and now all of our portfolios have excess cash. The question of a coming recession remains hotly debated in the investment community and around “the desk” at Pathfinder. We continue to watch very closely.

Pathfinder Asset Management Ltd. | Equally Invested™
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