Market Wrap: Key Moves and Trends for Week of May 26, 2024

Kyle Prevost, creator of 4 Steps to a Worry-Free Retirement, Canada’s DIY retirement planning course, reviews recent financial headlines and provides context for Canadian investors.

Canadian inflation eases, largely due to slower grocery price growth

Surprisingly, the groceries in your cart have not risen much compared with a year ago. While food prices climbed steeply over the past three years, the pace of price increases has recently moderated rather than reversed.

Statistics Canada’s latest Consumer Price Index shows April’s year-over-year rise at 2.7%, the lowest annual reading since March 2021. A milder increase in meat prices was the main factor keeping food inflation subdued—overall food prices increased about 1.4% year over year. Other grocery categories with relatively small increases included non-alcoholic beverages, bakery products and cereals. Some items, such as certain fruits, nuts and seafood, actually fell in price during April.

Key takeaways from the CPI report:

CPI-trim and CPI-median—two measures that smooth out volatile price swings—stood at about 2.9% and 2.6%, respectively.
The annualized three-month inflation rate, which often gives a clearer signal of near-term direction than 12-month readings, dropped to roughly 1.6%.
Mortgage-related costs rose sharply, up about 24.5% over the past year.
Rents increased about 8.2% nationally, with substantially higher rates in some provinces: about 16.2% in Alberta and 18% in Saskatchewan.
When excluding housing, consumer prices were up approximately 1.2% year over year.
Gasoline prices were higher, with an increase of about 6.1% year over year.
Services inflation rose roughly 4.2% but is trending downward.

Taken together, these figures suggest that higher interest rates are starting to dampen price pressures. Monetary policy typically affects the economy with a lag of 12 to 18 months, so the cooler three-month inflation trend and the weakness in non-housing inflation both point toward an approaching inflection point for interest rates.

Market-implied probabilities from swap-rate trades indicate a significant chance that the Bank of Canada will begin cutting rates within weeks. This expectation, and the prospects of Canadian rate cuts ahead of U.S. policy moves, contributed to the Canadian dollar trading slightly lower versus the U.S. dollar on the day the CPI data were released.

Nvidia shares top $1,000 after another blowout quarter

Nvidia continued to exceed expectations with another powerful earnings report—driven largely by demand for chips and systems tied to artificial intelligence. For the quarter, earnings per share came in at about $6.12, beating analyst forecasts, while revenue reached approximately $26.04 billion, also above estimates. Following the announcement, the stock climbed strongly and briefly crossed the $1,000 mark.

The company also announced a 10-for-1 stock split to make individual shares more accessible to a broader pool of investors.

How a stock split works

A stock split increases the number of shares outstanding while reducing the price per share proportionally. For example, one $1,000 share split 10-for-1 becomes 10 shares at $100 each, leaving the investor’s total value unchanged. Companies often use splits to keep share prices at levels that are easier for everyday investors to trade.

Nvidia’s valuation metrics reflect massive investor optimism: its price-to-earnings ratio has expanded well beyond many large tech peers. Recent quarterly growth was extraordinary—revenues and profits jumped significantly compared with both the prior quarter and the same period a year earlier. The company has also been returning cash to shareholders through buybacks and modest dividend increases on a pre-split basis.

While it’s reasonable to expect competitors and market dynamics to compress Nvidia’s exceptional margins over time, the current trend shows strong investor willingness to pay a premium for its future growth tied to AI infrastructure.

Challenging results for several major U.S. retailers

Not all big retailers posted stellar results in the first quarter. A few large U.S. chains reported mixed earnings and cited stretched consumer budgets as a primary challenge. Below are highlights from recent quarterly reports:

U.S. retail earnings highlights

Target: Reported earnings per share near expectations and revenue in line with estimates, but management noted softness in discretionary categories.
Macy’s: Beat modest earnings expectations but revenue was essentially flat versus estimates; leadership warned that consumers could remain under pressure for the balance of the year.
Lowe’s: Reported results slightly above forecasts, yet management emphasized that homeowner spending and consumer confidence remain key to future performance.

Executives at these retailers consistently pointed to a shift toward necessities and lower spending on discretionary items, which has weighed on stores that rely more heavily on fashion, home décor and other non-essential categories. Investors reacted accordingly: some retail stocks have seen notable price weakness in the days following their reports.

“Buy what you know” — but be careful with that advice

Investor Peter Lynch popularized the phrase “buy what you know,” encouraging retail investors to consider companies they understand. That advice can be useful, but it’s important to distinguish between genuinely deep knowledge and superficial familiarity.

Recent market examples demonstrate how familiarity doesn’t always translate into good long-term results. Nvidia, a company few knew about five years ago, has delivered extraordinary returns, while some household-name consumer companies that were well-known during the pandemic have struggled.

For example, a well-known casual dining chain experienced major financial trouble after a costly promotion and has been forced to seek Chapter 11 protection while it restructures and closes underperforming locations. The chain reported a sizable loss last year and will remain open while it reorganizes.

Another example is a fitness equipment and streaming company that soared during the pandemic but has since seen its stock collapse and has taken steps to reduce costs and restructure operations. While its streaming service retains a substantial subscriber base, sales of high-margin hardware have declined sharply, and the company has reported significant adjusted losses for the year.