Stock Market Trends This Week: March 12, 2023

Kyle Prevost, editor of Million Dollar Journey and founder of the Canadian Financial Summit, rounds up the week’s financial headlines and explains what they mean for Canadian investors.

Inflation and interest rates continue to dominate

Inflation and central bank policy remain the primary forces shaping markets in Canada and the United States, and each central bank appears to be considering a slightly different path.

The Bank of Canada (BoC) held its key policy rate at 4.5% last Wednesday after a year of steady increases. That decision was widely anticipated and provided relief to Canadians with mortgages maturing over the next year.

At the same time, U.S. Federal Reserve Chair Jerome Powell pointed to a robust U.S. labour market and indicated that the Fed’s terminal rate may be higher than earlier expected. He warned that if incoming data justify faster tightening, the Fed stands ready to accelerate rate hikes. The CME FedWatch Tool assigned a high probability to another U.S. rate increase at the Fed’s March 22, 2023 meeting.

Markets reacted quickly: the S&P 500 fell 1.53% to slip below 4,000 on Tuesday, and the U.S. dollar strengthened against the Canadian dollar. That currency move can amplify inflationary pressure in Canada because a weaker Canadian dollar raises the cost of imported goods.

At present there is a tug-of-war between two themes: healthy corporate earnings and a resilient U.S. consumer on one side, versus the dampening effect of higher interest rates and the possibility of further rate hikes on the other. As of early Friday trading, markets in North America and overseas were generally weaker, with U.S. and European banks leading declines.

The BoC’s decision took into account weak GDP growth in late 2022, but the bank reiterated its commitment to return inflation to the 2% target. In its statement, the BoC said it will continue to assess economic developments and the impact of past rate increases, and that it is prepared to raise the policy rate further if necessary.

Some analysts argue that if the U.S.-Canada dollar gap widens, the BoC may have to raise rates further to offset imported inflation. While a softer loonie can strain household budgets by boosting import costs, it can also benefit Canadian exporters by improving competitiveness for companies that sell to U.S. customers.

Campbell stock is M’m M’m Good!

This week’s U.S. earnings were mixed, and with the rate outlook turning more cautious, investors may shift toward defensive sectors. All figures in this section are U.S. dollars unless noted.

Oracle traded lower after forecasting softer future growth and reporting a 37% year-over-year rise in operating expenses, which trimmed net income. The Gap disappointed with a sizable earnings miss, extending its recent weakness. By contrast, Dick’s Sporting Goods rallied on strong holiday results and lower inventory levels, while Campbell Soup continued to act as a defensive favorite—its stock is up roughly 24% year over year.

Investing for the REIT reasons

Although I’m not an advocate of direct property management, I appreciate the potential returns from Canadian real estate. Broad Canadian equity ETFs, like Vanguard FTSE Canada All Cap Index ETF (VCN/TSX), include exposure to Canadian real estate investment trusts (REITs)—roughly 2.5% in that ETF. I’ve also covered the best REIT ETFs in Canada on MillionDollarJourney.ca.

This week featured quarterly reports from two different Canadian REITs. Granite REIT (GRT.UN/TSX), focused on industrial and warehouse assets, has outperformed many peers over five years. InterRent REIT (IIP.UN/TSX), which concentrates on multi-unit residential properties, struggled in recent years but has also delivered long-term gains relative to the sector. I do not hold these individual REITs personally; I’m comfortable with index-based real estate exposure.

InterRent reported several positive metrics: occupancy rose to 96.8% in December 2022 from 95.6% a year earlier; average monthly rent increased 7.1% year-over-year; and refinancing activity shifted a greater share of mortgages to Canada Mortgage and Housing Corporation (CMHC) insurance, raising the proportion insured from 63% to 82%. That refinancing, along with higher interest rates, lifted financing costs from $8.5 million to $13.9 million. Importantly for income investors, Funds From Operations (FFO) rose 5.6% in 2022 versus 2021. Despite these gains, InterRent’s unit price dipped slightly on the announcement.

Granite REIT reported a net loss of $126.3 million for 2022 compared with net income of $341.2 million in 2021. The loss stemmed largely from a $579 million reduction in the fair value of investment properties, even though operating income grew by $16.1 million. Adjusted Funds From Operations (AFFO) rose to $1.05 per unit in 2022 from $0.90 in 2021. The market reacted calmly—Granite’s units ticked slightly higher and the REIT’s 4% dividend appeared secure for now.

Bear-ly believable

Market sentiment remains divided. Michael Batnick of The Irrelevant Investor noted that many investors are bearish even though the stock market itself has shown strength since mid-2022.

For clarity: “bulls” expect markets to rise, while “bears” expect declines. Despite a larger share of bearish investors—now roughly two bears for every bull—the S&P 500 is about 8% higher since June 2022, when the index entered a formal bear market. Several market indicators support the more bullish case: large institutional money has flowed into equities, transportation and semiconductor stocks are performing well, and cyclical sectors like airlines, hotels and consumer banks have rallied—suggesting investors expect earnings growth rather than a pronounced economic slowdown.

Valuation measures provide mixed signals. The Shiller CAPE ratio—price relative to 10 years of inflation-adjusted earnings—remains elevated for U.S. stocks, which can temper expectations for long-term returns. In contrast, the simple price-to-earnings (P/E) ratio for the S&P 500 sits closer to historical averages, offering a less alarming perspective.

Bottom line: while many commentators remain cautious, significant capital has flowed into equities since last summer despite rising interest rates. Whether that momentum continues will depend on inflation trends, central bank action, and corporate earnings. Investors should stay informed, diversify, and align portfolios with their time horizons and risk tolerance.

Kyle Prevost is a financial educator, author and speaker. When he’s not on a basketball court or in a boxing ring trying to recapture his youth, you can find him writing about Canadian personal finance at MillionDollarJourney.com and organizing the Canadian Financial Summit.