Stock Market Update: Week of August 13, 2023

Kyle Prevost, editor of Million Dollar Journey and founder of the Canadian Financial Summit, summarizes this week’s financial headlines and provides context for Canadian investors.

Markets cheer lower inflation—then trim gains

The Dow Jones Industrial Average jumped more than 400 points on Thursday after the U.S. Bureau of Labor Statistics reported that the consumer price index (CPI) was up 3.2% year over year. By the end of the day most of those gains had been given back, and the S&P 500 and Nasdaq were trading softer the following morning while the Dow remained slightly higher. While a 3.2% inflation rate is still above the Federal Reserve’s 2% target, it represents a meaningful improvement from last summer’s readings. That said, core CPI — which excludes volatile food and energy prices — remained elevated at 4.7%, tempering some optimism.

The recent moderation in headline inflation has led many analysts to expect the Fed might pause interest-rate hikes in September, after 11 rate increases dating back to March 2022. That said, consumer resilience could be waning: American households have now accumulated more than $1 trillion in credit-card debt for the first time on record, a trend that could increasingly weigh on domestic spending even as unemployment remains low.

Eli Lilly sheds weight—profits keep climbing

The U.S. corporate earnings season continued to produce strong results this week, with several large companies beating expectations. Below are the notable reports (all figures in U.S. dollars):

Disney’s performance was driven by a 13% revenue increase in its parks and experiences division, offsetting continued challenges in streaming where Disney+ subscribers declined. Management also announced streaming price increases and tighter controls on password sharing, moves that may further pressure subscriber counts in the near term.

UPS delivered a solid quarter and avoided a potential driver strike, but investors remain cautious. The company’s price-to-earnings ratio sits well below the S&P 500 average, and competition from Amazon’s growing in-house logistics capabilities continues to be a long-term concern.

Eli Lilly produced the most dramatic market reaction after exceeding expectations, largely driven by strong sales of its diabetes treatment Mounjaro. There is optimism that Mounjaro could follow the strong growth trajectories of similar drugs, and the company reported substantial year-over-year profit gains.

Gold benefits from uncertainty

Amid volatile markets and uncertainty over interest rates and cryptocurrencies, gold-related stocks performed well this week.

Although both companies broadly met expectations, their share prices showed little movement immediately after the reports. Gold prices eased slightly in the second quarter but continue to trade around the USD $2,000-per-ounce mark for the year. Given the persistent uncertainties in equity markets, rates and digital assets, there appears to be limited downward pressure on the precious metal in the near term.

Between the two, Franco-Nevada is often viewed as the lower-risk option due to its royalties-based model and lack of debt, compared with Barrick’s traditional mining operations. In a higher-for-longer interest-rate environment, having a business model insulated from rising borrowing costs can be an attractive way to gain exposure to gold.

Does your portfolio need insurance exposure?

Canadian insurers and financial services firms often fly under the radar compared with the big banks, but they offer durable, oligopoly-like advantages that can make them attractive long-term holdings. Several large insurers reported solid quarterly results this week:

Manulife and Sun Life pointed to stronger results in Asia as a key driver of outperformance, while Great-West highlighted the sale of Putnam Investments as a significant factor for the quarter. Power Corporation outperformed expectations by a wide margin, but its stock moved little on the news.

Overall, North America’s largest companies posted steady, reliable profits this week. For many investors, the lack of dramatic volatility in blue-chip earnings may not be exciting, but it reinforces the advantage of stable, long-term wealth-building strategies as opposed to chasing speculative trends.