The US Federal Reserve (Fed) on July 26 raised the Federal Funds rate by 0.25 percentage points to 5.5%, the highest in more than 20 years. This was the 11th increase since March 2022.
U.S. interest rate futures currently point to a greater than 60% chance that this was the last rate hike in the current cycle of Fed tightening, says Mathieu Lachance , one of the managers of the Amethyst Arbitrage Fund. Between the last rate hike and the first rate cut that may follow, there is an average period of 6 to 7 months, which brings us to next winter. So what to expect for the stock market?
The last phase in the rate hike cycle is generally conducive to good stock market performance, and this is what we have been witnessing since the spring, recalls Mathieu Lachance. But the trend should reverse on the heels of the first rate cut, and a sharp fall in the equity market is then likely as the effect of rate hikes will be to send the economy into recession.
The Canadian telecom sector is going through a difficult period as Telus, the third largest player, has just announced 6,000 layoffs. Is BCE, which already made 1,300 job cuts in June, likely to announce more layoffs when releasing its next quarterly results in a few months?
Even more, will the firm have to slash its dividend, which is yielding close to 7% and which is certainly an important element in supporting the share price? “Nothing is impossible, because in technology, everything moves so quickly,” responds Jean-Paul Giacometti, Vice President, Portfolio Manager at Claret, Investment Management.
After deducting the use for its operations and capital expenditures, the free cash flow available to pay the dividend totals between 2 and 3 billion, while it costs 3.2 billion to pay this dividend, the manager estimates. . But he doesn’t believe management will opt for a lower dividend, at least for now. Instead, it will keep it at the same level for a while, but probably refraining from increasing it by 5% as it usually does every year, he said.
It will be remembered that rapid action by the Fed and the regulatory authorities had averted a banking crisis in the spring when Silicon Valley Bank and Signature Bank failed. The rating firm Moody’s, however, recalled earlier this week that the risk remains present by lowering the rating of 10 regional banks in the United States following the presentation of their results for the second quarter. Canadian banks will present their next quarterly results in two weeks, and investors will certainly be on the lookout to see if they show the resilience that they are usually known for. The release of previous quarterly results in May had caused some volatility in Canadian bank stocks, but most of them have recovered well and shown an interesting appreciation over the past two months.
Number of jewels of Quebec inc. have presented excellent quarterly results over the past few weeks. We note, among others, the consulting engineering firms WSP Global and SNC-Lavalin, the grocer-pharmacist Metro and the flight simulator manufacturer CAE. Investors should also expect good results in two weeks for National Bank, as the stock is at an all-time high.
The interest of potential buyers for the Laurentian Bank is somewhat mixed, a month after the announcement of its sale. After jumping as high as $48 on the day of the announcement, the stock price retreated to just under $40 on Friday. Recall that the book value of the bank’s assets is around $60 per share.