Report Updates
We have posted report updates on K-Bro Linen (KBL) and Leon's Furniture (LNF). KBL is the largest owner and operator of linen processing facilities in Canada and it also has a presence in the UK. LNF is a Canadian retailer of home furnishings, mattresses, appliances, and electronics in Canada. Underlying themes of rising input costs, margin compression from higher natural gas costs, and expanding inventory levels are present in these reports. Both companies have solid dividend yields, and one company has a strong balance sheet, while the other has shown expansion in market share. We feel these are both strong names worth giving a read.
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Investor Sentiment Survey - RESULTS!
Thank you to all those that participated in this past market update's Investor Sentiment Survey. We have published the results from the survey in a report in the link below. Please note that the weightings and categorization of these results are still a work in progress, and the model(s) used to analyze the results may change over time as more data comes in. Overall, investor sentiment is nearing the lows, and the expectations for a quick market recovery are quickly vanishing.
Survey Results - Sep 29
We look forward to releasing another round of the Investor Sentiment Survey at the next market update!
Market Update
The markets moved sharply lower last week following a higher-than-expected US inflation print, coming in at 8.2% against the consensus of 8.1%. While the markets dropped immediately following the report, they found their footing within the same day and ended up recovering from the lows. Earnings season has officially kicked off, with financial companies reporting strong numbers so far. The Bank of Canada is expected to raise interest rates at its meeting next week, and the Federal Reserve announces its decision in the week following. Earnings season, interest rate decisions, inflation data, and a lot of economic data in between for investors to glean insights from. We expect the upcoming month to be nothing short of boring, and in the meantime, we have analyzed the jobs data for any potential cracks forming in the labour market.
Open Jobs per Unemployed Person
The labour market has been a thorn in the Federal Reserve’s side, as a historically low unemployment rate and high job openings have resulted in rising wage growth, contributing to persistently high inflation.
This year has been all about economic data points, and rightfully so in the wake of persistently high inflation. There have been many economic releases that investors have kept a close eye on this year - Central Banks’ interest rate decisions, CPI prints, housing prices, GDP prints, and of particular interest in this market update, jobs data. The number of job openings in the US has ballooned since the trough in 2020 to a staggering total of 12 million open jobs earlier this year. At the time, this represented close to two available jobs per unemployed person. Now, of course, this does not consider that not every unemployed person is fit for all open jobs, but it still represents the highest proportion of open jobs to unemployed people in the past two decades.
Source: Koyfin
Year-Over-Year Change in Job Openings
The good news is that this figure has recently demonstrated a significant decline in its latest data point. The latest job openings figure for August pointed to a (1.1 million) decline in the number of job openings, down to 10.1 million open jobs. This recent release was encouraging for the Fed and investors, as it points to a narrowing of the gap between those unemployed and the number of job openings. We can see below that this large decline in job openings represents the first annual decline in just under two years.
Source: Koyfin
The Crushing Power of Interest Rates
Central Banks largely have one tool that they can use to curb excess demand, and therefore inflation, which is interest rates. Increasing interest rates cause economic demand to slow and decreasing interest rates are used to stimulate the economy. The Federal Reserve has historically raised interest rates when the labour market is strong and decreased interest rates when it is weak. As we know from this market update so far, the labour market is quite strong, which is why the Fed is comfortable with increasing rates, particularly at such a rapid pace.
While many, including the Fed, are quite worried that a stubbornly tight labour market may keep inflation high for years, what we know from recent history is that rising interest rates have demonstrated their ability to dismantle a strong labour market. Below, we can see the rounding tops formed in the total number of job openings in 2006 and 2018 as the Central Bank raised interest rates, and the eventual collapse in job openings as the effect of those higher rates took their toll. It’s unsurprising to see a similar impact take place today, as outsized rate increases over the past six months have appeared to finally take hold of the labour market and bring the number of job openings down sharply.
Source: Koyfin
Concluding Thoughts
While the August job openings data was encouraging for the Fed and investors, as the detrimental impacts of the labour market on inflation seem to be waning, it is only one data point, and we will need more to fully assess if we have passed the peak in labour market tightness. We expect to see further weakness in the labour market as higher rates force demand lower, and thus the need for more job openings.
Today’s economic environment is certainly different from that of 2008 and 2020, however, we do not want to understate the significant power that interest rates have on cooling/stimulating the economy. The Fed has made it abundantly clear that higher rate hikes to cool inflation supersede any financial market or economic troubles, and this, in our opinion, gives us more comfort that the Fed will accomplish its goal of dampening the currently strong labour market. This will bode well for stocks in the intermediate to long term, but it may take a few more data points to become fully confident about the reversing trend in the labour market.
Best wishes for your investing!
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