{{r.fundCode}} {{r.fundName}} {{r.series}} {{r.assetClass}}

Welcome to the new RBC iShares digital experience.

Find all things ETFs here: investment strategies, products, insights and more.

About this podcast

This episode, Stu Kedwell, Co-Head of North American Equities, discusses why we’ve yet to see a significant drop in companies’ earnings, despite a slowing economy, aggressive central bank hikes and other sources of volatility in markets. Stu also weighs on why the central inflation question is no longer whether it’s peaked, but rather what the path of descent will look like from here. [14 minutes, 35 seconds] (Recorded August 23, 2022)


Hello and welcome to The Download. I'm your host Dave Richardson and it's Stuesdays. Even better than just a normal Stuesday, it's a summer Stuesday. Since Stu took the week off last week, this is just a special event to have him working in August.

Thanks Dave.

So, could we get an update on the weeding around your property? I imagine with the time away from the podcast you were able to clean up that yard. How is it looking?

It’s looking good. The flowers have come up. It's been nice and warm and I'm having a little clover problem. I got a bunny rabbit back there that's not doing me any favors but I'm working my way through it.

Is it just flowers or have you got some vegetables going back there?

We have no vegetables. We have herbs and I've got basil that's like two feet tall – that type of thing. But no significant produce coming off the Kedwell farm.

Well, you got to get on that.

I know. I know. Especially with produce prices, I could probably turn a profit.

I know. That's what I did with my cherry trees this year. Fabulous savings, lots of delicious cherries, very good for you and I wasn't out a penny. Organic too.

Cherries too, sometimes you see those and they're multiple dollars per pound for cherries.

Billions of dollars, which gets us back to what we should probably be talking about, which people probably want to hear about what's going on with inflation and the markets and everything. We did take a week off last week thinking that it might be calm and quiet, it was anything but – all kinds of stuff going on in markets. I guess we saw perhaps the sort of petering out of this kind of incredible summer rally that we've had. Then things have gone … They've gotten a little bit more volatile. This week we've got Federal Reserve … Jerome Powell talking in Jackson Hole at the end of the week which seems to have people roiled up just in terms of what he's going to say. What do you make of what we've seen over the last couple of weeks?

Yeah. The last time we spoke the S&P was around 4300, so it's corrected a little bit. There's a discussion on the inflation front after the July inflation number, which was a little bit lower than expected. That kind of ushered in some relief that the amount of tightening that the Federal Reserve would need to send the market’s way might be less and contributed to a rally that had started earlier in the summer, as you pointed out. Then the inflation discussion has morphed into “okay, we've probably seen the peak, but what does the path of dissent look like?” And we've talked about that in the past. I think that path of dissent has two competing camps. The first is on some goods side – the price of goods: used cars, things like this. You can look at the inflation data and say “boy, inflation in those areas might really be over. It's considerably less.” If we annualized some of those categories in the month of July you would be not far from what the Federal Reserve might hope. The other side is wages and rent continue to chip away at higher levels. The wage thing is probably the more interesting one because labour force participation has not gone back to levels of pre-pandemic. In a couple of categories… First and foremost, if you have 100 people working in a workforce and 20 of them get COVID every month and they have to go home for five days, you lose 100 days of work. So if you otherwise had 2000 days of work in that month and you lose 100 because 25% of the people got COVID then businesses are going to have to spend more to get the same productive capacity. The second thing is that people over the age of 55 participation is definitely lower than it was pre-COVID. Then there's some other categories as well where you just don't have the same participation. So this question around the tension on wages, which is high, and are we going to get a response in terms of the number of people that might be available to work. That's a bit of a longer term discussion around inflation and that is another significant component of it that will affect the movement of inflation back towards that longer term goal of 2% to 3%. Will it kind of come screaming off of 9% and change back down or will it be a bit more of a subdued descent? Lastly, it's not as much a North American feature, but energy prices in Europe … You're talking about the price of power in Europe being up like tenfold from what it used to be. In Ontario I think we’re paying something like $0.09 per kilowatt/hour off peak, maybe $0.13. Like you would do your laundry in the middle of the day right in peak – I know you're a big spender – you pay the $0.13 for your laundry. But that's like north of a dollar per kilowatt/hour in Germany right now. That's another source that kind of continues to fester. Price is the arbiter of what's going on in the world. So when price goes up then worries come a bit more to the fore. Those are some of the discussions we're having around the inflation front. The path of descent in inflation is a lot more important when the S&P hits 4300 than when it is 3600. Then the last thing – and we've talked a lot about this also – is just what's going to happen to earnings. We've put this tightening into the economy. We know it comes with a lag effect and that might be a little bit more visible into the fall. Those are all the dynamics that continue to present themselves.

Earnings forecasts almost always – and I know you've spoken about this a lot over the years and I think we've covered it a little bit on the podcast over the last several months – but there always seems to be a bit of over-optimism around earnings. If we look at the last quarter earnings, earnings were pretty solid. They're not spectacular, but they were pretty solid. Where are we going to see this drop in earnings that we should see if the economy is slowing down or if we're even in a recession? Because it just hasn't manifested itself yet.

Yeah. There's two ways to measure earnings. There's the top-down view which is an economist looks at what's going on in the economy and says “this is the type of earnings the economy is capable of.” Then there's all the bottom-up forecasts that come from each individual analyst. The bottom-up forecast is almost always above the top-down one. The top-down one has started to leak downwards a little bit. That bottom-up one normally converges over time. When we get into the third and fourth quarters of the year that's when we'll have discussion around the level of demand and the ability to pass through some of the pricing pressure that's still in the environment. And that tightening that's in place tends to happen with a lag. The analogy we used last time was the day they raise interest rates; if I have dinner plans I still go out to dinner. But six or nine months later maybe I'm just not going out as often. So we can see when things like the Purchasing Managers Index, which is a forward based indicator of economic growth – the ISM, these types of things. As they start to slow that normally leads to a reduction in forward earnings guidance. I would say today that is a fairly well accepted premise. In the next six months the question is … This sounds like it's a long way away but already we're kind of on to what will 2024 look like? And a shallow slowdown due to this tightening that then bottoms and reaccelerates, the market will sniff that out probably towards the back half of this year or back end of this year.

So Stu, one of the things that I hear from… Oh, I get this question from a lot of people and there's some validity to the idea that if we look at it historically the worst performing month of the year is September. Generally, we see big market events in September, October historically. Again there's some validity to it because just like we've been talking about people go away for the summer. There's a view when they go away and trading is light and there's not as many people active in the market. Then after Labour Day school starts again, people are back, the analysts are back. They're reviewing their numbers, they're sharpening their pencils and making sure they get everything right. That’s where you see that readjustment, which is why you see that movement. Is there any risk that just this time of year with everything we're seeing that this is one we got to be particularly concerned about?

Yeah, I think the source of concern is we've had some degree of tightening and it hasn't really shown up in the numbers yet. Like even retail sales came out and they were quite strong. People have jobs, they have money that they built up through the pandemic. So it's hard to totally estimate when the tightening might hold because there are some resources that people have to draw on. But when you've seen the magnitude of interest rate increases that we've seen you also know that eventually they will bite. So coming into a seasonally slower period when tightening has taken place, it does raise some near-term risks, no question. Longer term, I think central banks want to cool inflation and slowing the economy is required for that. But they don't want to cause anything undue as well. So that's the delicate part of the job. Coming into the fall we will see some more interest rate hikes for sure. The question is when can they start to taper those off and how much impact they had? That’s the million dollar question. But no question – to be a little wordy – we have not seen the impact of tightening as of yet in the earnings estimates and that is a concern of ours.

So Stu, you and our regular listeners know I’ve pretty much just put the ball on the tee for you. What do you do? And the cape is in the mail, by the way.

Well, as I'm really trying to put a moniker on the superhero, dollar cost average boy, the DCA. I think I sent you that statistic last week about if you put a dollar in every day of this year in a fairly volatile period. You're actually up if you put a dollar in every day. So, during a volatile period of time a dollar cost averaging is just a tremendous tool to negotiate your way through that environment.

Yeah and just to be precise, I think at the time you sent the stat, the S&P 500 is down about 10% on the year but if you bought a unit of the S&P 500 every single day this year, you were actually up 1.26%. So dollar cost averaging boy is a superhero, Stu.

He's a superhero in the sense that he can't stop a speeding bullet or anything like that, but he's like an endurance superhero.

Well, who was it? Einstein said the most powerful force in the universe is compound interest. So you're a superhero of that ilk.

That's likely my only chance of being a superhero, Dave.

Well, you're pretty good at weeding. Just for the record as we close things out, it's taking actual weeds out of your lawn – the ugly weeds out of your lawn. Not anything else.

Yeah, exactly.

All right, Stu. Thanks for another great update and love that – all joking aside – dollar cost averaging example. It’s so powerful in a year of a lot of ups and downs – generally downs. But to be able to use a strategy that actually would have you up in the face of that again just shows the power of that approach as a way to enter into volatile markets. So I hope we got lots of people listening because that approach does work.

Great. Thanks, Dave.


Recorded: August 23, 2022

This document is provided by RBC Global Asset Management (RBC GAM) for informational purposes only and may not be reproduced, distributed or published without the written consent of RBC GAM or its affiliated entities listed herein. This document does not constitute an offer or a solicitation to buy or to sell any security, product or service in any jurisdiction; nor is it intended to provide investment, financial, legal, accounting, tax, or other advice and such information should not be relied or acted upon for providing such advice. This document is not available for distribution to investors in jurisdictions where such distribution would be prohibited.

RBC GAM is the asset management division of Royal Bank of Canada (RBC) which includes RBC Global Asset Management Inc., RBC Global Asset Management (U.S.) Inc., RBC Global Asset Management (UK) Limited, RBC Global Asset Management (Asia) Limited, and BlueBay Asset Management LLP, which are separate, but affiliated subsidiaries of RBC.

In Canada, this document is provided by RBC Global Asset Management Inc. (including PH&N Institutional) which is regulated by each provincial and territorial securities commission with which it is registered. In the United States, this document is provided by RBC Global Asset Management (U.S.) Inc., a federally registered investment adviser. In Europe this document is provided by RBC Global Asset Management (UK) Limited, which is authorised and regulated by the UK Financial Conduct Authority.

Additional information about RBC GAM may be found at www.rbcgam.com.

This document has not been reviewed by, and is not registered with any securities or other regulatory authority, and may, where appropriate and permissible, be distributed by the above-listed entities in their respective jurisdictions.

Any investment and economic outlook information contained in this document has been compiled by RBC GAM from various sources. Information obtained from third parties is believed to be reliable, but no representation or warranty, express or implied, is made by RBC GAM, its affiliates or any other person as to its accuracy, completeness or correctness. RBC GAM and its affiliates assume no responsibility for any errors or omissions. Opinions contained herein reflect the judgment and thought leadership of RBC GAM and are subject to change at any time. Such opinions are for informational purposes only and are not intended to be investment or financial advice and should not be relied or acted upon for providing such advice. RBC GAM does not undertake any obligation or responsibility to update such opinions.

RBC GAM reserves the right at any time and without notice to change, amend or cease publication of this information.

Past performance is not indicative of future results. With all investments there is a risk of loss of all or a portion of the amount invested. Where return estimates are shown, these are provided for illustrative purposes only and should not be construed as a prediction of returns; actual returns may be higher or lower than those shown and may vary substantially, especially over shorter time periods. It is not possible to invest directly in an index.

Some of the statements contained in this document may be considered forward-looking statements which provide current expectations or forecasts of future results or events. Forward-looking statements are not guarantees of future performance or events and involve risks and uncertainties. Do not place undue reliance on these statements because actual results or events may differ materially from those described in such forward-looking statements as a result of various factors. Before making any investment decisions, we encourage you to consider all relevant factors carefully.

® / TM Trademark(s) of Royal Bank of Canada. Used under licence.

© RBC Global Asset Management Inc. 2022