April 29, 2022
“Every cloud has a silver lining”
John Milton
There was no shortage of dark clouds in April, the stock market hit new lows with the S&P experiencing its second market correction of 2022, 10.8% down vs. March 29th. Even the TSX that had been the golden child of 2022, erased the gains and ended 2.2% below its start on Jan 1st.
As for tech stocks, the NASDAQ (tech heavy index) closed down 13.6% vs. the end of March and 21.2% lower than the start of the year. As many analysts have warned, with high inflation and the prospect of higher interest rates, “growth” stocks without actual earnings are being punished by Wall Street.
As I’m looking at May, I’m considering buying a bit more of Netflix (NFLX). NFLX has actual earnings and a low PE ratio of 16.9. It ended up losing 50% of its value after announcing the loss of subscribers for the first time in 10 years at the latest Quarterly Earnings Report. Really? Was that a surprise? I’m in awe that analysts were not expecting a decline in subscribers once the Covid restrictions were lifted. But, just like that, NFLX erased 5 years of stock value (the house of pain). I have done quite a bit of “Stock Talking” about NFLX over the last week. I think the brand is really strong and in the long run perhaps with consolidations, new content, and some of their member acquisition strategies, the stock should get back to growing. I think I’m ready to buy a bit more.
Alright, so what’s the silver lining?
I have been doing some research about fixed income opportunities, and I’m happy to report that there is a silver lining in all of this. It is the fact that there are now new GIC offerings that deliver a decent interest rate. If you recall, my 2022 Game Plan was to favour cash and put it into fixed income or use it to buy stocks (that I like) when they reach a fair value. So, at this point, GICs seem like an opportunity worth exploring further.
What is a GIC? A GIC is a Guaranteed Investment Certificate, issued by Canadian Banks and Trust companies. They provide a low risk fixed rate of return and are insured up to $100,000 by the CDIC (Canadian Deposit Insurance Corporation), in case the issuer fails (very unlikely in the case of a GIC issued by an established Canadian bank).
The money paid for the GIC is locked for a certain amount of time, and the interest it pays is usually higher the longer the money is locked.
For instance, these are the current GIC rates issued by one of the top Canadian Banks:
Just for perspective, the average 5-year GIC return between 2010 and 2019 was 2.15%. Furthermore, over the last year, it was impossible to find a GIC that would return 1% or more. Additionally, with the Bank of Canada and Federal Reserve’s commitment to bring inflation back to their 2% target over the next year, the longer term GIC’s should provide a positive real return.
To note, I’m planning to wait 5 more weeks before buying GICs; as the expectation is that both the Federal Reserve and the Bank of Canada (BOC) will announce a more aggressive interest rate hike at their next meetings on May 3-4th and June 1st, respectively.
As an aside note, the CRA prescribed rate is set to double on July 1st to 2%. If you read "Income Split Opportunities" post, you know that this rate can be used to establish a spousal loan, split income and potentially lower your household taxes. Thus, it makes sense to get it at 1% before July 1st. If you are interested and have questions about it, just Stock Talk me and we will connect.
Claudia Soler
* Disclaimer: The information contained within this blog is for informational purposes only and it is not intended as a recommendation of the securities highlighted or any particular investment strategy; nor should it be considered a solicitation to buy or sell any security. In addition, this information is not represented or warranted to be accurate, correct, complete or timely. the securities mentioned in this blog may not be suitable for all types of investors and the information contained in this blog does not constitute advice. Before acting on any information in this blog, readers should consider whether such an investment is suitable for their particular circumstances, perform their own due diligence, and if necessary, seek professional advice.