Is Disney the Canary in the Coal Mine?

Market Recap

• Equity markets pulled back this week, with light data flow and a wave of Fed speakers arguing for elevated rates through the year.
• The S&P 500 gave back 1.1%, with all sectors but energy in the red.
• The TSX was down 0.7%, with health care down sharply, offsetting gains in energy and consumer staples.

Consumer Confidence

Canadian consumer sentiment has notably declined, with the weekly Bloomberg Nanos Canadian Confidence Index down from a peak of 66% in 2021 to the recent 45% range.¹ This seems at odds with unemployment numbers, which remain relatively low. What’s at the heart of this discrepancy? In our view, it’s because current employment is a lagging indicator, meaning that it doesn’t yet reflect future job losses. Over the past couple of months, several large firms have announced layoffs, but in many cases, these haven’t actually occurred yet. As a result, consumer confidence has fallen, but the employment data hasn’t caught up yet. We expect consumer sentiment to continue to decline as job losses mount, the economy slows, and consumers increasingly feel the pain.

Bottom Line: Unemployment numbers are a lagging indicator, while consumer sentiment is more responsive to the on-the-ground reality.

Disney

Speaking of unemployment—last week, Disney announced that it will cut 7,000 jobs as part of an effort to slash costs. Is this an ominous sign for the rest of the economy? In our view, Disney is a prime example of where shareholder priorities lie in the post-COVID, higher interest rate economy. As we emerged from the pandemic, Disney’s theme park business picked up. There’s also their streaming business, Disney+, which did well at the outset but perhaps tapered off. When you add in ESPN, they have a nice, diversified portfolio, which investors tend to like. But ultimately, what did Disney get rewarded for? Cost-cutting and restructuring. Meta also got a boost when they announced less spending towards the Meta universe and a big buyback program. That’s an indicator that no matter how good earnings are, the market wants to see expense control and efficiency. Chipotle is a similar example. They announced that they’re looking to add workers to keep up with demand, but also noted that it was wage costs, and costs generally, that were driving down profitability. The markets focused on the latter and punished the stock.

Bottom Line: Expense control and shareholder value are likely to remain the focus for the next few quarters.

Fed Comments

U.S. Federal Reserve chairman Jerome Powell made a much-publicized speech last week, noting that the “disinflationary process” has begun but that it may take “a significant amount of time.” These comments were particularly interesting since, in recent months, the Fed has been going back and forth between remarks that could be interpreted as hawkish and dovish. The market, for their part, seemed to take these as slightly dovish. But it’s important to note that Powell, with his reference to data dependency, left the door open for more rate hikes. This may have been a reaction to strong job numbers. Contrary to the market, we read Powell’s messaging as hawkish—clearly, the U.S. economy isn’t near a recession just yet, so the Fed seems eager to reserve the right to continue to raise rates if inflation proves more stubborn than hoped. That being said, as previously mentioned, recent job numbers are a reflection of the past, whereas job cuts that have been announced by companies but not yet carried out will be factored into future releases. As a result, unemployment can be expected to rise.

Bottom Line: Based on the Fed’s mixed messaging, we’re not sure they’re 100% confident on how many more rate hikes there will be (1 or 2 before the pause) and whether inflation will reach their 2% target this year.

Positioning

We’ve recently held our monthly positioning meeting, reaffirming our overall approach while making a few adjustments. There is no change to our allocation of equities versus bonds—we’re sticking with a balanced view, remaining neutral on equities, slightly bullish on bonds, and slightly bearish on cash. This is largely based on our expectation that recession risks have been pushed a bit further down the line, which makes us less concerned about corporate earnings in the short term, especially since the market didn’t punish companies as badly as some may have expected. The near-term earnings risk now seems to have subsided, while there is still upside to be had if and when the Fed announces a rate-hiking pause. The reason we’re not overweight equities is because job losses are still happening, and at some point, that will affect the economy. For a deeper dive into our portfolio positioning strategies, tune in over the coming weeks to our monthly House View report containing insights from across the Multi-Asset Solutions Team.

¹ Theophilos Argitis, “Canadians Have Never Felt Worse About Their Finances, Poll Shows,” Bloomberg, October, 31, 2022.

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Originally Posted February 13, 2023 – Is Disney the Canary in the Coal Mine?

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