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BMO chief economist Doug Porter was blunt in his assessment of inflation risks in his latest weekly Focus report, beginning with, “If you’re not just a bit worried about real inflation, then you’re not paying attention.”

He went on to list numerous indicators that have been showing heightened price pressure, including the Bank of Canada’s commodity index, the core Personal Consumption Expenditure deflator (the Federal Reserve’s preferred inflation measure), U.S. employment costs, and Canadian average hourly earnings.

Last week, BofA Securities U.S. quantitative strategist Savita Subramanian highlighted inflation as the most important topic during the ongoing S&P 500 earnings reporting season. The strategist noted that mentions of the word inflation during earnings conference calls with management more than tripled relative to 2020, the biggest year-over-year jump in BofA’s records. Ms. Subramanian further related that inflation mentions on earnings calls has historically led the consumer price index by one quarter.

The Federal Reserve, and to a lesser extent the Bank of Canada, have to date viewed inflation pressure as transitory. They expect that price growth will slow as the easy year-over-year comparables for economic data fade into history. But as Mr. Porter wrote, the effects may be transitory, ‘but an earthquake is also transitory.”

Rising prices are a major annoyance for all consumers but for investors, inflation pressure is most important as a driver of bond yields. Higher risk-free yields decrease the value of equities automatically. The damage is historically acute in dividend-paying sectors as investment assets gravitate from them towards the surety of bond income as yields climb. It’s no surprise then that the S&P/TSX Utilities index fell 1.3 per cent in April as inflation concerns intensified.

So far, however, bond yields remain tame. The five-year government of Canada bond yield is higher by about half a percentage point for 2021, but at 0.94 per cent, the yield is well below the 2018 highs near 2.5 per cent. In the U.S., five-year yields are also higher at 0.85 per cent but well below the 3.0 per cent peak three years ago.

Inflation pressure is building in a more verifiable way than at any point since the financial crisis. I have no doubt that investors will be bombarded with inflation-related headlines in the months ahead. For equity portfolios, the real danger will occur if five and 10 year bond yields approach 2018 levels. At that point, and significant sector re-allocations away from income in favour of inflation-friendly commodities and cyclicals may be required.

-- Scott Barlow, Globe and Mail market strategist

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Stocks to ponder

Quisitive Technology Solutions Inc. (QUIS-X) With its head office in Toronto and its principal U.S. headquarters in Irving, Texas, Quisitive is a rapidly evolving company. The company has two main business segments: its cloud solutions business and its payment solutions business. Year-to-date, the share price is already up nearly 40 per cent and potential near-term catalysts may boost the share price and give investors another year of triple-digit gains. In 2020, the share price rallied 340 per cent. The stock has a unanimous buy call from six analysts with expected one-year returns ranging from 31 per cent to 80 per cent. Jennifer Dowty has this profile of the stock.

The Rundown

Bonds have stunk this year. Where should a fixed-income investor turn?

Fixed-income investments have lost some of their appeal this year, given rising inflation expectations and the looming threat of rate hikes from central banks as the global economy heals. Is there still a case for investing in fixed income at a time when some equity strategists are declaring there is no alternative to stocks? The short answer is yes, says David Berman. But it’s important where you go looking for it.

Warren Buffett’s Berkshire Hathaway faces headwinds as shareholders look to its future

For some Berkshire Hathaway shareholders, a list of post-pandemic challenges including looming inflation, a dearth of acquisitions and more environmental and social disclosure demands are prompting a rethink on Warren Buffett’s conglomerate. Investors have long been happy to bet on Buffett outperforming markets, and many remain confident Berkshire’s growth will pick up if the U.S. economy continues roaring back from its pandemic-induced slump. But, as Reuters reports, some worry the last year may have exacerbated Berkshire’s difficulties delivering faster growth.

Also see:

Robinhood hits back at Buffett for retail trading comments

Warren Buffett says Greg Abel will likely succeed him as Berkshire Hathaway CEO

Why Biden’s plan to raise taxes for rich investors isn’t hurting stocks

Investors have largely shrugged off President Joe Biden’s proposal to raise taxes on investment income for wealthy Americans, as the stock market hovers near record highs after news of a strong economic rebound and blockbuster earnings reports from technology giants such as Apple and Amazon. The indifference is well founded, analysts say. Matt Phillips of The New York Times explains.

Blow-out U.S. earnings suggest market has room to run

U.S. companies are leaping above expectations on first-quarter earnings, giving investors stronger confirmation that profit growth will be able to support the market this year. A big piece of that growth is coming once again from technology and growth companies, which suggests greater durability in companies that underperformed more economically focused value names for months. Caroline Valetkevitch of Reuters reports.

New meme stocks swing as shorts and retail investors face off again

Recent volatility in a handful of so-called meme stocks is putting the spotlight back on the tussle between individual investors and short sellers, months after a wild ride in GameStop captivated Wall Street’s attention.

Investors straining to look beyond India’s COVID-19 crisis

Indian financial markets have struggled this month as the world’s worst COVID-19 crisis engulfs the country but international investors are betting the economy will rebound quickly once the pandemic has passed.

Others (for subscribers)

The most oversold and overbought stocks on the TSX

Gordon Pape’s balanced portfolio is up 10% over the last 6 months, but it’s time to make changes

Monday’s analyst upgrades and downgrades

Monday’s Insider Report: Company leaders see a buying opportunity after this stock tumbles

Ethereum breaks past $3,000 to quadruple in value in 2021

Globe Advisor

The Financial Times: A commodity boom with a difference

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Ask Globe Investor

Question: I’m trying to help structure a portfolio for a friend who will soon have very little income when she retires – she will likely be eligible for the guaranteed income supplement (GIS). Her tax-free savings account is maxed out, so we are talking about income from a non-registered account.

My inclination is to buy some stable dividend-paying stocks and lock in a yield of, say, 4 per cent. The problem is that the grossed-up amount of the dividend counts as income for GIS purposes and so will reduce her GIS much more than interest, or, even better, capital gains. It seems that dividends will reduce GIS at 70 cents on the dollar, interest 50 cents, and capital gains 25 cents.

I could buy a growth-oriented portfolio and harvest some capital every year (capital gains) but some years it might go down. Is there any other way to essentially get stable dividend income, but receive it as interest or capital gains?

Answer: I have two suggestions to consider. The first is to invest some of her money in a stable mortgage investment corporation (MIC), such as Firm Capital Mortgage Investment Corp. Distributions from MICs are called dividends, but they are actually taxed as interest. That means they aren’t eligible for the dividend tax credit and, hence, no need to worry about the gross-up. Of course, the whole amount of the distributions will be taxable, but since she will be in a low tax bracket that should not be a major concern. Firm Capital currently yields just under 7 per cent.

My second suggestion is to look at corporate class mutual funds, which group a large selection of funds within a single corporation. Most major fund companies offer them. The wide range of mandates within the corporation enables you to construct a portfolio that is risk appropriate. All the distributions are in the form of capital gains dividends, non-taxable return of capital, or eligible Canadian dividends. Check the distribution history of any corporate class fund you’re considering before making a decision.

--Gordon Pape

What’s up in the days ahead

The Contra Guys revisit their investment recommendation for a U.S. bank stock. Meanwhile, Ian McGugan looks at what Berkshire Hathaway may end up doing with its mountain of cash under new leadership.

Click here to see the Globe Investor earnings and economic news calendar.

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Compiled by Globe Investor Staff