Investors have been watching the disconnect between stock prices and the economy as stocks have continued to rise despite the worst economic downturn since the Great Depression. Although this is not a new phenomenon, it is interesting given the magnitude of the present economic slump. Here are some key reasons for a downturn in stocks as well as reasons why they could move higher.
The Link Between Stocks and the Economy
I remember reading about a study from Goldman Sachs
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several years ago which examined the relationship between stock performance and economic activity. It concluded that about 40% of stock price movements were attributable to economic activity. That may explain part of the disconnect but there are other, more important factors to consider.
10 Year U.S. Treasury Yield
Alan Greenspan once remarked that if he could only view one indicator to gain a sense of the health of the economy, it was the yield on the 10-Year Treasury. Why? In general, when net buying pressure exceeds net selling pressure, price rises. Whenever there is strong demand for U.S. Treasuries, their price rises and yield falls. Since U.S. Treasuries are considered the safest investments on earth, whenever yields fall (price rises), buying pressure is greater than selling pressure. The reason for this is often rooted in fear. When investors get nervous, they tend to sell risky assets and seek safety. Where is the yield now?
At this moment, the 10-Year Treasury is yielding 0.577%, which is very close to its all-time closing low of 0.54% on March 9, 2020. This bellwether yield is a good indicator of what we already know, that is, that the U.S. economy is struggling, and fear is rising.
Gold & Silver
Gold and silver are another good metric to watch. When fear rises and investors seek cover, more money flows into gold and silver. Currently, silver is at a seven-year high and gold is near an all-time high.
Stock Valuation
Another good indicator is the valuation of the U.S. stock market. In short, is it under- or over-valued? One ratio compares the total market capitalization of all U.S. publicly traded stocks to total GDP. Since GDP measures total economic output, this ratio is widely used to gauge the valuation of the U.S. stock market. Be aware that stocks can remain over- or under-valued for an extended period. In short, it is useful when used in conjunction with other data. Where are we now?
Currently, the ratio indicates that stocks are 55.3% overvalued. For perspective, the all-time high was 58.9% overvalued, which occurred February 19, 2020.
The Coronavirus Effect
The primary cause of our anxiety today is Covid-19. The George Floyd incident is another, but without this virus, it’s possible that police officers would’ve been less stressed, and the entire incident might never have occurred. The emotional upheaval from this virus is clear and emotions have a tremendous influence on behavior. This behavior can be found in the debate over how to eliminate this virus. Many, whether intentional or not, have helped fuel this divisiveness. It doesn’t help when our leaders can’t agree.
President Trump was initially against wearing masks to stem the outbreak, despite strong evidence that masks help. Many adopted his view and fought just as vigorously against the policy. Fortunately, he has reversed his position and now supports wearing masks. Recent polls show that 75% of Americans support a mask mandate. Now for the bullish case.
The Bullish Case for Stocks: Liquidity, Liquidity, Liquidity
Earlier this year, when it seemed the credit markets might freeze, the Fed announced its intent to purchase any securities necessary to keep markets from collapsing. What caught my attention was its intent to purchase the bonds of companies with a weak credit rating, referred to as junk bonds. Why? Failure to buy this debt would’ve resulted in more selling pressure which would have caused prices on these securities to plunge, which would’ve created a ripple effect. Even though the fed did not actually purchase these securities at that time, the reassurance instilled confidence in investors.
Another key was the federal government’s relief package, which helped keep unemployment from spiking further. It also put money in the hands of the public, which helped fuel online sales (consumer spending). Washington is now working on a second stimulus bill to provide additional support for the economy.
Since we have never witnessed actions of this magnitude from our government, it’s hard to know if it will be effective. Even if the next round of stimulus is successful and stocks move higher, it could create the next stock bubble, especially with stocks being so over-valued.
Will this stock market rally continue unabated or will we see a correction soon? If this virus lingers another year or more, to avoid a more serious problem, the government will need to inject a great deal more liquidity than the estimated $1.0 to $3.4 trillion dollars expected in the next relief package. When I consider all aspects surrounding Covid-19, many of which I did not mention (ex: vaccine, willingness to abide by recommended safety measures, etc.), and the effect on the economy and financial markets, plus the emotional toll imprinted on the psyche of individuals, it’s hard to envision a quick recovery.
The emotional effects of this will linger for a long time, which will impact the economy and financial markets. What will change? Businesses will seek to become leaner in preparation for the next great challenge and individuals will likely save more and spend less. Whenever something of this magnitude occurs, we tend to examine our situation and seek ways to protect ourselves in the future. It’s just another way of coping with a crisis.
OTTAWA – Canada’s unemployment rate held steady at 6.5 per cent last month as hiring remained weak across the economy.
Statistics Canada’s labour force survey on Friday said employment rose by a modest 15,000 jobs in October.
Business, building and support services saw the largest gain in employment.
Meanwhile, finance, insurance, real estate, rental and leasing experienced the largest decline.
Many economists see weakness in the job market continuing in the short term, before the Bank of Canada’s interest rate cuts spark a rebound in economic growth next year.
Despite ongoing softness in the labour market, however, strong wage growth has raged on in Canada. Average hourly wages in October grew 4.9 per cent from a year ago, reaching $35.76.
Friday’s report also shed some light on the financial health of households.
According to the agency, 28.8 per cent of Canadians aged 15 or older were living in a household that had difficulty meeting financial needs – like food and housing – in the previous four weeks.
That was down from 33.1 per cent in October 2023 and 35.5 per cent in October 2022, but still above the 20.4 per cent figure recorded in October 2020.
People living in a rented home were more likely to report difficulty meeting financial needs, with nearly four in 10 reporting that was the case.
That compares with just under a quarter of those living in an owned home by a household member.
Immigrants were also more likely to report facing financial strain last month, with about four out of 10 immigrants who landed in the last year doing so.
That compares with about three in 10 more established immigrants and one in four of people born in Canada.
This report by The Canadian Press was first published Nov. 8, 2024.
The Canadian Institute for Health Information says health-care spending in Canada is projected to reach a new high in 2024.
The annual report released Thursday says total health spending is expected to hit $372 billion, or $9,054 per Canadian.
CIHI’s national analysis predicts expenditures will rise by 5.7 per cent in 2024, compared to 4.5 per cent in 2023 and 1.7 per cent in 2022.
This year’s health spending is estimated to represent 12.4 per cent of Canada’s gross domestic product. Excluding two years of the pandemic, it would be the highest ratio in the country’s history.
While it’s not unusual for health expenditures to outpace economic growth, the report says this could be the case for the next several years due to Canada’s growing population and its aging demographic.
Canada’s per capita spending on health care in 2022 was among the highest in the world, but still less than countries such as the United States and Sweden.
The report notes that the Canadian dental and pharmacare plans could push health-care spending even further as more people who previously couldn’t afford these services start using them.
This report by The Canadian Press was first published Nov. 7, 2024.
Canadian Press health coverage receives support through a partnership with the Canadian Medical Association. CP is solely responsible for this content.
As Canadians wake up to news that Donald Trump will return to the White House, the president-elect’s protectionist stance is casting a spotlight on what effect his second term will have on Canada-U.S. economic ties.
Some Canadian business leaders have expressed worry over Trump’s promise to introduce a universal 10 per cent tariff on all American imports.
A Canadian Chamber of Commerce report released last month suggested those tariffs would shrink the Canadian economy, resulting in around $30 billion per year in economic costs.
More than 77 per cent of Canadian exports go to the U.S.
Canada’s manufacturing sector faces the biggest risk should Trump push forward on imposing broad tariffs, said Canadian Manufacturers and Exporters president and CEO Dennis Darby. He said the sector is the “most trade-exposed” within Canada.
“It’s in the U.S.’s best interest, it’s in our best interest, but most importantly for consumers across North America, that we’re able to trade goods, materials, ingredients, as we have under the trade agreements,” Darby said in an interview.
“It’s a more complex or complicated outcome than it would have been with the Democrats, but we’ve had to deal with this before and we’re going to do our best to deal with it again.”
American economists have also warned Trump’s plan could cause inflation and possibly a recession, which could have ripple effects in Canada.
It’s consumers who will ultimately feel the burden of any inflationary effect caused by broad tariffs, said Darby.
“A tariff tends to raise costs, and it ultimately raises prices, so that’s something that we have to be prepared for,” he said.
“It could tilt production mandates. A tariff makes goods more expensive, but on the same token, it also will make inputs for the U.S. more expensive.”
A report last month by TD economist Marc Ercolao said research shows a full-scale implementation of Trump’s tariff plan could lead to a near-five per cent reduction in Canadian export volumes to the U.S. by early-2027, relative to current baseline forecasts.
Retaliation by Canada would also increase costs for domestic producers, and push import volumes lower in the process.
“Slowing import activity mitigates some of the negative net trade impact on total GDP enough to avoid a technical recession, but still produces a period of extended stagnation through 2025 and 2026,” Ercolao said.
Since the Canada-United States-Mexico Agreement came into effect in 2020, trade between Canada and the U.S. has surged by 46 per cent, according to the Toronto Region Board of Trade.
With that deal is up for review in 2026, Canadian Chamber of Commerce president and CEO Candace Laing said the Canadian government “must collaborate effectively with the Trump administration to preserve and strengthen our bilateral economic partnership.”
“With an impressive $3.6 billion in daily trade, Canada and the United States are each other’s closest international partners. The secure and efficient flow of goods and people across our border … remains essential for the economies of both countries,” she said in a statement.
“By resisting tariffs and trade barriers that will only raise prices and hurt consumers in both countries, Canada and the United States can strengthen resilient cross-border supply chains that enhance our shared economic security.”
This report by The Canadian Press was first published Nov. 6, 2024.
