A resilient U.S. economy and expectations of a nearing peak in the Federal Reserve’s monetary policy tightening cycle are emboldening stock investors, even as worries persist over rising valuations and the potential for inflation to rebound.
The S&P 500 is up nearly 19% this year after gaining around 1% in the past week. It has risen nearly 10 percentage points since June 1, over which time the U.S. government avoided a debt ceiling default and consumer prices cooled, while growth stayed resilient.
One key factor driving stocks higher has been the view that the economy is moving towards a so-called Goldilocks scenario of ebbing consumer prices and strong growth that many believe is a healthy backdrop for stocks.
That view gained further traction in the past week, when Chair Jerome Powell said the central bank’s staff no longer forecasts a U.S. recession and that inflation had a shot of returning to its 2% target without high levels of job losses.
Policymakers raised rates by another 25 basis points to their highest level since 2007 at the central bank’s July 26 meeting and left the door open to another increase in September.
“The market has fully accepted the narrative that it wanted, which is Goldilocks. Until we see some set of data that scares them it’s hard to see how that changes,” said Bob Kalman, senior portfolio manager at Miramar Capital.
At the same time, investors believe the Fed is unlikely to deliver much more of the monetary policy tightening that shook markets last year. Futures markets on Friday priced a nearly 73% chance that rates don’t rise above current levels through the end of the year, according to CME’s FedWatch tool, up from 24% a month ago.
A test of the economy comes this coming week, when the U.S. reports employment numbers for July. While comparatively strong employment data has been a driver of this year’s stock rally, signs that the economy is growing at too rapid a pace could spark worries that the Fed will need to raise rates more than expected.
“For markets to continue to trade higher, the soft landing must be a soft landing, not a reacceleration, because if housing and consumer spending accelerate from here, the Fed will have to raise rates a lot more,” wrote Torsten Slok, chief economist at Apollo Global Management.
Kalman, of Miramar Capital, believes there’s a growing chance the Fed may need to raise rates beyond their current 5.50% threshold and hold them there for longer than expected, an outcome he worries could dampen the economy and hurt risk assets.
“It’s a 50-50 chance that we’ll get Goldilocks or we’ll get a stronger downturn,” he said.
Many are also assessing the durability of a rally in tech stocks, which has been fueled in part by excitement over developments in artificial intelligence. The tech-heavy Nasdaq 100 is up nearly 44% year-to-date, while the S&P 500 information technology sector has gained nearly 46%.
Optimistic forecasts from Meta Platforms and results from Alphabet earlier this week bolstered the case for those who believe megacaps’ lofty valuations are justified. Some smaller companies have delivered as well, with shares of streaming device maker Roku Inc soaring on Friday after it gave an upbeat quarterly revenue forecast.
Still, some investors have been looking outside of tech stocks for further gains, wary of rising valuations. The S&P 500 tech sector now trades at 28.2 times forward earnings, from 19.6 at the start of the year.
Burns McKinney, senior portfolio manager at NJF Investment Group, owns shares of Apple and Microsoft but has been adding to dividend-paying positions in healthcare, financials, and energy in anticipation that megacap names start to falter.
For megacap stocks, “the risk-reward is not as good as it was a quarter ago,” he said.
Others believe the rally in equities is due for a pause. Randy Frederick, managing director of trading and derivatives for the Schwab Center for Financial Research, said he wouldn’t be surprised to see the S&P 500 fall 5% or more in the next month or two as investors take profits on recent gains.
Yet he also believes stocks are in the “early stages” of their recovery after falling into a bear market last year.
“There’s always a concern with too much optimism, but longer term a sort of consolidation here speaks to a positive market going out,” he said.
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OTTAWA – Statistics Canada says wholesale sales, excluding petroleum, petroleum products, and other hydrocarbons and excluding oilseed and grain, rose 0.4 per cent to $82.7 billion in July.
The increase came as sales in the miscellaneous subsector gained three per cent to reach $10.5 billion in July, helped by strength in the agriculture supplies industry group, which rose 9.2 per cent.
The food, beverage and tobacco subsector added 1.7 per cent to total $15 billion in July.
The personal and household goods subsector fell 2.5 per cent to $12.1 billion.
In volume terms, overall wholesale sales rose 0.5 per cent in July.
Statistics Canada started including oilseed and grain as well as the petroleum and petroleum products subsector as part of wholesale trade last year, but is excluding the data from monthly analysis until there is enough historical data.
This report by The Canadian Press was first published Sept. 13, 2024.
VICTORIA – British Columbia is forecasting a record budget deficit and a rising debt of almost $129 billion less than two weeks before the start of a provincial election campaign where economic stability and future progress are expected to be major issues.
Finance Minister Katrine Conroy, who has announced her retirement and will not seek re-election in the Oct. 19 vote, said Tuesday her final budget update as minister predicts a deficit of $8.9 billion, up $1.1 billion from a forecast she made earlier this year.
Conroy said she acknowledges “challenges” facing B.C., including three consecutive deficit budgets, but expected improved economic growth where the province will start to “turn a corner.”
The $8.9 billion deficit forecast for 2024-2025 is followed by annual deficit projections of $6.7 billion and $6.1 billion in 2026-2027, Conroy said at a news conference outlining the government’s first quarterly financial update.
Conroy said lower corporate income tax and natural resource revenues and the increased cost of fighting wildfires have had some of the largest impacts on the budget.
“I want to acknowledge the economic uncertainties,” she said. “While global inflation is showing signs of easing and we’ve seen cuts to the Bank of Canada interest rates, we know that the challenges are not over.”
Conroy said wildfire response costs are expected to total $886 million this year, more than $650 million higher than originally forecast.
Corporate income tax revenue is forecast to be $638 million lower as a result of federal government updates and natural resource revenues are down $299 million due to lower prices for natural gas, lumber and electricity, she said.
Debt-servicing costs are also forecast to be $344 million higher due to the larger debt balance, the current interest rate and accelerated borrowing to ensure services and capital projects are maintained through the province’s election period, said Conroy.
B.C.’s economic growth is expected to strengthen over the next three years, but the timing of a return to a balanced budget will fall to another minister, said Conroy, who was addressing what likely would be her last news conference as Minister of Finance.
The election is expected to be called on Sept. 21, with the vote set for Oct. 19.
“While we are a strong province, people are facing challenges,” she said. “We have never shied away from taking those challenges head on, because we want to keep British Columbians secure and help them build good lives now and for the long term. With the investments we’re making and the actions we’re taking to support people and build a stronger economy, we’ve started to turn a corner.”
Premier David Eby said before the fiscal forecast was released Tuesday that the New Democrat government remains committed to providing services and supports for people in British Columbia and cuts are not on his agenda.
Eby said people have been hurt by high interest costs and the province is facing budget pressures connected to low resource prices, high wildfire costs and struggling global economies.
The premier said that now is not the time to reduce supports and services for people.
Last month’s year-end report for the 2023-2024 budget saw the province post a budget deficit of $5.035 billion, down from the previous forecast of $5.9 billion.
Eby said he expects government financial priorities to become a major issue during the upcoming election, with the NDP pledging to continue to fund services and the B.C. Conservatives looking to make cuts.
This report by The Canadian Press was first published Sept. 10, 2024.
Note to readers: This is a corrected story. A previous version said the debt would be going up to more than $129 billion. In fact, it will be almost $129 billion.
NANAIMO, B.C. – Former Bank of Canada governor Mark Carney says he’ll be advising the Liberal party to flip some the challenges posed by an increasingly divided and dangerous world into an economic opportunity for Canada.
But he won’t say what his specific advice will be on economic issues that are politically divisive in Canada, like the carbon tax.
He presented his vision for the Liberals’ economic policy at the party’s caucus retreat in Nanaimo, B.C. today, after he agreed to help the party prepare for the next election as chair of a Liberal task force on economic growth.
Carney has been touted as a possible leadership contender to replace Justin Trudeau, who has said he has tried to coax Carney into politics for years.
Carney says if the prime minister asks him to do something he will do it to the best of his ability, but won’t elaborate on whether the new adviser role could lead to him adding his name to a ballot in the next election.
Finance Minister Chrystia Freeland says she has been taking advice from Carney for years, and that his new position won’t infringe on her role.
This report by The Canadian Press was first published Sept. 10, 2024.
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