Economy

In today's environment, the notion that the stock market isn't the economy doesn't hold up anymore – CNBC

Published

3 years ago

May 9, 2022

Harry Miller

A Wall Street subway station near the New York Stock Exchange (NYSE) in New York, on Monday, Jan. 3, 2022.

Michael Nagle | Bloomberg | Getty Images

The stock market may not literally be the economy, but the distinction between the two is getting increasingly harder to draw.

With household ownership of stocks scaling new heights and the destiny of companies — particularly in the innovative tech sector — tied to their share prices, the fates of Wall Street and Main Street have never been so intertwined.

So as the stock market goes through this volatile period, it’s not sending a particularly good sign for the broader growth outlook.

“In the last 20 years, we’ve had a financial economy that has grown significantly,” said Joseph LaVorgna, chief economist for the Americas at Natixis. “You could have argued a few decades ago that the stock market was not the economy, and that was very accurate. That is no longer the case today.”

No one would argue that the stock market is all of the economy, but it’s also hard to dispute the notion that it’s become a larger part of everyday life.

Through the end of 2021, the share of household wealth that comes from directly or indirectly held stocks hit a record 41.9%, more than double where it was 30 years ago, according to data from the Federal Reserve. A host of factors, from the advent of online trading to stock-friendly monetary policy to a lackluster global economy, has made U.S. equities an attractive place to park money and earn nice returns.

It’s also made the economy much more susceptible to shocks on Wall Street.

“When risk assets fall and fall fast enough, there’s no question they’re going to hurt growth,” said LaVorgna, who was chief economist for the National Economic Council under former President Donald Trump. “If anything, the relationship is even better when asset prices decline than when they go up.”

How it works

The transmission mechanism between the market and economic growth is multipronged but fairly simple.

Stocks and consumer confidence historically have been linked closely, so when stocks fall people tend to curtail spending. The decline in spending slows sales growth and makes share prices less attractive when compared to future earnings. In turn, that triggers a market reaction that spills back into less wealth on consumer balance sheets.

There’s also another important point: Companies, particularly innovation-heavy Silicon Valley firms, constantly need to raise capital and look to growth in their stock prices to do so.

“In addition to the wealth effect on consumers, [the market] does affect investment decisions by companies, particularly the high-growth companies, the tech companies, that rely on raising capital through the equity market to finance their growth,” said Mark Zandi, chief economist at Moody’s Analytics.

“If stock prices are down, it’s much more difficult to raise equity. Their cost of capital is also a lot higher, therefore they’re not going to be able to expand as aggressively,” he added. “That’s another element of the line between what’s happening in the equity market and economic growth.”

If revenue growth gets weak enough, companies then have to find a way to cut costs to make their bottom-line numbers.

The first place they usually look: payrolls.

Employment has been rising at a steady pace over the past two years, but that can come to an end if the current market tumult persists.

“Companies manage their share price, and they want to make sure those projections remain intact as best they can maneuver that,” said Quincy Krosby, chief equity strategist at LPL Financial. “If need be, they will bring costs down. For most companies, their main cost of capital is labor. That’s another reason why the Fed has to watch this.”

Where the Fed fits in

Indeed, the Federal Reserve is a major component as well in the link between the markets and the economy.

Central bankers always have been attuned to market gyrations, but following the 2008 financial crisis, monetary policy has even more so relied on risk assets as a transmission mechanism. The Fed has bought more than $8 trillion in bonds since then in an effort to keep rates low and maintain the movement of cash through the economy, and that includes the financial economy.

“Consumers are extraordinarily involved in the equity market, and the Fed has put them there,” said Steve Blitz, chief U.S. economist at TS Lombard. “Consumers have been big buyers of equities ever since 2016, in particular. We’ve seen a really big correlation between equity prices and discretionary spending.”

Fed officials, though, might not mind seeing some of the froth come out of Wall Street.

For the central bank, inflation remains its main problem, and that has come from supply that has been unable to meet with relentless consumer demand for goods over services. Markets have been in sell-off mode since Thursday, the day after the Fed announced a 50-basis-point rate increase that was the biggest hike in 22 years.

The Fed also is going to start shedding some of those bonds it has accumulated, another process that directly affects Wall Street but also finds its way to Main Street through higher borrowing costs, especially on home loans.

So the market and the economy “are different, but they are joined at points,” Krosby said. The market “is a component of financial conditions, and as the market pulls back, the assumption is it can help curtail demand, which is one of the things they want. They want to slow the economy.”

Still, Zandi, the Moody’s economist, cautions against letting the current downturn in which the S&P 500 has tumbled about 15% year to date send too strong a signal about a recession ahead.

GDP dropped at a 1.4% pace in the first quarter, but most Wall Street economists see stronger growth through the end of the year, if nowhere near the big gains of 2021.

“The market is a prescient indicator of where the economy is headed, but overstates the case generally,” Zandi said. “So the sell-off we’re seeing now strongly argues for a slowly growing economy, perhaps an economy that’s flirting with recession. But it’s probably getting ahead of itself in that regard.”

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Economy

Canada’s unemployment rate holds steady at 6.5% in October, economy adds 15,000 jobs

Published

2 days ago

November 8, 2024

Anne Joseph

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.

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Economy

Health-care spending expected to outpace economy and reach $372 billion in 2024: CIHI

Published

3 days ago

November 6, 2024

Anne Joseph

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.

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Economy

Trump’s victory sparks concerns over ripple effect on Canadian economy

Published

4 days ago

November 6, 2024

Anne Joseph

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.

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