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Overheated stock market at risk of bubble in a disconnect from economy, experts say – Airdrie Today

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TORONTO — “We’re all in this together” has been a common refrain since the arrival of the COVID-19 pandemic last March, but the yawning chasm between dismal economic data and soaring stock market valuations suggests some Canadians are doing much better than others.

A large segment of the population is untouched financially by the crisis or in better shape. The housing market is strong and those able to work remotely have saved mountains of cash they are using to pump up stock markets.

Meanwhile, lockdowns have caused major disruptions for workers in the service sector and other parts of the economy that have been forced to rely on government support.

“All the jobs that were lost in the country since the beginning of the crisis — not some, all — were in low-paying sectors, low-paying occupations,” says Benjamin Tal, deputy chief economist for CIBC.

North American stock markets have been on a tear since March, setting record highs almost daily even while COVID-19 has battered the economy and produced lacklustre employment data. 

Some individual stocks have soared amid the froth. Tesla shares are up about 1,160 per cent over the past year while Ottawa’s Shopify Inc. has risen 425 per cent to become Canada’s most valuable company by market capitalization.

The S&P/TSX composite is up 65 per cent from March 2020 lows and 6.5 per cent in February alone. The rebound has been even stronger in the U.S., with the Dow up 73 per cent, S&P 500 79.5 per cent and the tech-heavy Nasdaq composite up about 113 per cent.

Meanwhile, Canada’s unemployment rate climbed to 9.6 per cent in January as 212,800 jobs were erased that month.

The disconnect between so-called Main Street and Bay or Wall streets is not new, but has been accentuated during the most “asymmetrical recession” in Canadian history, said Tal.

Retail investors with healthy cash balances have increased market volumes and contributed to frenzied buying that propelled stocks like GameStop and BlackBerry Inc. 

The TMX Group, which runs the Toronto Stock Exchange, has noted that amid an increase in volumes, the proportion of retail trading peaked at 45 per cent of total volume traded in January, compared with an average of 35 per cent a year earlier.

“The things that are underlying the strength in retail trading are drivers that are going to continue for some time,” TMX chief executive John McKenzie recently told analysts on an earnings call.

He pointed to the low interest rate environment that supports market valuations, a large work-from-home culture right now and continuing growth in retail trading applications.

Famed investor Jeremy Grantham, who has predicted some past bubbles, now says that the bull market that began in 2009 has “matured into a full-fledged epic bubble” featuring “extreme overvaluation, explosive price increases, frenzied issuance and hysterically speculative investor behaviour.” 

“I believe this event will be recorded as one of the great bubbles of financial history, right along with the South Sea bubble, 1929, and 2000,” he wrote in a commentary posted on his company website.

“These great bubbles are where fortunes are made and lost — and where investors truly prove their mettle.”

While some stocks are overheated and could burst, Tal doesn’t see that happening for the whole market.

“I think that clearly we have to distinguish between the speculative pockets everybody’s talking about and the general market,” he said.

“Of course there’s always risks that it will be dragged into it but at this point it doesn’t seem to be a reasonable scenario.”

Massive fiscal and monetary stimulus is propping up markets, observers say, unless earnings collapse and central banks tighten their policies.

Yet Federal Reserve chairman Jerome Powell said last week that the U.S. central bank will remain dovish until employment fully recovers.

Erik Bregar, head of currency strategy at the Exchange Bank of Canada, thought that the GameStop Reddit frenzy might have taken some speculative excess out of the market.

“But as soon as those stocks crashed, everybody breathed a sigh of relief and bid the market up again,” he said in an interview.

“It’s hard to kill this thing … you can make lots of fundamental arguments that it shouldn’t be this high, but it hasn’t paid to bet against it just yet.”

He said there’s just too much positive news and widespread expectation that the global economy will be strong in the second half of the year as COVID-19 vaccinations progress.

“I continue to believe that stocks are going to represent good value as we move forward here throughout 2021,” said Mike Archibald, vice-president and portfolio manager with AGF Investments Inc.

He said unlimited liquidity and people putting their saved money into the stock market are key drivers for its growth.

In fact, the savings rate and cash deposits have increased by more than 10 per cent the last two quarters, the highest level on record, says Brian Belski, chief investment strategist at BMO Capital Markets.

“Yes, valuations appear stretched at first glance, but they also need to be considered within the context of historically low interest rates and little inflation, ingredients that are likely to persist throughout 2021 and beyond, in our view,” he wrote in a report.

“When viewed through this lens, we believe it is not unreasonable for market valuation to sustain (or even expand slightly) from its current level.” 

Some areas of the market, including cannabis stocks, cryptocurrency and parts of technology are “frothy,” but other investments remain attractive, said Archibald.

“By and large if you look at what I would call solid, stalwart companies … those stocks still appear to be reasonably priced to me and I still think there’s good upside potential for a number of those businesses.”

It’s natural and healthy for markets to pause after strong runs. Stock markets are forward-looking and anticipate where things are going in the future, not where they stand now.

“If you can look beyond the next few months, the outlook is looking extremely bright,” said Candice Bangsund, portfolio manager for Fiera Capital.

A near-term correction of five to 10 per cent is possible and should be viewed as a buying opportunity, but massive spending is putting a floor under any big movements downward, she said.

Besides, we won’t know if we are in a sustained rally or a speculative bubble “until it is in the rear-view mirror,” Kristina Hooper, chief global market strategist at Invesco, wrote in a note.

“And it really doesn’t matter for longer-term investors. The reality is that market rallies and corrections occur, but the trend line for stocks over the long run is upward.”

This report by The Canadian Press was first published Feb. 14, 2021.

Ross Marowits, The Canadian Press

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Canadian dollar clings to this week’s gains as oil climbs

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Canadian dollar

By Fergal Smith

TORONTO (Reuters) – The Canadian dollar was little changed against its broadly stronger U.S. counterpart on Wednesday, holding on to this week’s gains as oil prices rose and domestic data showed the value of building permits scaling a record high in January.

The loonie was trading nearly unchanged at 1.2629 to the greenback, or 79.18 U.S. cents. Since the start of the week, it has advanced 0.9%.

Canada‘s “strong” GDP data and the rally in oil prices have helped underpin the Canadian dollar, said George Davis, chief technical strategist at RBC Capital Markets.

The price of oil, one of Canada‘s major exports, settled 2.6% higher at $61.28 a barrel, boosted by a huge drop in U.S. fuel inventories and expectations that OPEC+ producers might decide against increasing output when they meet this week.

Canadian building permits rose 8.2% in January from December to C$9.9 billion, surpassing the previous record set in April 2019, Statistics Canada said.

On Tuesday, data showed that Canada‘s economy grew at an annualized rate of 9.6% in the fourth quarter and likely rose again in January, boosting speculation the Bank of Canada will reduce its bond purchases soon.

The central bank is due to make an interest rate decision next Wednesday.

A break of 1.2587 would add “to positive CAD momentum,” while the currency could find buyers at 1.2655, Davis said.

The U.S. dollar rose against a basket of major currencies as investors priced for strong U.S. growth relative to other regions.

Canadian government bond yields were higher across a steeper curve in tandem with U.S. Treasury yields. The 10-year rose 7.6 basis points to 1.401% but was trading well below Friday’s 13-month high at 1.501%.

 

(Reporting by Fergal Smith; Editing by Jonathan Oatis and Peter Cooney)

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UK extends job support, tax breaks for pandemic-hit economy – Lethbridge News Now

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U.K. public borrowing has risen to levels not seen since World War II as the government seeks to cushion the fallout from COVID-19, which has reduced gross domestic product by 10% and cost more than 700,000 people their jobs. Projections released Wednesday by the Office for Budget Responsibility show that the economy will still be 3% smaller five years from now than it would have been without the pandemic.

Sunak said government support programs have succeeded in mitigating the impact. The unemployment rate is now expected to peak at about 6.5%, rather than the 11.9% forecast last July, he said, citing estimates from the Office for Budget Responsibility. The economy is forecast to grow 4% this year and 7.3% in 2022.

On Wednesday, Sunak announced plans to extend those support programs for six months. They include a furlough program, under which the government pays 80% of the wages for private employees unable to work during the pandemic, as well as grants for self-employed workers, a temporary increase in welfare payments and tax relief for businesses.

Looking to the future, Sunak said the government will in 2023 increase corporation tax to 25%, from the current rate of 19%, and freeze personal income tax thresholds, which will increase revenue as inflation boosts incomes.

But opposition leader Keir Starmer accused Sunak of failing to address deep-seated economic problems and banking on a “consumer spending blitz” to bail out the economy.

Starmer said the budget fails millions of key workers who are having their pay frozen, businesses swamped by debt, and families paying higher local property taxes.

“The central problem in our economy is a deep-rooted insecurity and inequality, and this budget isn’t the answer to that,” Starmer said. “So rather than the big, transformative budget that we needed, this budget simply papers over the cracks.”

Ian Blackford, the Scottish National Party’s leader in Parliament, criticized Sunak for continuing a strategy of temporary support that leaves businesses and consumers unsure of the future.

The budget leaves Scottish voters with a clear choice as the SNP campaigns to hold a second referendum on independence from the U.K., Blackford said.

“For the people of Scotland, this budget comes at a critical moment of choice,” he said, echoing Sunak’s language. “Post-Brexit and post-pandemic, Scotland now has a choice of two futures: The long-term damage of Brexit and more Tory austerity cuts, or the opportunity to protect her place in Europe and to build a strong, fair and green recovery with independence.”

___

Follow AP coverage of the virus outbreak at:

https://apnews.com/hub/coronavirus-pandemic

https://apnews.com/hub/coronavirus-vaccine

https://apnews.com/UnderstandingtheOutbreak

Danica Kirka, The Associated Press

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UK extends job support, tax breaks for pandemic-hit economy – North Shore News

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LONDON — Britain’s treasury chief on Wednesday announced an additional 65 billion pounds ($91 billion) of support for an economy ravaged by the coronavirus pandemic, extending job support programs and temporary tax cuts to help workers and businesses in his annual budget.

Chancellor of the Exchequer Rishi Sunak told the House of Commons that it is too soon for the government to rein in spending, saying that his plans would “protect the jobs and livelihoods of the British people” through September as the government slowly lifts lockdown restrictions that have shut businesses across the U.K.

At the same time, he said Britain must be prepared to cut the deficit, announcing plans to increase the tax on corporate profits and boost revenue from personal income taxes in 2023.

“An important moment is upon us,” Sunak told the House of Commons. “A moment of challenge and of change. Of difficulties, yes, but of possibilities, too. This is a budget that meets that moment.”

U.K. public borrowing has risen to levels not seen since World War II as the government seeks to cushion the fallout from COVID-19, which has reduced gross domestic product by 10% and cost more than 700,000 people their jobs. Projections released Wednesday by the Office for Budget Responsibility show that the economy will still be 3% smaller five years from now than it would have been without the pandemic.

Sunak said government support programs have succeeded in mitigating the impact. The unemployment rate is now expected to peak at about 6.5%, rather than the 11.9% forecast last July, he said, citing estimates from the Office for Budget Responsibility. The economy is forecast to grow 4% this year and 7.3% in 2022.

On Wednesday, Sunak announced plans to extend those support programs for six months. They include a furlough program, under which the government pays 80% of the wages for private employees unable to work during the pandemic, as well as grants for self-employed workers, a temporary increase in welfare payments and tax relief for businesses.

Sunak cheered business leaders by offering a tax credit of up to 130% of the money companies invest in expanding and improving their operations. Sunak said the credit is expected to increase investment by 10% or 25 billion pounds over the next two years, creating jobs and boosting economic growth.

Stephen Phipson, chief executive of Make UK, described the policy as bold.

“Manufacturers have strong intentions to invest in capital equipment as well as digital and green technologies which are crucial for our long-term recovery,” he said. “Today’s announcement should help turbocharge investment to ensure that those plans turn into reality in the short-term.”

Looking to the future, Sunak said the government will in 2023 increase corporation tax to 25%, from the current rate of 19%, and freeze personal income tax thresholds, which will increase revenue as inflation boosts incomes.

But opposition leader Keir Starmer accused Sunak of failing to address deep-seated economic problems and banking on a “consumer spending blitz” to bail out the economy.

Starmer said the budget fails millions of key workers who are having their pay frozen, businesses swamped by debt, and families paying higher local property taxes.

“The central problem in our economy is a deep-rooted insecurity and inequality, and this budget isn’t the answer to that,” Starmer said. “So rather than the big, transformative budget that we needed, this budget simply papers over the cracks.”

Ian Blackford, the Scottish National Party’s leader in Parliament, criticized Sunak for continuing a strategy of temporary support that leaves businesses and consumers unsure of the future.

The budget leaves Scottish voters with a clear choice as the SNP campaigns to hold a second referendum on independence from the U.K., Blackford said.

“For the people of Scotland, this budget comes at a critical moment of choice,” he said, echoing Sunak’s language. “Post-Brexit and post-pandemic, Scotland now has a choice of two futures: The long-term damage of Brexit and more Tory austerity cuts, or the opportunity to protect her place in Europe and to build a strong, fair and green recovery with independence.”

___

Follow AP coverage of the virus outbreak at:

https://apnews.com/hub/coronavirus-pandemic

https://apnews.com/hub/coronavirus-vaccine

https://apnews.com/UnderstandingtheOutbreak

Danica Kirka, The Associated Press








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