Bad news, good news In 1982, the U.S. unemployment rate started high and finished higher. It entered the year at 8.6% and concluded at 10.8%, its steepest level since the Great Depression. That was the first time that I had paid attention to employment statistics, because I was approaching my college graduation, and I must confess I was worried. (Correctly, as it turned out: I would not land a permanent job until summer 1984.)
To my surprise, stocks surged in 1982. The S&P 500 gained 21.6% on the year, well above its average. That made no sense to me. Not only was unemployment rising, but seasonally adjusted gross domestic product fell during every quarter of 1982. The media called it “the Reagan recession.” (It wasn’t until later that I realized presidents cause neither busts nor booms.)
What I did not know, because I was not then an investor, is that stock prices are only tenuously connected to general economic conditions. For one, stocks anticipate future developments rather than dwell on current affairs. For another, neither employment statistics nor GDP growth directly affect equity prices. The primary drivers are instead two sets of expectations: 1) future earnings and 2) future interest rates, with the latter being used to discount the former.
Disconnected Later I learned that it is difficult to find even an indirect relationship between a country’s GDP growth rate and its future stock-market returns. In perhaps the most widely cited of such studies, London Business School professors Elroy Dimson, Paul Marsh, and Mike Staunton found a negative correlation between national per capita GDP growth and stock performances. (When aggregate GDP growth was substituted, the correlation became slightly positive.)
In theory, expansion floats corporate boats. In practice, many factors affect whether an economy’s general success reaches companies’ bottom lines. Managements may squander their good fortunes by making poor investment decisions. Workers may collect the gains instead, through wage inflation. Or governments may enjoy the benefits, through corruption or excessive taxes. The economy is not the stock market.
This year has powerfully reinforced that lesson. Unofficially, U.S. unemployment is currently far above 1982’s apex, although the official numbers are lower, as they do not count workers who have been sidelined but who expect to return to their positions. At negative 4.8%, the first quarter’s USGDP slide was deeper than any suffered in 1982, and of course that was only the beginning. The second quarter’s GDP decline is forecast to approach 30%.
Yet stocks have rallied strongly, even as the economic news has deteriorated. (When stock prices began to rise in late March, the consensus second-quarter GDP outlook was for an 18% decrease. Since then, stock prices have steadily climbed, while the GDP predictions have steadily fallen.)
The Few and the Many To be sure, the headlines do not relate the full story. The S&P 500 has recovered so powerfully as to make its year-to-date loss of 12% unmemorable, aside from the abruptness of the path. Meanwhile, small-company indexes have fallen twice that far, and small-value indexes, which represent the largest number of publicly traded companies, are down 30%. Those are genuinely poor results.
Two additional factors have weakened the already tenuous link. One is the increasing divergence between the “have” companies and the “have nots.” The other has been the federal government’s aggressive intervention.
While most businesses are at best struggling, a happy few are booming. This fact is not only reflected in the performance gap between the large- and small-company indexes, but also by the disparity in fortunes between public and private companies. Because publicly traded firms operate nationally (if not internationally), they tend to be technologically capable and therefore positioned to compete during social distancing. Local businesses, in contrast, are likelier to be brick-and-mortar affairs that are hampered by movement restrictions.
In other words, that millions of workers have been released by local businesses–or national firms in industries that have been devastated, such as airlines and hotels–is relatively immaterial to the stock market’s leaders. As long the layoffs don’t lead to a ripple effect, wherein the broader economic woes affect their revenues, their stocks quite logically can rise even as other businesses fall.
John Rekenthaler has been researching the fund industry since 1988. He is now a columnist for Morningstar.com and a member of Morningstar’s investment research department. John is quick to point out that while Morningstar typically agrees with the views of the Rekenthaler Report, his views are his own.
This article has been edited for a Canadian audience
TORONTO – Canada’s main stock index was higher in late-morning trading, helped by strength in energy stocks, while U.S. stock markets also moved up.
The S&P/TSX composite index was up 34.91 points at 23,736.98.
In New York, the Dow Jones industrial average was up 178.05 points at 41,800.13. The S&P 500 index was up 28.38 points at 5,661.47, while the Nasdaq composite was up 133.17 points at 17,725.30.
The Canadian dollar traded for 73.56 cents US compared with 73.57 cents US on Monday.
The November crude oil contract was up 68 cents at US$69.70 per barrel and the October natural gas contract was up three cents at US$2.40 per mmBTU.
The December gold contract was down US$7.80 at US$2,601.10 an ounce and the December copper contract was up a penny at US$4.28 a pound.
This report by The Canadian Press was first published Sept. 17, 2024.
OTTAWA – Canada’s inflation rate fell to two per cent last month, finally hitting the Bank of Canada’s target after a tumultuous battle with skyrocketing price growth.
The annual inflation rate fell from 2.5 per cent in July to reach the lowest level since February 2021.
Statistics Canada’s consumer price index report on Tuesday attributed the slowdown in part to lower gasoline prices.
Clothing and footwear prices also decreased on a month-over-month basis, marking the first decline in the month of August since 1971 as retailers offered larger discounts to entice shoppers amid slowing demand.
The Bank of Canada’s preferred core measures of inflation, which strip out volatility in prices, also edged down in August.
The marked slowdown in price growth last month was steeper than the 2.1 per cent annual increase forecasters were expecting ahead of Tuesday’s release and will likely spark speculation of a larger interest rate cut next month from the Bank of Canada.
“Inflation remains unthreatening and the Bank of Canada should now focus on trying to stimulate the economy and halting the upward climb in the unemployment rate,” wrote CIBC senior economist Andrew Grantham.
Benjamin Reitzes, managing director of Canadian rates and macro strategist at BMO, said Tuesday’s figures “tilt the scales” slightly in favour of more aggressive cuts, though he noted the Bank of Canada will have one more inflation reading before its October rate announcement.
“If we get another big downside surprise, calls for a 50 basis-point cut will only grow louder,” wrote Reitzes in a client note.
The central bank began rapidly hiking interest rates in March 2022 in response to runaway inflation, which peaked at a whopping 8.1 per cent that summer.
The central bank increased its key lending rate to five per cent and held it at that level until June 2024, when it delivered its first rate cut in four years.
A combination of recovered global supply chains and high interest rates have helped cool price growth in Canada and around the world.
Bank of Canada governor Tiff Macklem recently signalled that the central bank is ready to increase the size of its interest rate cuts, if inflation or the economy slow by more than expected.
Its key lending rate currently stands at 4.25 per cent.
CIBC is forecasting the central bank will cut its key rate by two percentage points between now and the middle of next year.
The U.S. Federal Reserve is also expected on Wednesday to deliver its first interest rate cut in four years.
This report by The Canadian Press was first published Sept. 17, 2024.
FREDERICTON – New Brunswick‘s finance minister says the province recorded a surplus of $500.8 million for the fiscal year that ended in March.
Ernie Steeves says the amount — more than 10 times higher than the province’s original $40.3-million budget projection for the 2023-24 fiscal year — was largely the result of a strong economy and population growth.
The report of a big surplus comes as the province prepares for an election campaign, which will officially start on Thursday and end with a vote on Oct. 21.
Steeves says growth of the surplus was fed by revenue from the Harmonized Sales Tax and federal money, especially for health-care funding.
Progressive Conservative Premier Blaine Higgs has promised to reduce the HST by two percentage points to 13 per cent if the party is elected to govern next month.
Meanwhile, the province’s net debt, according to the audited consolidated financial statements, has dropped from $12.3 billion in 2022-23 to $11.8 billion in the most recent fiscal year.
Liberal critic René Legacy says having a stronger balance sheet does not eliminate issues in health care, housing and education.
This report by The Canadian Press was first published Sept. 16, 2024.
