Market update - Back to the Business in September
We hope everyone enjoyed the warm weather months, and got some much deserved ‘R and R’!
Hundreds of new words are added to the dictionary each year, and it often takes months of consideration to decide which ones. Here’s a list of our favourites for 2021!
Definition: The action of becoming or acting like an adult
It’s often used by young people when they talk about doing tasks that are essential to every-day life – like cooking meals, buying insurance, or paying taxes.
How to use it: My roommates and I are adulting during lockdown. We clean the whole house every Saturday!
2. Awe walk
Definition: Taking a walk outside and making an effort to look at the things around you
The word was actually coined by the authors of a recent psychological study, which found older people who took awe walks felt more positive and less stressed over time.
How to use it: Today on our awe walk we noticed a tree we’d never seen before.
Definition: Reading the news on social media and expecting it to be bad – so much so that you become obsessed with looking at updates
Doomscrolling is when you become obsessed with staying up to date with bad news. It’s a combination of the noun “doom” and verb “scroll” – and was made popular by the journalist Karen Ho last year.
How to use it: I was doomscrolling on Twitter today while reading about Covid-19 cases. I think it’s why I feel so anxious now.
Definition: a teenager during the COVID-19 pandemic
Do you know a “quarenteen?” It’s another word that’s been observed by Cambridge Dictionary – but hasn’t been added quite yet. If it is added, quarenteen will be a homophone for the word “quarantine.” It’ll also be a compound noun of “quarantine” and “teenager.”
How to use it: My sister is a quarenteen and spends a lot of time on TikTok.
Definition: Having a need for attention or approval
We know what you’re thinking: doesn’t thirsty mean needing to drink? Well, Merriam-Webster added a new definition of the word last year. “Thirsty” means having a strong desire for attention – especially on social media. Thirsty is informal, and it’s mostly used by young people.
How to use it: My brother is thirsty. He posts so many photos of our dog Jellybean on Instagram because he wants her to be a dog model.
Definition: Something that seems true but isn’t backed up by evidence
The word “truthiness” became popular after American comedian Stephen Colbert talked about it on his show The Colbert Report back in 2005. It was meant to be a joke, but many dictionaries have now included the word – including Merriam-Webster. With so much disinformation going around right now, we think it’s a great word for 2021.
How to use it: In this class, you can’t speak truthiness and expect to get away with it.
Definition: An abbreviation for work (or working) from home
The word “WFH” was added to Merriam-Webster last April – when well, many people were WFH! This is an important word to know if you become part of an English-speaking workplace this year.
How to use it: My co-workers say they’re WFH on Slack everyday.
…Now back to the economic stuff.
The investment backdrop remained risk-friendly during the Summer months, as evidenced by the spectacular resilience of the U.S. S&P 500. The stock Market Index has challenged its 50-day moving average three times since June and eight times since the beginning of the year, bouncing higher on all occasions (chart below).
It has now been almost ten months (219 business days) since the U.S. stock market last experienced a decline of at least 5%, something that historically happens every three months, on average (chart below).
While risk appetite remained high, demand for safer assets such as U.S. Government Bonds also proved to be strong. Accordingly, 10-year Treasury yields continued to decline in July and rose only modestly in August, a downward trend favouring more defensive and growth stocks (chart below).
Indeed, while the cyclical sectors of the S&P 500 remain among the top-performing assets year-to-date, the last three months have seen their competition with growth stocks tighten significantly. Concurrently, the gap between the dominant U.S. market and foreign equities – particularly Emerging Markets – has widened to the advantage of our neighbours to the south (chart below).
On the economic front, the latest corporate earnings have come in very strong. The S&P 500's expected earnings growth for 2021 now stands at 46%, the highest since records began (chart below).
U.S. job creation, which is of primary importance given its influence on the future path of U.S. monetary policy, has gained traction with an average monthly increase of +832,000 jobs over the past three months. At this pace, employment could return to pre-pandemic levels by March 2022 (chart below).
Clearly, the issue is not demand for workers – there are more than 10 million job openings – but rather supply, an imbalance that should ease with the expiration of enhanced unemployment benefits and the return of in-person teaching this Fall.
As for inflation, figures remained high for the most part. Yet, price increases still appear to be largely influenced by factors specific to the pandemic, as highlighted by an analysis from the San Francisco Federal Reserve.
In sum, the macro-financial picture remained rather benign over the Summer, with most assets recording gains and the economic recovery proceeding without major hiccups. Yet, uncertainty is on the rise on several fronts.
Without returning to crisis status, it is increasingly clear that the COVID-19 pandemic will continue to cloud the outlook in the short to medium term. For now, the spread of the Delta variant in developed countries has been met with a moderate increase in deaths (chart below). However, recent data out of Israel – the first country to reach vaccination coverage of over 50% in March – points to a reduction in the efficacy of Pfizer's vaccine over time and against the Delta variant. Cases and also hospitalizations are on the rise in the country that had abandoned virtually all forms of restrictions until recently. By comparison, the situation in UK hospitals – a nation largely covered by AstraZeneca's vaccine – doesn't seem to be as problematic at the moment, as shown by data compiled by the Financial Times (chart below)
Solutions, such as the third dose for people at higher risk, are already being put in place. Nevertheless, the likelihood that the health situation will undermine consumer sentiment (and thus economic recovery) is increasing as a result. In fact, the University of Michigan's Consumer Sentiment Index has already fallen sharply in the wake of the new wave of contagion in the past months.
Moreover, it appears that exceeding growth expectations is already becoming increasingly difficult. For the first time since June 2020, the Global Economic Surprise Index just crossed into negative territory, a typically more challenging environment for Equity markets.
Global economic growth will inevitably slow in the coming months. It should nonetheless remain above its long-term trend (chart below), supported by a substantial savings surplus, among other things. Consequently, we remain relatively optimistic on the potential for equities to outperform over a cyclical horizon, with recession risks still distant.
That said, after a fairly profitable period, the near-term risk/return outlook is no longer as compelling. Heightened pandemic uncertainty along with shifts in monetary conditions have the potential to add to the recent string of negative economic surprises. Furthermore, any upward moves in real interest rates which recently hit a new all-time low (chart below), would not only pose a challenge for bonds, but also for equities, whose valuations depend on the measure.
Lastly, looking at the Loonie - after peaking near 83 cents U.S. ($1.20 CAD/USD) in May, the Canadian dollar hit a low of 78 cents U.S.($1.28 CAD/USD) in August. Bouts of risk aversion would certainly see the Loonie retreat further, but interest rate differentials continue to point to a strengthening C$ beyond the immediate risks to the global economic outlook. In this regard, our colleagues at NBF Economics and Strategy project a modest appreciation to 81 cents U.S.($1.24 CAD/USD) by year-end.
As always, please feel free to reach out to any of our team members to discuss any of your financial matters.
- The Creed Capital Management Team