WHY THE STOCK MARKET IS STRANGE AND GETTING STRANGER. MARTIN PELLETIER EXPLAINS
NO LOVE FOR COMMODITIES
Investors have yet to take a summer vacation from the markets as they remain quite active providing support on any weakness by stepping in and buying each dip. That said, in the midst of this positive environment some peculiarities are developing that are worth keeping a very close eye on.
In particular, we have noticed five oddities that could have an impact not only on investors’ portfolios but on other areas of their financial well-being as well.
RATE HIKES AMID RECORD HOUSEHOLD DEBT
The Bank of Canada responded to Canada’s latest economic data including an impressive first quarter GDP print by signalling that it is preparing to raise it benchmark rate for the first time in seven years.
The majority of our economic growth has come from consumers who have ramped up their spending, feeling confident because of skyrocketing home prices. Banks have increased their lending accordingly, sending household debt- to- income to record highs at 166.9 per cent, the highest level in the G7.
As long as interest rates remain at low levels this shouldn’t be a problem, as the interest- only debt- service ratio in Canada is at a record low of 6.1 per cent, according to a recent Reuters report.
That said, this could be about to change if the market is correct with its expectation of one rate hike by the end of 2017, which could be a good test of just how dependent our economic growth is on housing and debt.
OIL AND THE LOONIE DECOUPLE
Looking l onger- t erm, there is a strong relationship between the Canadian dollar and the price of oil. This makes sense given the nature of our exports, primarily to the U. S. Interestingly though, the loonie has recently delinked from this relationship as speculators focus in on the potential for an interest rate hike by the Bank of Canada.
Contrary to what some may believe, a lower dollar has been a positive to most Canadians, especially those in the real estate market, because it provides a great incentive for foreigners looking to purchase properties in Canada.
Meanwhile, oil prices have recently weakened again despite attempts by OPEC to talk them back up again.
We wonder what the Canadian economy will look like in the event of an interest rate hike, a higher loonie and falling oil prices.
COMMODITIES GO AWOL
Equity markets, especially in the U. S., are continuing to set new highs despite commodities continuing to sell off.
According to Katusa Research, the ratio of the S& P Commodity Index to the S&P 500 has now reached record low levels, exhibiting a similar profile to what transpired during the tech bubble of 2000. This means one of three things: stocks are overly expensive, commodities are overly inexpensive or the market is correctly factoring in economic growth that has been so efficient that we no longer rely on commodities like we used to.
TECHNOLOGY, PART TWO
While many are saying its different this time around in regards to the rapid rise in technology stocks, that’s not how it looks to us. Investors have always been prone to return- chasing and have herded into tech stocks like the FANGs (Facebook, Apple, Netflix, and Google) over the past three years at an astounding pace.
Consequently, you now have companies like Tesla with a market capitalization of more than US$61.1 billion which is larger than Ford’s US$ 44.7 billion with only 76,000 cars sold last year versus Ford’s 6.65 million.
The recent Amazon acquisition announcement of Whole Foods wiped out $ 40 billion of market value from other food companies including powerhouses like Costco and Walmart.
Apple and Alphabet’s combined market cap is now larger than the entire financial sectors in Japan and the Eurozone, according to a recent Market Watch report.
BONDS AND STOCKS MOVING TOGETHER
Bond investors have taken the opposite stance of equity investors and as a result bond and stock prices have both been rallying together since mid- January. Whenever this happens, it’s time to take notice as it isn’t sustainable longer- term. The big question is who will be right: the conservative bond investors or the tech focused stock investors?