Market collapse muddies outlook for Canadian growth
Weak jobs data adds to gloom as investors brace for more shocks, Gordon Isfeld writes.
Financial markets have faced their first big sell-off scare of the year, but investors might have to endure a few more stock shocks in the coming days, weeks or perhaps even through 2018, such is the nature of the beast.
At this point, the most recent data show the Canadian economy still rattling along as predicted, with at slower but more sustainable levels of growth. Equity markets, however, are not doing as well at the moment.
Still, after a surprisingly strong performance in what was forecast to be much milder growth in the second half of 2017, gross domestic product gained 0.4 per cent in November, or 3.5 per cent on an annualized basis.
Overall, the Bank of Canada is forecasting a three-per-cent gain for 2017, followed by a 2.2-per-cent pace this year as the economy adjusts to a more moderate and sustainable pace.
The labour market, as well, enjoyed a trend of strong job growth in 2017 — at 2.3 per cent, or a gain of 423,000 positions, compared with a 229,000 increase in the workforce a year earlier, or a pace of 1.3 per cent. More Canadians found work — in both full- and part-time positions.
Obviously, job creation is not immune to the impact of a slower economy.
January marked the first monthly workforce decline in 16 months — and a whopper loss at that, with 88,000 positions wiped out. Much of that weakness was due to the slowdown in GDP, but also to recent and planned increases in provincial minimum wages.
“We often caution against reading too much into any one month of Canadian employment data, and that holds for both strong reports and weak results,” said Douglas Porter, chief economist at BMO Capital Markets.
Indeed, Friday’s sudden “sour news is at least in part an offset to the unusually strong gains seen late last year, and most likely does not represent the start of new trend,” Porter added.
“However, it does bring the job market back down to Earth, and reinforces the view that the Bank of Canada will proceed ultra-cautiously through the rest of this year.”
The central bank’s trendsetting interest rate is now at 1.25 per cent, set on Jan. 17.
Even before the market gyrations and weak jobs data, Porter said “we were of the view that the bank would wait until the second half of the year before hiking again — these developments only embolden that view.
“At the very least, we can dismiss any chance the bank hikes in March, and April is now looking more like a long shot as well.”
Muddying the outlook for the economy and job creation is the still-unfolding crisis in stock markets — in Canada, the United States and elsewhere.
Here’s what some market experts are saying:
David Dietze, chief strategist at Point View Wealth in New Jersey: “You’ve got a lot of mechanical, computer-driven traders, and they’re looking at various points. And when those points are hit, they’re out of there.
“I just don’t think that humans can rationally change their opinion that quickly from down 100 to up 100,” he added. “People who don’t want to think for themselves, who want to mechanically just kind of ... follow markets and make snap decisions — ultimately, I don’t think that’s going to be a great investment strategy.”
Yana Barton, portfolio manager at Eaton Vance Investment Manager in Boston: “The obvious take-away is volatility is back and I think the market and investors are just adjusting for a new paradigm, and perhaps one that can find an equilibrium where prices of the underlying equities go up while inflation interest rates do as well.”
Barton added that “the fundamental story hasn’t changed, earnings continue to come through very aggressively on the upside.”
Paul Nolte, senior vice-president at Kingsview Asset Management in Chicago: “We’ve had our correction, the economic data is still OK and the earnings for a lot of the companies are doing well, and the (U.S.) tax benefit we’ll see later on this year will also boost up earnings.
“So, when we look at it as a whole, I think this is not a bad opportunity to take a look at portfolios — maybe improve the quality (of the stocks) and pick up some of the very good names that have come down here recently.
“I think we’re still in a good next phase for the markets over then next couple of months.”
We’ve had our correction, the economic data is still OK and the earnings for a lot of the companies are doing well, and the (U.S.) tax benefit we’ll see later on this year will also boost up earnings.