Three reasons for investor optimism
Favourable rates, election season and U.S. growth
Canadian stocks just booked what was, by any measure, a crappy month. To the end of July, the S&P/TSX composite was the worst-performing developed-market stock index in the world, falling by nearly five per cent last month and by more than 12 per cent since the start of 2015.
Over the past 12 months, the TSX has dropped by four per cent. That compares unfavourably to the gains posted by the S&P 500 (9.8 per cent), the Dow Jones industrial average (7.1), the Nasdaq (18.8), the Euro Stoxx 50 (19.7), Japan’s Nikkei 225 (34.6) or even Hong Kong’s Hang Seng, which despite a meltdown in Chinese mainland markets is down less than one per cent on the year.
For index investors, at least, it’s been a semi-annus horribilis. It’s not hard to see why. Oil prices hit multi-month lows, commodities remained in the tank, and economic data suggesting a first-half recession weighed on equities.
If you sold in May and went away, as the old chestnut prescribes, you’d have saved yourself a lot of pain. And if earlier this year you had done what the textbook says you should — achieve better diversification by gaining exposure to international stocks — then you’d be resting a little easier in your deck chair right about now.
If you didn’t do all that, well, you might be looking for some comfort in the fact that nothing lasts forever. Maybe you’re scanning the horizon for signs of hope.
Maybe you’re not having much luck. Or maybe you think the TSX’s recent mini-rebound — it notched its sixth straight daily gain on Wednesday — bodes well for better times ahead.
When you look at what’s happening in China, Greece and oil prices — this year’s triumvirate of woe for Canadian investors — the signs are not good.
And yet it’s not all bad news, even in the midst of these summer doldrums. If you’re looking for reasons to believe in a better second half — or maybe a better 2016 — for Canadian markets, then put on your rose-coloured sunglasses and consider the following.
First, we are in for low, low interest rates for the foreseeable future. The Bank of Canada has already shaved 50 basis points off the overnight rate this year, and it can go lower if it has to (even though the likelihood of that is very low, at least until after the recently called federal election).
Cheap money should be broadly supportive of stock valuations, especially if we begin to see that they are having some benefit in the real economy.
We might have started to see that already in Wednesday’s trade data, which showed exports surged in July by 6.3 per cent — the biggest monthly gain in almost a decade. That might suggest the devalued loonie is starting to have the desired effect of making our exports (especially non-energy) more competitive.
Granted, trade data can be volatile, but last month’s figures at least reversed a months-long decline. And they might be an early indication that the economy as a whole started to rebound in June. (Emphasis on “might.”)
Second in our Pollyanna Top Three is the fact that we are heading into elections in Canada this year and the U.S. next year.
U.S. markets and their satellites (the TSX included) tend to outperform in the year before and the year of a presidential election. (It’s not a perfect correlation, of course, but hey, we’re looking for signs of hope here.)
When it comes to the Canadian election, the good-ish news is that it’s unlikely to have any effect whatsoever on stock markets. The little research that’s been done on correlations between parliamentary election outcomes and financial market performance suggests that there really aren’t any. Left-wing, right-wing, minority, majority — it just doesn’t matter much.
Of course, that’s a benefit in the negative, but at least the upcoming election is unlikely to derail any resurgence in market performance. (On the other hand, we’ve never had an NDP government before ...)
Last, but perhaps most importantly, there’s the U.S. economy. The U.S. Bureau of Economic Analysis recently revised its measure of first-quarter GDP growth into positive territory, to 0.6 per cent from the previous revision of -0.2 per cent (which itself was a gain from an earlier estimate of a 0.7 per cent contraction).
The revisions resulted largely from an increase in reported consumer spending, which grew in the first quarter at a healthy pace of 2.1 per cent.
In the second quarter, consumer spending grew at an inflation-adjusted rate of 2.9 per cent, driving overall GDP growth of 2.3 per cent. That was below expectations, but the consumer sector is relatively strong, and that’s important for Canadian exports.
Those June trade numbers showed Canadian exports of consumer goods rose by more than 17 per cent — a record.
Put it all together, and you have, well, maybe not very much. But as you’re contemplating the future from your deck chair, it’s worth remembering that things could always be worse — and they just might get better.