Monday, October 11, 2021
Happy (Canadian) Thanksgiving!
Legislators in the United States held a staring contest, and to nobody’s surprise, there was not a clear winner. Markets were holding their collective breath to see if the US government would not be able to meet its financial obligations as it hit its debt ceiling. Instead of dealing with this permanently, elected officials do what it seem like they always do – kick the can down the road to deal with another day. So while the debt crisis is averted, it is only temporary.
That, though, was enough to reinvigorate the market, which saw most major indices reaching or nearing their high water mark, recovering the ground lost in September. For the period ending October 7, the bellwether indices S&P500 in the United States and the FTSE 100 in Europe were both up 0.98% and 0.73%, respectively month-to-date (1).
One of the US's tech darlings, Facebook, dominated the news cycle this past week. Admittedly, I’m not a fan of the platform, but nobody can deny the impact that it has had on many parts of our society. So when the double-whammy of whistleblower testimony followed by an outage last week left users scrambling, Facebook’s share price dropped by 4.02% between close of business September 30 and October 7 (2). We need to wait and see if this is temporary.
It looks like centre-left leaning Olaf Scholz is a step closer to taking the job of German Chancellor, gathering support from the third and fourth place finishers in the recent election. Analysts do not anticipate much change in government policy – Scholz was the finance minister for Germany and Vice Chancellor. That may mean that economically Germany continues to lead Europe, but politically Angela Merkel’s leaves behind big shoes to fill.
Next week promises to be a quieter one on the markets (fingers crossed). Canadians celebrate Thanksgiving, and Americans celebrate Columbus Day. Many states have already decided to move away from recognizing Columbus, choosing instead to use the day to recognize indigenous people. Financial markets in New York will be open and operating, although US bond markets are closed for the federal holiday.
We’ve mentioned it before, but markets will be watching for the October 15 release of the Michigan Sentiment Index. Early indications are that consumer sentiment has been edging upwards in the second half of September. It should be pointed out that the index was quite low as fears of the delta variant dominated the economic landscape for the past few months. What this means for the health of the overall markets remains to be seen, but the data seems to suggest that consumers are not foregoing purchases and spending, merely postponing them. It’s an interesting indicator to keep an eye on.
Other economic data being released next week includes the Consumer Price Index (CPI). For clarity, this is a measure of the average change over time of prices paid for a “basket” of goods and services. It’s a way of estimating the impact price changes have on the average person. The basket contains fuel, food, and even shelter and utility bills. It is a measurement of inflation, which is something that all governments are hoping to keep in check. Interestingly, while inflation has been rising for the past year in most countries around the world, energy costs has been the largest contributor to this rise. Is this because energy prices have been abnormally low during the past few years and are rediscovering their natural price? Certainly energy costs – especially automotive fuel – were lower at the height of the pandemic. In the US, for example, the 18 month average retail price for a gallon of gas has risen from around $1.89/gallon in April 2020 to $3.25/gallon in September, 2021.
Indeed, we need to keep a close watch on energy as prices around the world have been climbing, leading to some anticipated fuel shortages in parts of Europe and especially in the U.K.. That won’t be good for economic development or for keeping inflation in check.
I can’t let the Evergrande story slide. For something that dominated headlines only a week or two ago, it seems to have been put on the back burner. I’m not sure the story is over. Creditors continue to demand more information and transparency. The company continues to wrestle with over $300 billion in debts and has already defaulted on over $100 million in interest payments. These payments don’t stop. They owe another $150 million of interest on loans next week. Financial markets don’t seem overly concerned any more – shinier objects have come along. That doesn’t mean we should stop watching this situation unfold. Fortunately, none of our clients have direct exposure to the Chinese market.
We’ve been writing for some time about how global markets are increasingly interconnected. In financial jargon, this is often referred to as market “correlation”. Two investments are perfectly correlated if they move in lock-step – when one price changes by 3%, the other does exactly the same. For assets that are perfectly correlated, there is no diversification benefit since the changes are identical.
We quickly compared the US and Canadian markets between January 1, 2021 and September 30, 2020 to draw an example. During that span, there was a total of 187 trading days. On 109 of those days (58%), both markets moved in exactly the same direction, albeit in different magnitudes. So if the Canadian market was up, so was the US. On another 29 days (15%), although the markets moved in different directions, the change was less than a half of one percentage point. For example, on January 25, 2021, the US market (as measured by the S&P500 index) fell by 0.15% while Canada (as measured by the S&P/TSX index) gained 0.34%. (3)
Parsing all the numbers takes some time, but the long and the short of it remains -- if you are trying to diversify a portfolio, it’s really important that you understand how they relate to one another. Otherwise you may not be as diversified as you think.
On October 14 we are hosting a live ZOOM event with Marc Liss of Origin Handcrafted. This is part of our “Before the Business” series of live events. Click here to register.
The opinions expressed are those of Craig Swistun and not necessarily those of Raymond James Investment Counsel which is a subsidiary of Raymond James Ltd. Statistics and factual data and other information presented are from sources believed to be reliable but their accuracy cannot be guaranteed. It is furnished on the basis and understanding that Raymond James is to be under no liability whatsoever in respect thereof. It is for information purposes only and is not to be construed as an offer or solicitation for the sale or purchase of securities. Raymond James advisors are not tax advisors and we recommend that clients seek independent advice from a professional advisor on tax-related matters.