Lexicon Financial Group Weekly Update
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Major markets around the world pulled back modestly last week – maybe Labour Day in North America had something to do with that. Investors continue to scratch their head about the impact of the rapidly spreading “Delta variant” on the broader economic reopening. And now we’re starting to hear about the “Mu” variant. Some parts of the world are entering another round of lockdowns to deal with the virus, while others – notably parts of the United States – are opening their economies while dealing with the increase in case counts that have resulted. Markets don’t appreciate uncertainty, and it showed – for the week ending September 10 the S&P500 and Nasdaq were down 1.69% and 1.61%, respectively for the week. This needs to be put in context, however, since it was less than a month ago that these major indices both reached all-time highs. In Europe, the Euro Stoxx 50 index (large European companies) also fell by 1.78% and in Canada the S&P/TSX fell by 0.90%, highlighting just how interconnected developed markets have become. (1)
Canadians are, as you know, returning to the polls on September 20 after Canadian Prime Minister Trudeau called a snap election with the hope of turning his minority government into a majority. Next week we’ll see campaigns ratchet into higher gear, with each party hoping to build momentum on the nationally-televised leaders’ debates from the past week. The possible impact of the outcome of this election on the markets will reveal itself once the dust has cleared and a winner is announced.
From a global perspective, the business news cycle continues to be dominated by the response to the COVID-19 virus. In the United States, President Biden has lost his patience, and last Thursday came out firing, attacking the anti-vaccine movement and mandating widespread vaccination and testing. The new measures in the US would apply to about two-thirds of all US employees as it targets any business with more than 100 employees. This is clearly the most aggressive stance taken to date, and will likely be the subject of legal challenges in the US. We’ve come to expect divisive politics in the United States, but it will be interesting to see the response from investors to this news. Markets generally love stability, so there are expectations of stability returning to the markets now that a vaccination plan – even if it is not universally supported -- has been put forward.
Consumer sentiment plays a big role in driving the domestic economy. In the US, as measured by the University of Michigan Consumer Sentiment Index, the Delta variant, higher inflation and slower wage growth resulted in a decline in consumer confidence in August of 2021. The impact of Hurricane Ida and the devastation it wrought has yet to play out in economic data, but I can’t imagine it boosting consumer confidence. This usually translates into consumers spending less, which has a trickle-down effect on business – especially small business. How much will this drop in consumer confidence impact investment markets? Hopefully the pictures gets clearer when new data is released around September 17.
On the inflation front, August 2021 consumer price data for the US will be released September 14. Inflation has been in the news a lot lately, but if you look more deeply into the numbers, it seems to be most pronounced in prices of food and energy. It will be interesting to see if this trend continues – we all need to eat and an increase in fuel costs adds to the price of almost every product. Again, the markets seem confident that energy price fluctuations as a result of Hurricane Ida would be temporary at best.
It is useful to pause and review longer term information from financial markets, to ensure that client portfolios are properly managed and diversified. We took a deeper look at the S&P500. Interestingly, in September 2011 “information technology” represented approximately 18.7% of the index. Ten years later, it represented 28.0%. The growth is due in large part to the rise of technology companies, especially the “big five”: Facebook, Apple, Amazon, Google and Netflix. However, it also means that investors who value diversification and did not adjust their portfolios along the way may find themselves more concentrated in technology stocks than they might want to be. It’s something to think about when building portfolios – underlying economies change all the time and must be factored in to long-term investment management decision making.
On the flip side, “consumer staples” -- companies that produce household goods, food, beverages, hygiene products and other items that people are unwilling or unable to eliminate from their budgets – have fallen as a percentage of the overall US economy, from 11.6% in 2011 to only 5.8% in 2021.
I’m a sports fan. Most major sports seem to be back in full swing of having games with fans in attendance. But after seeing professional sport played in empty stadia last year I confess it is shock to my system seeing 65,000 fans show up to cheer on their home town Tampa Bay Buccaneers kick off the 2021 National Football League season.
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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.
(1) Data provided by Factset, showing the price returns of all the major indices i.e. (S&P TSX, S&P500, NASDAQ composite) for the period between September 6th 2021 and September 10, 2021 in its respective local currency.