Equity markets ended the week mixed on the back of improving economic and employment news but became muted during the week as concerns surfaced over the resurgence of COVID, reversal of re-openings and the subsequent impact on economic data in later weeks. The markets were led by technology and long-term growth stocks benefitting from “work at home.” In the US, shares of Amazon, Apple, Microsoft and Netflix helped boost the Nasdaq to a record high. The large technology and internet companies have demonstrated resilience during the pandemic, in part as consumer spending patterns increasingly rely on technology for everyday expenditures and business activities. The big loser for the week was crude oil falling below $40 and dragging the sector lower. In Canada, the TSX gained .6%, bringing the total return year-to-date to -7.9%. In the US, the S&P 500 advanced 1.8%, with year-to-date performance coming in at -1.4%, whereas the Nasdaq gained 3.8% for the week, with the year-to-date returns coming in at 18.33%.
As mentioned, there were several positive economic announcements. The PMI (nonmanufacturing Purchasing Managers Index), a measure of business conditions, moved back into expansion territory. Euro-area retail sales surprised on the upside and reported earlier, the PMI advanced to a high of 47.4 compared to the estimates of 46.9 and May’s final reading of 39.4. (A reading higher than 50 indicates a growing economy.) In the US, weekly jobless claims fell to 1.31 million from the previous week’s 1.41 million, taking the unemployment rate to 11.1%. Forty percent of the additional jobs were in leisure and hospitality, causing concerns as states like Florida, Arizona and Texas, which eased restrictions early, are now reversing course, suggesting re-employment may stall. In Canada, 953,000 jobs were added in June – 488,000 full-time and 465,000 part-time jobs – bringing the unemployment rate to 12.3%, down from 13.7% in May. Statistics Canada reported that the real unemployment rate is closer to 16.3% adjusted for those not actively seeking employment. On Wednesday, Finance Minister Bill Morneau published the financial snapshot that predicts a budget deficit of $340 billion this year, or a projected deficit of 16% of GDP, pushing the federal debt to over $1 trillion. With low interest rates and a stated global Central Bank policy of keeping rates low for the foreseeable future, the Minister thinks the higher deficit will be manageable.
COVID continues, in one way or the other, to dominate monetary and fiscal policies. The announcement this week of another US unemployment stimulus package will not include the $600 bonus incentive over employment earnings to stay home. The current package is to expire on July 31. The false restart of the economy over time will more than likely forestall the notion of a “V” shape recovery. Many predict a return to a new normal as early as next year, whereas others predict at least two years before a return to pre-COVID economic conditions. It is hard to fathom how we can return to pre-COVID economic conditions when we know with 100% certainty we will be faced with higher taxes and government fees to pay for the cost of COVID. In Canada, if you remember, the HST was a temporary tax, and yet it is still in place. Any tax is a drag on economic activity and with pre-COVID growth expectations here in Canada basically flat, it will be hard to imagine anything but recessionary conditions in our future. The disconnect between the economy and the equity markets has lulled investors into a sense of “everything will be okay.” This disconnect will eventually come to an end when, at some point, earnings are needed to support equity valuations. Unless, of course, equities and precious metals become the investment of last resort, which is entirely possible when current government debt levels and unfunded promises are considered.
Warren Gerow is an independent investment wealth consultant to Sightline Wealth Management.
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