Canadian stocks finished the week flat but negative year-to-date. US and international equities pulled back with an increase in volatility. For the week, the S&P 500 fell 2.51%, the tech-laden Nasdaq continued the previous week’s decline ending the week down 4.06%, bringing the index into correction territory after hitting all-time highs, and EAFE also fell off 1.4%. The broader indices in the US also sold off during the week. Like the previous week, there was no single event or catalyst trigger for the sell-off.
In economic news, the Labor Department reported for the week ending September 5, the adjusted initial claims of 884,000 versus the expected number of 850,000. The previous week was adjusted up by 3,000 to 884,000.
The seasonally adjusted insured unemployment rate was 9.2% for the week ending August 29, slightly up .1 from the previous week. Continuing claims came in at 13,385,000 compared to the expectation of around the 13 million mark. The stalling of declining initial claims came as no surprise as re-opening due to COVID slowed and, in some cases, reversed. The stalemate in Congress over the next stimulus package weighed on investor sentiment. On a positive note, July job openings beat expectations, and the gauge of small business optimism rose in August after falling in July. The headline inflation data released on Friday showed an increase to .4% (ex-energy and food costs). On the commodity front, oil came under pressure as Saudi Arabia cut prices for some customers. Oil fell below $40.00 a barrel for the first time since July. Precious metals consolidated at slightly lower levels from the previous highs.
Another factor influencing investor sentiment is the financial pressures of US cities and states. The financial condition is becoming a concern, especially in those cities where protesting and looting are starting to take a toll on businesses. The realization that the tax base is eroding as the exodus continues from cities to suburbs and out of state is becoming a wake-up call, not only for the leadership but also for those remaining, who will ultimately be forced to pick up the tab. With schools starting back, it is reasonable to expect a spike in COVID or a second wave as we enter the flu season. Further influencing investor sentiment is the increasing polarization as we get closer to the date of the election. We expect the result will indeed be challenged in court. Any delay in results will not be favorable for investor sentiment and is expected to increase equity market volatility.
The US is not the only country going through a difficult time. This weekend in Paris, riots occurred as the yellow vests once again squared off against the police. In the spring, French elections will be hotly contested unless President Macron decides, like New Zealand, to delay the election for health safety reasons resulting from a recent spike in COVID cases. Great Britain is threatening to renege on the EU withdrawal after re-writing some of the previously agreed-to sections last year. The EU is threatening legal action.
In conclusion, it is becoming quite interesting from an investment perspective. The return of capital is becoming more important than the return on capital. The political landscape, reaction to COVID, equity valuations, slow growth economic activity, and exploding government debt are undoubtedly a perfect storm for the investor. We all would like to avoid a storm, but it is clear there are few places to hide.
Warren Gerow is an independent investment wealth consultant to Sightline Wealth Management.
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