It is estimated that the consumer drives over 80% of GDP1. So, at a time when consumers, the drivers of our economy, are house-bound and unable to participate in their usual economic activities, why do we have a booming stock market? In their latest conversation, Sightline’s Paul de Sousa and Warren Gerow discuss this dichotomy between Wall Street and Main Street. Specifically, de Sousa and Gerow discuss:
- Earnings: With banks reporting below expectations and more than quadrupling their loan-loss provisions, they are signaling that there may be more trouble to come in their loan portfolios.
- Oil: We entered the week with a possible resolution on the supply side, but when the agreement did not come to fruition, oil finished the week trading around $18.
- Consumer behaviour: Cities in Northern China are “back to normal” but the consumers remain reticent to shop and go out to eat. If consumers here share this reticence, it could mean for a slow recovery, particularly for the entertainment, travel and leisure sectors.
- The federal deficit: In just one year, Canada will have increased its budget deficit by 25%. While some argue we can grow our way out, others argue tax increases or spending cuts will be necessary.
While markets tend to lead the economy, history tells us that after market shocks, it’s common to see a bull rally after the initial drawdown, only to go back and retest the previous lows shortly thereafter. Given the economic conditions we are faced with today, de Sousa and Gerow expect a similar situation to play out.
1. Source: Federal Reserve Bank of St. Louis
Warren Gerow is an independent investment wealth consultant to Sightline Wealth Management.
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