The major indices except for the tech-laden Nasdaq endured another week of declines, the fourth in a row. The Canadian TSX lost 0.8%, bringing the year-to-date total to -5.8%, the US S&P 500 fell 0.6%, reducing the year-to-date to 2.1%, and the MSCI World index dropped 4.2%, taking the year-to-date return to a negative -10.1%. In the US, the larger cap indices proved to be more resilient than the broad-based S&P 400, which fell at 3.21% and the Russell 2000, which slid 4.45%. Both indexes are in negative territory for the year to date, 11.99% and 11.65% respectively. The energy sector in the US and Canada endured some of the most significant declines as oil and natural gas prices declined.
On the economic front, the week produced mixed data. Real estate is one of the bright spots in the US and Canada. Existing and new home sales continue to show strength and, in some regions and categories, are setting records. The weekly initial claims data for the US rose slightly to 870,000, while the continuing claims slid somewhat to 12.6 million from 12.7 million. Both data points were less than consensus. The manufacturing PMI came in marginally stronger at 53.5 versus a consensus of 53.2, and the services PMI 54.6 vs. 54.7 consensus. A number above 50 indicates expansion. Both indicators, while indicating the expansion is continuing, show a more tepid rate compared to the snapback experienced late in the second quarter.
In testimony before the Senate Banking Committee, the US Fed Chairman Powell warned of mortgage defaults if the government cannot provide additional stimulus. He is concerned that as consumers spend the last of the fiscal stimulus, it could force a reduction in spending and ultimately could impact their ability to pay rent or a mortgage. This is not the first time Chairman Powell has alluded to the need for additional fiscal stimulus to accompany monetary stimulus. On a more positive note, the President of the St Louis Fed, James Bullard, stated he believes the economic rebound will continue as “businesses learn how to produce products and services safely using simple, existing technology.” He went so far as to say that very rapid third-quarter GDP growth may put the US economy within reach of a sort-of full recovery by the end of 2020″.1
On the health front, rising COVID cases in Europe, Canada and the US are causing concerns over renewed restrictions and reversals of re-openings. News that a vaccine is highly unlikely until mid-2021 tempered optimism that a fix is near, allowing the return to normalcy. Then, it will become a concern about availability and effectiveness. The impact of COVID will be with us longer than any hoped and will continue to be a source of worry for investors. The effect on small business revenue is staggering with revenue 21% lower. Spending is 25% lower in US restaurants compared to the first of the year. The view of a “V”-shaped recovery is morphing into a “U” shape.
Two trends have emerged as we navigate these troubled waters. The first is the shift in consumer spending from services to goods as witnessed in both Canada and the US, with retail sales reaching levels above pre-COVID. The second trend emerging is the increase in savings rate as a percentage of disposable income. In Canada, households saved 28% versus the pre-COVID rate of 2% to 3%. In the US, the saving rate jumped to 18% versus 9%, the historical average. The lowest interest rates in history could also influence the savings rate trend, as mentioned before in previous weekly comments. We expect the increased savings rate to continue until we have a more normal interest rate environment and political stability, which is looking more unsettled every day.
It is interesting to note that as we witness the political turmoil south of the border, as difficult as it may be to believe, the US dollar is rebounding against almost all currencies. Suppose the USD’s strength is beginning a new trend where investors and traders feel safe despite the US leadership. What does that say about investor and trader views of other country leaderships, including Canada?
Warren Gerow is an independent investment wealth consultant to Sightline Wealth Management.
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