The recent economic news is pretty dismal as was expected.  There are over 3 million Canadians that have lost their jobs.  The unemployment rate in the US is 14.7% which is the highest since the great depression.  All the jobs that had been created since the financial crisis have been eliminated. 

Other highlights are that:

  • Oil prices are back up to over $24/barrel after falling negative in price a few weeks ago.  That was more a storage issue than anything else.
  • COVID:
    • 3.9 million cases around the world
    • 2.3 million active cases (this will increase as testing improves)
  • US treasury borrowing $3 trillion, double what they borrowed in all of 2019 
  • Home sales dropped 66% in Toronto, prices down 12% 
  • Re-opening process is starting, US distancing guidelines ended in April
  • Moving to vaccine trials and gearing up for manufacturing.  Might have a more positive impact on markets than fundamentals even though 12-18 months away from production
  • Montreal is opening schools in mid-may, Ontario says the end of May.  Quebec opening stores sooner
  • Bank of Canada saw small business loans and credit lines drawdown, largest drawdown since 1981
  • Many investment managers think the recovery will be u shaped, not a V
  • There is still the possibility for more downside given the economic news won’t be good for awhile

At the same time, stock markets have continued to climb from their lows in March.  As of today (May 8th) the TSX/S&P is down 12.3% and the S&P 500 is down 9.6% which is up considerably from the lows in March.

How does that work?

It doesn’t always make sense, but one thing to keep in mind is that the stock market is a leading indicator, so values are based on future expectations. The reasons that the stock markets are doing better now in spite of the economic news is for a few reasons:

  1. Governments around the world have taken unprecedented steps (i.e. given resources) to support businesses and consumers
  2. Central banks around the world have also taken unprecedented actions towards lowering interest rates, purchasing financial assets to keep things moving
  3. Governments are issuing lots of debt to use for spending – estimates are up to 9 trillion dollars which is good for stocks
  4. It is an election year in the US and the incumbent will do whatever he can to hold power and Trump has used the stock market as his talking point.
  5. Finally, as bad as the economic numbers are, they are slightly less bad than the markets were expecting and analysts were predicting.

Source: 05/06/2020 AGF Flash Update by CEO Kevin McCreadie & and SIA Charts Investments

 

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