Author: Danny Popescu | August 30, 2021
While it’s tempting to get caught up on the high returns markets can sometimes deliver, the reality is that in practice, no investor wants to see a 30% decline in their accounts during periods of contraction. We also must not forget “The Lost Decade” being the first decade in this millennium where global markets saw significant volatility while delivering very little returns to investors. With high public equity valuations and fundamentals having gone out the window, most sophisticated investors including pensions plans have continued to reduce their allocation to public equities in favour of more reasonably valued private securities.
Public equities having been in a sideways trading pattern for a few months now. While we finally saw a recovery last week, the level of recovery has occurred only three other times in 2021. A primary driver last week was the announcement on Friday by the Chair of the Fed, Jerome Powell, at the conclusion of the annual Jackson Hole Symposium. Some changes are on the horizon for monetary policy but are not imminent. The Fed’s current program of buying $120 Billion in bonds each month, which injects liquidity into capital markets, will likely be “tapered” by the end of the 2021. The liquidity (along with low interest rates) encourages personal and corporate borrowing to fuel economic growth.
Secondly, the need to temper inflation with an interest rate increase is being handled with extreme care. The major concern is that a rate rise now will cause lasting damage to a temporary, pandemic-recovery related period of price increases. The need to act is reduced because inflation is limited to a narrow band of goods and services, the areas with the highest inflation are moderating, wages are not positioned to support further inflation growth.
After hitting an 8-month low on August 20th the Canadian dollar has risen sharply, 1.6% last week. The TSX relied heavily on the results of the major banks who bested profit expectations based on reduced loan-loss provisions and increasing retail banking performance. The banks’ collective performance of quarterly profit above $15 Billion caused Trudeau to propose increased taxation on large financial insitutions.
Looking ahead, Canadian real Gross Domestic Product (GDP) for the second quarter is scheduled for release along with July’s trade balance, labour productivity and building permits.
In the U.S., pending home sales, construction spending, goods and services trade balance, and factory orders will be announced. The most important data, especially affecting monetary policy, on the schedule is August employment numbers, which includes labour force participation and unemployment. A number of Purchasing Managers Indices (PMI) will also be released by Markit and ISM.
Globally, Japan retail sales, industrial production, unemployment and consumer confidence will be released. Eurozone inflation, Germany consumer inflation U.K. markets are closed for the Summer Bank Holiday.
Have a good week!
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