Hello everyone,
Happy June! Or, shall I say, not so Happy June? LOL. The TSX is off 3% from May's close and the S&P 500 is up again, 4% (Source: www.ycharts.com, June 20, 2024), at the time of this writing! The tale of two Indexes, a story worth examining, I think.
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Technology stocks in the U.S. have also been soaring, propelled by AI rocket fuel. Nvidia continues to set record highs and Dell just announced it's building an AI factory with Nvidia to help Mr. Jetson's (Elon Musk) xAI Grok supercomputer (whole other topic) development.
Q1 earnings in the U.S. have been posting results that have generally been positive and supportive of stocks. The expectation of a 7.1% year-over-year increase in Q1 earnings surpasses the pre-earning season estimate of 3.8%. Additionally, over 80% (Bloomberg Intelligence) of reporting S&P 500 companies have beaten Q1 earnings estimates, which suggests strong performance across a significant portion of the market.
These positive Q1 earnings results have contributed to investor confidence and has led to increased stock prices, of which we have seen. When companies report higher-than-expected earnings, it often reflects positively on their financial health and growth prospects, which can attract investors and drive stock price appreciation.
The said above essentially marks how the two indexes are diverging but similarly, and the economies in Canada and the U.S. are doing the same thing from a monetary policy standpoint. The divergence in monetary policy between the Bank of Canada and the U.S. Federal Reserve could potentially lead to volatility for the Canadian dollar in the future. If the Bank of Canada's interest rates fall too much below those of the Fed, it could negatively impact the Canadian dollar. This would result in more expensive imports from the U.S. and put upward pressure on inflation. Moreover, experts suggest that if the Bank of Canada continues to cut rates while the Fed remains unchanged, significant divergence could occur even further.
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The U.S. economy has shown resilience in the face of higher borrowing costs and inflation, and the Federal Reserve has indicated the need for more positive data to confirm sustainable inflation decline. In contrast, the Bank of Canada recently announced its first interest rate cut in over four years following a period of hiking rates to control inflation. Governor Tiff Macklem expressed confidence that inflation is heading towards the target of two percent.
The differences in interest rate sensitivity between the two countries are attributed to factors such as the length of mortgage terms and the dependence of the Canadian market on commodities like oil. The Canadian dollar could find support in rising energy prices if they continue to increase.
Historically, a difference of one percentage point in overnight rates between Canada and the U.S. has been considered a comfortable zone. While some experts believe there is room for divergence between the two central banks, the extent is uncertain. The market currently indicates a possibility of one rate cut by the Federal Reserve in September and another in December. Seems to be getting less and less every time I write an editorial! Lol.
Investors hoping for lower rates received some optimism with the easing of consumer price inflation in May. The Bank of Canada will evaluate interest rate decisions on a meeting-by-meeting basis and may consider further cuts if inflation eases and confidence in reaching the two percent target zone.
So, you may ask, what's in store besides the said above? In the month of July, stock markets have historically demonstrated varied performance, with some years experiencing notable gains while others may see more modest results. For instance, recent reports indicate that the stock market has exhibited strong performance in the month of July, with the S&P 500 index rising 3.3% on average between 2012 and 2022 (www.marketwatch.com/story/july-can-be-a-top-month-for-stocks-heres-what-it-will-take-for-the-market-to-rally-again-this-summer-9b3c3ef5).
Furthermore, in 2022, the S&P 500 rose by 9.1% in July, marking its best performance since November 2020 (www.nytimes.com/2022/07/29/business/stock-market-july.html).
Moreover, experts have pointed to factors such as positive earnings results and market optimism as potential drivers for stock market rallies in July (abcnews.go.com/Business). Additionally, predictions from market strategists suggest expectations for continued strong performance in July. But here's some food for thought: the market has surged approximately 50% since October 2022, surpassing the advancements of its predecessors dating back to 1957 and the latest Bloomberg market live pulse survey indicates that investors are becoming more apprehensive about the rich valuations in the stock markets. Not surprising considering the U.S. benchmark has hit many record closing highs this year. The stock markets are hot!
And so, in keeping with that theme, I'm hoping it will stay that way! But if it doesn’t, you know what else July will bring? Cold cocktails, relaxation and great company! So keep calm and SUMMER on! LOL…
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