Market Insights: Consumer Confidence Gaining Strength

Macroeconomic and Market Developments:

• North American markets were positive this week. In the US, the Dow Jones was up 0.25% and the S&P 500 was 1.16%, closing above 4,000 for the first time. In Canada, the S&P/TSX Composite index was up 1.27%.
• The Canadian dollar was up slightly this week, finishing at 79.7 cents compared with 79.5 cents last Friday.
• Oil prices were mixed this week. US WTI crude oil closed up at $61.20 vs $60.85 last week and the Canadian WCS oil price finished down at ~$49.00 vs ~$51.00 last week.
• Gold prices were flat as of Thursday’s close, closing at ~$1,731 vs ~$1,733 last week.
• News broke last weekend that New York based family office Archegos Capital Management had been forced to liquidate several very large stock positions as part of a massive margin call. This forced liquidation caused massive declines in stocks such as ViacomCBS, Discovery, Baidu and Tencent. Additionally, two large financial institutions, Nomura and Credit Suisse, announced that they could be exposed to significant losses as a result of their exposure to the hedge fund.
• On Monday, officials announced that the giant container ship, the Ever Given, had been refloated after being stuck for five days. Shipping analysts estimated the shipping jam was holding up nearly $10 billion in trade every day. It was estimated that it will still take days for the ship backlog to be alleviated, disrupting supply chains all over the world that were already recovering from the COVID pandemic.
• Statistics Canada reported January GDP in Canada rose 0.7%, which was ahead of both consensus estimates and its own flash estimate for +0.5%. Also, the agency provided an early estimate for February real GDP +0.5% growth.
• US Consumer Confidence, as reported by The Conference Board, has finally shown signs of life and March’s report was the largest beat relative to expectations since at least 2000, with a score of 109.7 points vs. consensus of 96.0 and 90.4 from February. In addition, the 19.3-point month-over-month increase in the headline index was the third largest since at least 1980.
• The US ADP national employment report came in with a strong reading of 517,000 new private sector jobs for March. This was slightly below consensus estimate of 550,000; however, it is the largest monthly increase since September, and they revised the February number up from 117,000 to 176,000 jobs. Including revisions, March beat the consensus estimate by 26,000 jobs. Overall, the stronger ADP reading could be a precursor for Friday’s US employment situation report for March, the most closely watched of all economic indicators.
• The US ISM Manufacturing Index rose to 64.7 for March (levels higher than 50 signal expansion), easily beating the consensus expected 61.5. The manufacturing sector is now firing on all cylinders, with the latest reading being the highest mark since 1983 (almost 40 years!).
• On Wednesday, US President Joe Biden released the Democrats’ new infrastructure growth plan, committing $2.0 trillion to infrastructure spending over the next eight years. The bill proposed to pay for this plan with a 7% increase to corporate taxes in the US, reversing the corporate tax cut that previous President Donald Trump had instituted.
• On Thursday, Brookfield Asset Management (BAM.a) and Brookfield Property Partners (BPY.un) announced that they have reached agreement for Brookfield to acquire all of the limited partnership units of BPY at a value of $18.17 per BPY unit, to be completed by way of an Ontario court-approved plan of arrangement.
• Total global cases of COVID-19 finished this week at 129.3 million, with the total deaths at 2.82 million. In Canada, total cases now stand at 982,116, with active cases at 47,864. In Alberta, total cases are 148,332, with active cases of 8,350.

Charts of the Week:

With the weather improving and the first quarter behind us, today feels like a fresh start. With that in mind, feeling upbeat on April 1st, we wanted to share with you the equity seasonality strength of April for both Canada and the US. April has been the strongest month of the year for US equities over the last 50 years. Also, as opposed to some months being choppy, going back to 1983, April’s intra-month performance has tended to be characterized by steady stair step gains throughout the month. Here is a look at the monthly average performance of Dow Jones Industrial Average over the last 20, 50 and 100 years. As you can see, the last 20 and 50 years for April has been on top and over the last 20 years it has been by far the most consistently positive at 85%.

Source: Bespoke Investment Group

For Canada, while April has also historically been a strong month on average (fourth best) since 1977, one big difference up North here is that May has also been a strong month (third best), whereas in the US, May has been one of the worst months of the year. This bodes well for Canada this spring and fits nicely into the sector theme of financials, industrials and energy continuing to perform well in a rising interest rate environment. As always, these are historical trends only and by no way determine how markets will actually perform in April and May.

Source: S&P Capital IQ; Sam Poon, Canaccord Genuity

In our notes above, we mentioned that The Conference Board’s US Consumer Confidence reading (the most widely followed consumer confidence index) is coming back to life with March’s report being the largest beat relative to expectations since at least 2000 and the largest month-over-month increase since at least 1980. Here is a chart that illustrates all 21 occurrences since 1980 where there has been a monthly increase of 10 or more points (red dots). Although these instances have occurred at all points of the economic cycle, what is important to note is that they are least common towards the end of an expansionary period. In fact, other than July 2019 (shorty before the current recession which was triggered by a black swan event), other occurrences typically occurred at the beginning or middle of an expansion. There have only been two occurrences with larger monthly gains than this past March, one in March 1991 and the other in April 2003. They are highlighted on the chart with black dots, and as you can see, they both started near the beginning of large multi-year expansions. While strong 10+ point readings like this past March suggests good things for the economy in general, how has it affected the stock market over the next year? Looking at the data, the returns over the next 3-month period after such readings, on average, have been significantly better than all other periods at 4.4% vs. 2.5%. For 6- and 12-months out, it hasn’t been quite as strong, but still a little stronger than all other periods at 6.2% vs. 5% over next 6 months and 11% vs. 10.1% over the next year, on average since 1980.

Source: Bespoke Investment Group

Sources: CNBC.com, Globe and Mail, Financial Post, Government of Canada, Johns Hopkins University, oilprice.com, Canaccord Genuity, Tony Dwyer, Wealth Professional, Bespoke Investment Group, S&P Capital IQ