Market Insights: Low Expectations

Macroeconomic and Market Developments:

• North American markets posted somewhat of a recovery this week. In Canada, the S&P/TSX Composite Index was up 2.63%. In the U.S., the Dow Jones Industrial Average was up 2.66% and the S&P 500 Index increased 3.64%.
• The Canadian dollar was positive this week, closing at 76.78 cents vs 76.15 cents last Friday.
• Oil prices were slightly lower this week. U.S. West Texas crude closed at $86.19 vs $87.03, and the Western Canadian Select price closed at $65.99 vs $66.10 last Friday.
• The gold price was up slightly this week, closing at $1,716 vs $1,710 last week.
• On Wednesday, the Bank of Canada issued its latest policy decision, continuing their path of aggressive rate increases by raising interest rates by 0.75% to 3.25%. This decision was expected and as such, bond yields and the Canadian dollar were relatively flat on the news.
• Similarly, the European Central Bank (ECB) raised interest rates by 0.75% on Thursday, as expected. The increase follows a move from -0.5% to 0.0% at its July meeting. The central bank, which sets monetary policy for the 19 euro-using nations, has kept rates in negative territory since 2014 in a bid to spur spending and combat low inflation.
• Standard & Poor’s announced changes to Canadian stock indices this week. The S&P/TSX 60 index will add Tourmaline Oil Corp (TOU) and remove Bausch Health Companies (BHC). The more broadly based S&P/TSX Composite index will add Algoma Steel Group (ASTL), Bellus Health (BLU) and Uni-Select (UNS) and remove Aurora Cannabis (ACB), Aecon Group (ARE), Dream Office REIT (D.un) and New Gold (NGD).
• CVS Health (CVS) has reached a deal to buy home-health and technology services provider Signify Health in an all-cash deal for about $8 billion, as the drugstore chain continues to expand beyond its retail origins. CVS emerged as the winning bidder over potential suitors that included UnitedHealth Group, Amazon.com and Option Care Health.
• The U.S. ISM Non-Manufacturing (Services) index increased to 56.9 in August, easily beating the expected 55.3 (levels above 50 signal expansion; levels below signal contraction). The major measures of activity moved mostly higher in July, and all stand above 50, signaling growth.
• On Friday, Statistics Canada reported that the Canadian economy lost 39,700 jobs last month, a surprise negative reading compared to the 15,000 gain that had been anticipated. The unemployment rate rose to 5.4% from the record low reading of 4.9% in June and July.
• Here is a link to a short video from Canaccord’s chief U.S. Strategist Tony Dwyer entitled Countertrend Macro Week Off Extreme Whoosh: DWYER VLOG

Weekly Diversion:

Click here for a picture from every year of Queen Elizabeth II.

Chart of the Week:

Equity markets had a very strong week this week, which is an encouraging sign for the S&P 500 after staying above and rebounding off the 3900 support level (from May) last week.

Low expectations for stock price increases are historically a bullish pre-condition. These types of indications can be early (exception: 2008) but they often occur near a long-term bottom. When we say low expectations, we don’t mean a little bit low, we mean at historically extreme levels. The recent U.S. Conference Board Consumer Confidence Survey, a widely followed sentiment gauge, showed that the expectation from market participants for stock price increases vs. decreases fell to a level of -20.7 for the first time in a decade. Today's readings are much more consistent with bottoms than tops. Those with patience and fortitude by continue to own solid companies with quality balance sheets, pricing power, strong free cash flow and a consistent track record of growing earnings/dividends will be rewarded.

Source: Renaissance Macro Research

 

DISCLAIMER: Investing in equities is not guaranteed, values change frequently, and past performance is not necessarily an indicator of future performance. Investors cannot invest directly in an index. Index returns do not reflect any fees, expenses, or sales charges.

Sources: CNBC.com, Globe and Mail, Financial Post, Connected Wealth, BNN Bloomberg, Tony Dwyer, Canaccord Genuity, First Trust, Renaissance Macro Research, US Conference Board