In some respects, the third quarter turned out to be a relief for global markets. Economic activity was adequate to support stock valuations, despite the constant political ruffle in Washington and the eight plus year rally was allowed to continue. On the other hand, momentum was not stellar and we are entering September with increased geopolitical concerns (North Korea) and some doubts as to the real strength in economic growth.
No doubt the weekend headlines will be dominated by what was a disappointing US jobs report for August. Where market participants were teased with a stellar ADP payrolls number on Wednesday, the reported 156K increase in non-farm payrolls fell well below what economists had predicted. On top of that, the prior months were revised down and wage growth was largely stagnant, rising only 0.1% on the month. The counter argument is that August numbers have typically shown an upward revision in the past, however, the effects of Hurricane Harvey on Texas will likely act as a drag on any September rebound we see.
This comes after seeing an upward revision to US economic growth in the second quarter (3% versus the previous estimate of 2.6%) and an August consumer confidence index that exceeded estimates (at 122.9) and is only two points from the 16-year high set in March. Economists will now focus on the rebuilding efforts in Texas and how this could play into stronger economic activity into the fourth quarter. Whether that translates into another strong GDP read remains to be seen, but the fact that US stocks are remaining near all-time highs suggests there is optimism that the US can escape the 2% doldrums seen throughout most of this recent economic recovery. That still leaves the question of US fiscal policy in play and September is critical.
The one positive thing from the hurricane is that it might detract the Administration from spurious tweets over wall building and improve the chances of a tax reform bill being introduced and passed by Congress. At the time of writing there were suggestions that Trump was looking at linking relief funding for Texas with a debt ceiling agreement—a positive departure from the rhetoric of shutting down the government if wall funding wasn’t passed. The risk though is that failure to get tax cuts and infrastructure spending into play could send tremors through the equity market into October—a time when we have seen increased turbulence in markets in the past.
Canada’s situation is even more perplexing as the country continued to lead the G7 in economic growth going into the third quarter, but has delivered a dismal equity performance. Compared to the near 3% lift in the Dow Jones, the TSX was up just 0.2% for the quarter as of the end of August. This was slightly better than what we saw in Europe, but on a year-to-date basis, the index is down half a percent—the only red to be seen among the major markets.
The disconnect between this performance and what has taken place in the economy stems mainly from energy (down almost 14% year to date) and financials (up a mere 0.7%). Stronger employment growth has helped the consumer sector, where discretionaries are up close to 10% this year, while industrials are also up more than 9% and telecoms have improved by 8%. The consumer gains would have been better had it not been for the sharp slide in Cineplex shares in August, though I view this as a temporary setback related to a lack of a decent movie pipeline in the summer.
It is the outlook for banks and energy that matters most, however, as these represent more than 50% of the TSX. Concerns over Canada’s housing market, which contributed to the negative sentiment in the second quarter, look to be overdone as activity remains positive, albeit with home prices relaxing. The stronger CAD dollar has also impacted earnings, but I believe the Loonie is going to be hard-pressed to fly above 85 US cents. As for oil prices, if global growth remains solid then a move back above $50/barrel is likely and should support energy shares. If so, then the TSX can still outperform the US in the last four months of 2017.
Canada: Merchandise trade, Bank of Canada meeting, building permits, Ivey PMI, employment
US: Factory orders, durable goods, trade balance, ISM non-manufacturing, Federal Reserve Beige Book, wholesale inventories, consumer credit
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