The stock market is not the economy
The global economy is not doing well so far this year. Pacific Investment Management Co (PIMCO) believes the “forced closure of businesses across the United States and surge in unemployment will cause U.S. growth to contract by 30% in the second quarter of 2020.” The U.S. unemployment rate rose to a high of 14.7% in April. The recent protests, civil unrest, and calls to defund police forces have only made the future of the country more uncertain.
Yet the North American stock market rallied 11% over the last month. The S&P 500 just broke above the 200-day moving average, signally a bullish trend. The Nasdaq is at an all time high. Why did this happen? Aren’t markets suppose to hate uncertainty? Well the answer is because of fiscal and monetary stimulus. 🙂 Central banks are so afraid of deflation they are doing whatever it takes to keep the economy moving.
Both the U.S. and Canadian governments are giving away billions of dollars. More than 7.8 million Canadians have applied for the CERB government assistance program which pays $2,000 a month. That’s literally 40% of all employed people in the country. The Bank of Canada has engaged in QE, buying up Canadian mortgage assets. In the United States, the Federal Reserve is now sitting on over $7 trillion of financial assets. This has never been done before.
Since I had some extra cash lying around I decided to buy some more stocks. I picked up 800 shares of Canadian Western Bank (CWB.TO), a financial stock that pays a 4.5% annual dividend. I also added 700 more shares to my Suncor (SU.TO) position. This adds about $37,500 worth of new stocks into my investment portfolio. 🙂 I believe the worst part of 2020 is over and the markets should be higher by the end of this year.
A debt fueled economic system
Canadian household debt as a percentage of GDP has been steadily climbing over the past 20 years, rising from 58% in 2000 to 99% in 2019. But according to CMHC, we could see that figure go as high as 130% by the third quarter of this year. That’s a massive jump in a short amount of time.
Financial ETFs saw $123 million in net inflows in May. U.S. mortgage applications are up 62% and approaching all-time highs. More debt means more credit which leads to higher asset prices. As Robert Kiyosaki would say – the rich hold assets and the poor have debt. This has always been the case so it’s not surprising. What’s new however is the speed at which the wealth gap is accelerating.
Under normal market conditions a downturn would hurt rich households the most because the stock market is disproportionally held by the wealthy. This is the market’s natural way to rebalance when things get out of hand. Those who speculate in asset bubbles rightfully get burned if they take on too much risk. But thanks to government intervention the opposite is happening today, – and the rich are actually getting richer.
We may see a second wave of the virus coming in the fall or winter, but that probably won’t have any lasting impact on the stock market. 🙂 Don’t fight the Fed. Much like losing your feet to a bear trap, if you bet against the financial markets long term you will be defeated. 😎 This is why I continue to buy stocks and bonds even if things appear to be bleak and uncertain.
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Random Useless Fact:
There are about 600 billionaires in the U.S. and only 44 in Canada.
Dont bet against the fed this happened in 2008 and it took until 2015 for the economy to catch up. The fed will keep of QE until the economy catches up or until inflation become a problem. Stay in the market if you want to make money.
I agree. There’s nowhere else to put your money these days other than in the markets. There’s a battle going on right now between inflation and deflation. It’s good to have some high quality bonds, cash, and defensive stocks to mitigate against short term deflationary risk. But growth stocks, real estate, and commodities are the best place to be in long term because policy makers have a 2% annual inflation mandate.
Liquid, Great post always. Can you comment on why you picked CWB.TO to add positions at this time?
I like Canadian Western as an alternative to the big banks. Looking at the company’s financials it appears to be in pretty good shape now. From a valuation point of view I think CWB is cheaper than any of Canada’s big 5. A recent Morningstar Quant report puts the fair value of CWB.TO at $33/share. That’s about 34% higher than the share price today – a higher potential than a TD, or Royal Bank. 🙂 CWB is smaller however so it’s a more risky investment if there’s a major economic depression coming. But I think it will perform well over the long run.
Thank you
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