Oh No Not the "R" Word - Your Money June 24th 2022

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What a week and finally there’s lots of green on the screen and for good reason but before I get to the good news, I guess we ought to begin the week with some of the troubles we are facing in the economy. The risk of inflation is becoming cemented into Canada's economy, as surging prices at the pump and other visible sign of consumer items are costing more, (i.e., food and housing), and appears to be undercutting efforts of the Bank of Canada making it difficult to keep prices at bay. However, it is not just Canada but globally as well, slowing manufacturing, China’s COVID-19 curbs, supply chain disruptions, and Russia's invasion of Ukraine continue to exacerbate the inflation problem. Goldman Sachs sees a 30% chance of the U.S. economy tipping into recession over the next year, up from its previous forecast of 15%, in the midst of record-high inflation and a weak macroeconomic backdrop. Gauges of factory activity released Thursday in Japan, Britain, the Euro-zone, and the United States all softened in June, with U.S. producers reporting the first outright drop in new orders in two years. All of this in the face of slumping consumer and business confidence, while recession winds are being stoked by supply chain inflation. Of course, this is alarming, but there seems to be an odd side bar to this, that being, we still have very low unemployment alongside of labor shortages for now. So, what gives, does the inflation top out and gradually return to more normal levels or do we start to see changes in the labor market, beginning with job layoffs and eventually unemployment rising.

US stock markets were closed on Monday taking a pause for Juneteenth day, but despite a shortened trading week there was a cautious tone in the markets leading up to Fed Chairman Jerome Powell addressing congress. The soup de Jour was Jay’s testimony in front of a congressional hearing on the economy. This event often becomes a pulpit for uneducated members of congress trying to explain their poor understanding of economics and more about pushing their political agendas. Powell has a tough job deflecting this nonsense; however, it does bear mentioning that he reaffirmed the Feds position on employment and price stability and not to assist in fiscal matters, that is for policy makers.

Joe Biden is in the news again and not for his sagging political poll numbers but rather his comments on inflation that is getting a great deal of attention, calling on Congress to pass a three-month suspension of the federal gasoline tax to help combat record pump prices and provide temporary relief for American families this summer. It initially had a negative effect on both the price of WTI as well as oil and gas stocks. This seems odd, as lower gas prices should mean higher demand and in the face of tight supply, you would expect the price of oil to rise. In the end, this may have had more to do with profit taking in the sector than real demand/supply issues. WTI has recently pulled back from over $ 122 a barrel US, briefly touching under $ 100 before closing over 3% today to $ 107.62.
So, what does the latest political move by the President have on the energy markets despite tight supply, this tax relief will not materially change the underlying dynamics, oddly it could increase demand. There is no new pipeline or refining capacity in North America and don’t forget the energy embargo on Russia has not fully kicked in furthering the problems in the market. What about increased Chinese demand on energy as they re-open their economy from the pandemic. What if a hurricane season knocks out supply lines? This tax holiday is just a temporary political band aid relief for the consumer and will do little to alter the energy supply issues. Only a recession will dampen the demand.

Turning to stock markets, the Dow moved well into the green, up 5.4% for the week. Tech stocks drove the NASDAQ up 7% across the finish line, and the S&P 500 also finished strong - up 6% as U.S. banks cleared the Federal Reserve's annual health check. Meanwhile in Canada, declining oil stocks dampened the TSX’s results, posting only a .7% increase. So going back to the good news I promised to talk about, well here it goes. Maybe the worst of this bear market sell off is behind us. Let us remind ourselves of the damage that has already materialized. The bear market definitely caught investors off guard. The depth of the declines continues to shock me, but I have fond memories of the Tech wreck in early 2000 so I shouldn’t be surprised. I mean the average stock on the Nasdaq is down 42%. Of course, that’s the "average" stock. There is a plethora of stocks that are down a great deal more: The average Internet Stock has been cut in half, take Meta for example, declining from a high of $ 384 to $ 170 that’s 55%. The average social media stock is down over 54%. These are serious declines but as we approach the end of month, the release of inflation and economic indicators may point to a soft landing in the economy possibly offering up green shoots of recovery. If we can get past the news of next months 2nd quarter earning releases, which may be frightfully awful but deliver a final round of market volatility, then we could see a substantial rally that lasts well into the fall.

Next week we await important economic indicators like the US home price index reading, the consumer confidence index, GDP economic readings, monthly core and PCE inflation numbers as well as the job numbers. It’s a big week folks and then it’s CANADA DAY!

PLEASE NOTE THESE ARE NOT RECOMMENDATIONS TO BUY securities, please check with your investment advisor to determine if they are an appropriate risk for your portfolios.

Happy trading and Stay Safe.

Cheers Ian.

Information contained herein represents the views of the writer and not those of PI Financial Corp., and based on assumptions which the writer believes to be reasonable. The material contained herein is for information purposes only and is not to be construed as an offer or solicitation for the sale or purchase of securities. This information is intended for distribution in those jurisdictions where PI Financial is registered as an advisor or a dealer in securities. Any distribution or dissemination of this article in any other jurisdiction is strictly prohibited. PI Financial and/or its’ officers, directors, employees and affiliates may, from time to time, acquire, hold or sell a position in the securities mentioned herein.

Ian David Clark

Portfolio Manager CIM, CFP