Can the Bull Market Keep Going?
July was a rollercoaster bringing market drops not seen since 2022
The return of market volatility is upon us, as Big Technology sold off and Small Caps/Value rallied. This shift is pivotal if the market is starting to rotate to a similar stance at the end of 2021. Economic numbers continue to weaken and investors are beginning to fear the lingering effects of longer-than-expected high interest rates.
Topics
Market Dynamic Change
Parallels to 2021/2022
Canadian Economy Spiraling
Market Dynamic Change
July was a rollercoaster month starting up for the first two weeks before selling off rapidly towards the end of the month. This does not appear to be a normal sell-off as valuations were stretched too far and bad news became bad news.
During the market run-up over the past year, bad economic numbers were a sign of good news that rates would be coming down sooner. The market wanted bad news, but this narrative has run its course, where bad economic numbers are now signs of a weakening economy, and fears that rate cuts may be coming too late. This is not good news for the indexes as the economic numbers have been trending worse for quite a while now.
US Monthly Job Additions
US Monthly Job Openings
US Unemployment
The employment scenario has been getting consistently weaker for 2 years after the lockdown recovery period. This has been a good scenario as the investors were hoping for rate cuts. Now, that rate cuts are here the question is will they be enough to stop these trends? In the past, there has either been a delayed reaction or the unemployment problem has spiraled out of control. Therefore, history is not on our side.
This is a good reason for the market to focus on the health of the economy and what the next 3-6 months will bring. We will need to see unemployment flatten (soft landing), rather than continue to increase (history). While employment will move up and down, it comes at a difficult time. With the market is predicting unemployment to flatten, any bad jobs news should be considered bad news right now.
Parallels to 2021/2022
At the end of 2021, the major focus was on the “Work-From-Home” trade, which rallied throughout the lockdowns of 2020/2021 and achieved extreme highs in valuations vs. earnings. There is a similar trade in the “Artificial Intelligence” space.
We are not at the extreme valuations of 2021, but we are elevated above the average. The “Work-From-Home” trade is not the same dynamic as artificial intelligence but is similar in the sense that it is expected to change the way we operate day to day. It does bring up a similar conversation, yes more people will work from home but will this be as dramatic and as soon as the market predicts? Artificial intelligence asks the same question, we will be using more artificial intelligence day to day but will it happen as quickly as the market predicts?
At the end of 2021, the focus shifted away from that software growth and focused on the more traditional way to operate. While many people still work from home or in a hybrid environment it was not as dramatic as anticipated. This period came at a time when inflation was increasing and the fear of economic impacts was high. This is similar to today, with artificial intelligence and will it be as rapid as expected. To compound this the economic outlook is once again in question.
There is the risk that, with high valuations, can artificial intelligence save the economy from feeling the effects of 2 years of high interest rates. The consumer is undoubtedly strapped and it does not appear AI can stop that.
Canadian Economy Spiraling
The economic numbers in Canada continue to trend lower as the year progresses. This has caused the Bank of Canada to cut for the second time, while many other countries have held at one cut or have yet to cut.
The unemployment rate has jumped to 6.4% and does not appear to be slowing down.
This problem is two-fold, the first being a weak economy and the second being high immigration. This number will continue to climb until those trends reverse. We have already seen this weak economic picture leak into the real estate market in Canada. You can read our Canadian Real Estate Update here. Canadian housing continues to weaken and the outlook is bleak. The Bank of Canada is right to cut interest rates quickly and the forecast is for more to come into 2025, this will have a delayed effect on housing as unaffordability remains high in Canada.
The employment picture is one of the largest factors in an economy and lowering rates does not turn this around quickly. Employment percentage wise is getting weaker but also from a real numbers basis. We have seen negative full-time jobs in 5 out of the last 7 months. Even with immigration, we are not adding full-time jobs.
Part-time jobs are growing but we are decreasing in full-time employment. Unfortunately, part-time jobs do not drive an economy and with a strapped consumer, it is a challenging time to live off a part-time job.
Summary
The economic trends remain challenged. In the US, it is less challenging and the lag between cutting rates and economic recovery should be shorter than in Canada. In Canada, we are behind the eight ball and we likely have waited too long to cut rates as we are already spiraling down. We will likely need to cut more rapidly to improve the economic picture. The market valuations have come down from their highs, but we would need to see economic stabilization for indexes to move higher than before.
Justin, Konrad, and Merriel
More articles and information are available at www.knowprotectgrow.com
Content Sources: Bloomberg, Trading Economics, Yahoo Finance, BCA Research
Ventum Financial Corp. is a member or participating organization of the Canadian Investor Protection Fund (CIPF), Canadian Investment Regulatory Organization (CIRO), TSX, TSX-V, and Bourse de Montreal. Information contained herein represent the views of the writer, and not those of Ventum Financial Corp. or Ventum Financial (US) Corp. (collectively “Ventum Financial”), 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. While the information herein cannot be guaranteed, it was obtained from sources the writer believes to be reliable, but in providing it neither the writer nor Ventum Financial assume any liability. This information is given as of the date appearing on this report, and the writer and Ventum Financial assume no obligation to update the information or advise on further developments relating to securities, products or services. This report is intended for distribution in those jurisdictions where Ventum Financial is registered as an advisor or a dealer in securities. Any distribution or dissemination of this report in any other jurisdiction is strictly prohibited.
DISCLAIMER
Due to the security risks involved in sending information over the Internet, Ventum Financial Corp. cannot be held responsible for ensuring the confidentiality and integrity of this e-mail message. This message is only intended for the use of the addressee and any other use is strictly unauthorized. Any opinions or recommendations expressed herein do not necessarily reflect those of Ventum Financial Corp. Ventum Financial Corp. cannot accept any orders via e-mail as the timely receipt of e-mail messages, or their integrity over the Internet, cannot be guaranteed.
NOTICE REGARDING PRIVACY AND CONFIDENTIALITY Ventum Financial Corp. and its subsidiaries may, at their discretion, monitor and review the content of all email communications.
Ventum Financial Corp. | www.ventumfinancial.com
Toronto Head Office: 2500 – 181 Bay Street, Toronto, ON M5J2t3; tel 416 572 5523
Vancouver Operations Office: 2500 - 733 Seymour Street,Vancouver, BC V6B 0S6; tel 604 664 2900
For branch office locations and contact information, please go to www.ventumfinancial.com