More Bad News S'Il Vous Plaît

May 21, 2024

I think we might be in that very unique market mood when bad news is good news. The equity market weakness in April can probably be attributed to bond yields moving higher, so any economic data on the weaker growth side is welcome news at the moment. The S&P started to recover on May 3rd, rising 1.3% when the ever-important non-farm payroll labour report came in softer than expected, helping 10-year yields fall back down to 4.5%. Then, over the past few weeks, we have seen generally weaker economic data for the ever-important U.S. economy; bond yields have continued to come down, and equity prices have moved up.
Of course, all eyes were on the U.S. inflation print for April, which was marginally softer than expected (soft CPI is truly good news), helping bond yields fall and pushing the S&P 500 to a new all-time high. But really, 0.3% vs. expectations of 0.4% is not huge, especially given that the core reading was in line at 0.3%. This still has the annualized 3-month change running a hot 4.5%. To be fair, there was some good news beneath the surface on the CPI print. But on that day, helping, and less talked about, was a really weak Empire manufacturing survey and weak retail sales. 

So, weak economic data helps bond yields come down, softens inflation fears, and opens the door a little more for central bank rate cut optimism, which allows the stock market to trade at a higher valuation multiple. Stocks up, bonds up—perfect! The problem is that this will work until bond yields have cooled enough, and then the market may start to fret about a lack of economic growth.
The U.S. economy is about 25% of the global economy, and the U.S. consumer is about 70% of the U.S. economy. So, with some rough math, the U.S. consumer is about 18% of the global economy, which is kind of important. We are well versed in never betting against the U.S. consumer, but what is not being talked about much is some clear signs of erosion. No denying past rate hikes are starting to take a toll. As is inflation, that has been making everything cost much more than before. For the past few quarters, the consumer has been complaining about the higher prices of everything from vacations to goods but still paying the tab. This is mainly because of some positives. Good gains in labour over the past few years, wage gains too, and don’t forget all those accumulated savings that built up during the pandemic period when mobility was restricted.
Unfortunately, those positives appear to be fading while the consumer headwinds remain. Wage growth has slowed, as have job gains. But this erosion may be more apparent in behaviours. Walmart just posted stronger numbers, helped by higher-end consumer shopping at the big box. When the wealthy start showing up at Walmart, this could be evidence that higher prices are causing consumers to start downshifting their spending habits.
 It is not just trips to Walmart; instead of higher-end retailers, look at the restaurants. Dining-out options vary greatly from those Michelin-star restaurants all the way to picking up a happy meal at McDonald’s. It is hard to get data on Michelin-star restaurants. Still, it continues to be challenging to get reservations, so high-end consumers still appear confident. First, popping into Walmart, then off to Le Bernardin. However, there is a quality of restaurants just above QSR (Quick Service Restaurants) that may be showing signs of softening spending choices. We created a basket of seven publicly traded sit-down restaurants that are a notch above McDonalds, Chipotle or Wild Wings. The list was created by asking one of our team members where his family eats when travelling in the U.S. 

We cut off the peak and trough caused by abrupt changes brought on by the pandemic, but you can clearly see that same-store sales at these restaurants have been slowing and starting to turn negative. Even more impactful is that same-store sales are a nominal measurement, which means if volumes remained steady, then this would be higher, given that the ‘food away from home’ component of CPI is up 4.1% over the past year. Adjusted for inflation, the consumer appears to be slowing their spending habits in this very discretionary category.


 Then, there is how people are paying for things. During the pandemic, consumers were spending less and still earning well. This helped them pay down debt, including credit cards. But look at the trajectory or slope of credit card debt accumulation during the past few years, even as rates rose. Maybe we could argue that society has gone more cashless, leading us to use cards more. Fair point. So then look at the delinquency rates, ticking over 10%. Of that big pile of credit card debt, over 10% is beyond 90 days delinquent. A level not seen since early in the financial crisis of ‘08/’09. 

Trends are very similar for the Canadian consumer as well. Job gains slowing, wage growth slowing, spending slowing, we are not that different.

Final Thoughts


Fortunately, all this is good news today. Because this is how it is supposed to work. A central bank raises rates to slow inflation, causing slowing economic activity. Now, this mechanism, which operates on slow variable lags, has been further delayed due to aggressive fiscal spending. But it does appear to be starting to show up, at least in some of the more discretionary categories or behaviours. I'm not betting against the consumer yet, but they are certainly on a fragile-looking footing.

— Craig Basinger is the Chief Market Strategist at Purpose Investments

Source: Charts are sourced to Bloomberg L.P. and Purpose Investments Inc.


The contents of this publication were researched, written and produced by Purpose Investments Inc. and are used by Echelon Wealth Partners Inc. for information purposes only.


This report is authored by Craig Basinger, Chief Market Strategist, Purpose Investments Inc. 


Disclaimers
Echelon Wealth Partners Inc. 
The opinions expressed in this report are the opinions of the author and readers should not assume they reflect the opinions or recommendations of Echelon Wealth Partners Inc. or its affiliates. Assumptions, opinions and estimates constitute the author's judgment as of the date of this material and are subject to change without notice. We do not warrant the completeness or accuracy of this material, and it should not be relied upon as such. Before acting on any recommendation, you should consider whether it is suitable for your particular circumstances and, if necessary, seek professional advice. Past performance is not indicative of future results. The comments contained herein are general in nature and are not intended to be, nor should be construed to be, legal or tax advice to any particular individual. Accordingly, individuals should consult their own legal or tax advisors for advice with respect to the tax consequences to them.
Purpose Investments Inc. 
Purpose Investments Inc. is a registered securities entity. Commissions, trailing commissions, management fees and expenses all may be associated with investment funds. Please read the prospectus before investing. If the securities are purchased or sold on a stock exchange, you may pay more or receive less than the current net asset value. Investment funds are not guaranteed, their values change frequently and past performance may not be repeated. 
Forward Looking Statements
Forward-looking statements are based on current expectations, estimates, forecasts and projections based on beliefs and assumptions made by author. These statements involve risks and uncertainties and are not guarantees of future performance or results and no assurance can be given that these estimates and expectations will prove to have been correct, and actual outcomes and results may differ materially from what is expressed, implied or projected in such forward-looking statements. Assumptions, opinions and estimates constitute the author’s judgment as of the date of this material and are subject to change without notice. Neither Purpose Investments nor Echelon Partners warrant the completeness or accuracy of this material, and it should not be relied upon as such. Before acting on any recommendation, you should consider whether it is suitable for your particular circumstances and, if necessary, seek professional advice. Past performance is not indicative of future results. These estimates and expectations involve risks and uncertainties and are not guarantees of future performance or results and no assurance can be given that these estimates and expectations will prove to have been correct, and actual outcomes and results may differ materially from what is expressed, implied or projected in such forward-looking statements. Unless required by applicable law, it is not undertaken, and specifically disclaimed, that there is any intention or obligation to  update or revise the forward-looking statements, whether as a result of new information, future events or otherwise. Before acting on any recommendation, you should consider whether it is suitable for your particular circumstances and, if necessary, seek professional advice. 
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US core capital goods orders strengthen in September, but momentum ebbing

October 27, 2024
An overview of United States and Canadian capital goods and retail sales figures as at September 2024.

Webinar insights from Greg Valliere, AGF’s Chief Political Strategist on October 3, 2024

By Patrick MacLean • October 11, 2024
Here are our key takeaways from the Webinar held on Thursday, October 3rd on the US Election with Greg Valliere, AGF’s Chief Political Strategist. Greg is AGF’s ‘boots on the ground’ and Washington insider, offering excellent information and perspective on key storylines happening on Capitol Hill and their impact on the markets and the global economy.

Ventum Financial Corp. and Echelon Wealth Partners Complete Amalgamation

June 24, 2024
VANCOUVER, BC, and TORONTO, ON, June 24, 2024 – Ventum Financial Corp. (“Ventum” – formerly PI Financial Corp.) is pleased to announce the successful completion of its amalgamation with Echelon Wealth Partners Inc. (“Echelon”), marking a significant milestone that solidifies its position as a leading independent investment advisory, wealth management, and capital markets firm in Canada. David Cusson, former CEO of Echelon, has assumed the role of CEO of Ventum. Jean-Paul Bachellerie, former CEO of Ventum, has assumed the role of President and COO of Ventum. This strategic alignment of leadership combines the expertise and vision of both firms to enhance client service and operational efficiency. “With offices across Canada, and strong anchors in the east and west, we are well positioned to deliver comprehensive financial solutions tailored to meet the diverse needs of our clients,” said David Cusson, CEO of Ventum. “This amalgamation represents a significant step forward in our commitment to excellence and towards becoming the leading independent investment dealer in Canada.” “Our combined Private Client Services and Capital Markets teams provide us with the scale needed for future success, enabling continuous investment in our platform and the provision of leading-edge tools and technology for our advisory teams,” said Jean-Paul Bachellerie, President & COO of Ventum. For more information about Ventum, please visit our website at ventumfinancial.com. About Ventum Financial Corp. Ventum Financial Corp. is headquartered in Toronto, ON with key operational functions in Vancouver, BC, and is a leading independent investment advisory and capital markets firm with fifteen offices across Canada. With a steadfast commitment to integrity and client service, Ventum provides a wide array of financial services to individual, institutional, and corporate clients through our team of experienced professionals. Media Contact: David Cusson CEO Ventum Financial Corp. Email: media@ventumfinancial.com Phone: (416) 572-5523

Is it over?

By Website Editor • June 17, 2024
It seems like just yesterday that you could buy a pint of Stella for $7 or so. Now, more often than not, it is closer to $10. Yep, inflation. It is kind of like a tax on doing things, as just about everything has cost more over the past few years. Hop on a flight, eat at a nice restaurant, refinance your mortgage, the list goes on. With the benefit of hindsight, the current higher inflationary environment can be blamed on a few pretty big factors. Changes in behaviour during and coming out of the pandemic blew up supply changes, as capacity was unable to keep pace with demand. Then, of course, unprecedented money printing magnified the situation, as it made everyone wealthier and more willing to pay $10 for a pint. Of course, the textbook solution is to raise interest rates, which is clearly occurring around the world. These monetary policy shifts are effective but do work with variable lags. Making those lags longer, or even temporally offsetting them, was fiscal policy. It doesn’t take an economist to understand if the monetary policy is trying to slow the economy to tame inflation; materially elevated fiscal spending in an economy that is still growing at a decent pace is counterproductive for the inflation fight.

Crisis Alpha

By Website Editor • June 10, 2024
If the wealth advice service were in the manufacturing industry, the portfolio would be akin to what we make. Sure, there are many value-added services in addition to the portfolio, but it’s the portfolio that has to succeed for the client to reach their long-term goals. So, the more we can think about portfolio construction, the better. One challenge is that while portfolio construction is often based on as long a historical time period as possible, things never remain static. Markets evolve and change over time, relationships change, and the available tools in the portfolio construction toolbox also change over time. One recent change that has been a challenge is the bond/stock correlation. After a couple of decades of very low or even negative correlations between these two core building blocks, correlations are back to being positive. The following chart shows the 2-year monthly correlation between Canadian equities and bonds. It looks rather similar for the U.S. and global markets, but we just thought some Canadian content would be nice. The higher correlation means that, more often, equities and bonds are moving in the same direction. Nobody complains when both are moving higher, like in the past 12 months, but when they move lower together, everyone starts getting grumpy, like in 2022. The 2nd line, beta, measures not just the direction of the two asset classes but the magnitude of the relative move.

This Ain't That

By Website Editor • June 3, 2024
The US market is up a little over 10% this year, Canada +6%, Europe +10%, and Japan +15%, while bonds are down about -1%. Huh, that sure does look like asset allocation is working well again after the car crash of 2022. Even better news is that the market is moving higher thanks to good fundamental news, not simply because central bankers are jamming more money into the financial system. Recession risk has continued to fade, as evidenced by the survey of economists. For the UK, Canada, US, Eurozone, China & Japan, the average probability of a recession hit a high in late 2022 at about 60% and has fallen down to a mere 25% of late. The UK, which was as high as 90% and suffered two negative quarters of GDP growth, is now down to 30%, winning the most improved ribbon. Even Canada, which is clearly struggling with higher rates, has improved from over 60% to 30%. Most are clustered around the 30% zone.

The Calm Before the Calm

By Website Editor • May 28, 2024
Should it be any surprise how calm markets have become? Global equities are up 9.2% year to date. Apart from a 2% decline in January and a 5% drop in April, the trend has been steadily up to the right on the chart. We can easily slap a financial narrative on this, such as improving economic growth globally, a decent Q1 earnings season, or maybe it's just the AI frenzy. More than a third of the advances in global equities are attributed to Nvidia, Microsoft, Amazon, Meta, and Alphabet. Whatever the cause, equity volatility has been very calm so far in 2024. But it is more than this, as it isn’t just equities.  The volatility in the bond market has gone super low (2nd panel in chart). The MOVE index measures volatility in U.S. Treasury Bonds [actually at-the-money options on interest rate swaps, but let’s not go down that rabbit hole]. Even though bond yields moved higher this year, the 10-year started at 4%, gradually up to 4.75%, then back down to 4.5%; these moves pale in comparison to the last couple of years. In case you forgot, the same bond in 2022 went from 1.5% to 4.0% and in 2023, yields oscillated between 3.5 to 5.0%. Looking beyond Treasuries, credit spreads are back down to or close to historical lows. Investment Grade spreads in the U.S. are 50bps. Lows in past mini-credit cycles have been 40-60bps.

More Bad News S'Il Vous Plaît

By Website Editor • May 21, 2024
I think we might be in that very unique market mood when bad news is good news. The equity market weakness in April can probably be attributed to bond yields moving higher, so any economic data on the weaker growth side is welcome news at the moment. The S&P started to recover on May 3rd, rising 1.3% when the ever-important non-farm payroll labour report came in softer than expected, helping 10-year yields fall back down to 4.5%. Then, over the past few weeks, we have seen generally weaker economic data for the ever-important U.S. economy; bond yields have continued to come down, and equity prices have moved up. Of course, all eyes were on the U.S. inflation print for April, which was marginally softer than expected (soft CPI is truly good news), helping bond yields fall and pushing the S&P 500 to a new all-time high. But really, 0.3% vs. expectations of 0.4% is not huge, especially given that the core reading was in line at 0.3%. This still has the annualized 3-month change running a hot 4.5%. To be fair, there was some good news beneath the surface on the CPI print. But on that day, helping, and less talked about, was a really weak Empire manufacturing survey and weak retail sales.

Is It Time for Emerging Markets

By Website Editor • May 13, 2024
The normal narrative for encouraging investors to look at emerging markets typically goes like this: The valuations are cheap, the demographics/rising incomes are supportive of growth, and they offer diversification. Perhaps this is more the marketing narrative. Kind of how, like for infrastructure strategies, they always talk about how many bridges need repairing. We are not refuting any of the above reasons, as they have been rather perennial for many, many years. And yet, for those who know us, we have been rather negative or at least cool on emerging markets for a long time. How long? Well, this negative view persisted for well over a decade. This is us giving ourselves a pat on the back since Emerging Markets (EM) have done roughly nothing for the past 12 years as Developed Markets (DM) have charged higher (chart).

Lots of Bulls & Bears

By Website Editor • May 6, 2024
Take your pick. There is no shortage of both good and bad news floating about the financial markets. To be fair, this is always the case. The hard part is understanding which side is stronger today and which side will be stronger tomorrow. With markets up low to mid-single digits following a very strong Q4 finish to 2023, most would agree the optimists are carrying the day at the moment. It is not just rose-coloured glasses; there is good news out there. Economic growth signs or momentum appear to be improving year-to-date. Dial back a few quarters, and the U.S. economy remained resilient while other economies softened or were rather lacklustre, including Canada, Europe, Japan, and China, to highlight some of the biggies. Today, while Canada is struggling, momentum in the U.S. has moved even higher, and there are signs of improvement in most jurisdictions.
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