Another TSX Milestone - What Does It Mean?
A week ago today, Canada's main stock index closed at 20,029. This is a huge milestone which highlights the Canadian stock market's hot start to the year. The market is up 14.6% year-to-date, and is up over 76% since the March 2020 bottom. Commodity prices are hitting all time highs, interest rates are at rock bottom, and consumer habits are changing. These are the primary reasons that Canada's resource rich economy has been (to quote Charlie Sheen) "winning". Energy and Materials have led the gains, accounting for 25% of the TSX capitalization.
What does this mean for our investors? Well... nothing really. 20,000 is a psychological barrier that has been passed. For most Canadians this will have no effect on their day to day, but it does show us the momentum that has been building since the latter half of 2020. This momentum doesn't look like it is going to slow down anytime soon, even with Canada shedding more jobs (-68,000) in May than expected (20,000 - 35,000). A Reuters poll last month predicted the TSX to rise to 21,750 by the end of 2022.
While this is a great milestone for the TSX, there are still a number of factors that we are watching. With last month's miss on the jobs report, we will be watching the June job numbers to see how well the recovery is going, especially with the continued rollout of the COVID-19 vaccinations and looser restrictions to boost the expected job hiring. We are also expecting that with the continued gains being made by the TSX and the Canadian economy overall, the fiscal stimulus will also start to be pared back. We have seen an example of this from the Bank of Canada last month. With China and other countries following suit, this has the potential to derail the rally in equities that we have seen. The Federal Reserve has also signaled that they would be open to tapering the US stimulus programs in the coming months if inflation heats up. However, this should not affect Canadians as much as commodity prices. Commodity prices tend to lead to higher inflation numbers, and with Canada's commodity and resource rich (albeit cyclical) economy, it provides a degree of cushion.
We do remain cautious of the potential for a market correction in the longer term. With a budget deficit of over $360B (or 17% of GDP) in the fiscal year ending Mar. 31st, and another $150B budget gap predicted this year, Trudeau will have accumulated more debt than all 22 previous prime ministers combined. This has lead to increased taxes on the highest earners, but has yet to trickle down to the middle class, where Trudeau has historically been hesitant to increase taxes. With the mounting debt and an estimated $1.4T deficit forecasted for the next few years, this may have to be re-assessed in order to bring the balance sheet under control.
Many of our long time readers will note a change in the tone of this market update as our long time author and colleague Alex Kilpatrick has moved on to a new opportunity. to bigger things. We wish him well, and as always will endeavour to bring our clients and readers commentary on the most important and interesting stories in the financial world. With that being said, we are always looking to add exceptional talent to our team, so if you know of any, intelligent, hardworking, passionate people who are looking for a fantastic job opportunity here.
If you'd like to talk about these events or discuss your portfolio, don't hesitate to reach out to us at 604.643.0101.
Cash Management Group
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