Le volatility in the market this week is expected to continue. Justin Hahn explains why the Feds are increasing inflation and its’ relevance in the markets.
This week's questions:
[00: 30] : What’s your perspective on on this move? (What is your perception of the market’s volatility this week?)
[03:39] : I know Canada’s credit rating has already been downgraded, but I wonder, is Canada alone in this or other countries in the same boat? Where does it end and what will happen aside from a massive debt load in Canada and the provinces for decades?
[05:08] : Can you explain that change in lay language that our clients can understand? And why is that profound?
Leslie Cliff : [00:00:02] So welcome, everybody, to the Genus weekly video, this is week 25 of the since we started this with the coronavirus in late March. With me today is Justin Hahn, who is our macro research analyst. And my name is Leslie Cliff. I’m one of the co-founders and currently chair of the board of Genus. Today is September the fourth and the market hasn’t closed yet today, Justin, but it’s been a rocky couple of days. The tech sector down quite a bit and overall stock market down. So what’s your perspective on on this move?
Justin Hahn : [00:00:43] So, yeah, this week actually started off pretty great with the markets up almost two to three percent at the beginning of the week. But Thursday and today, we’ve seen a bit of a pullback. But there are some positives today with the market bouncing from its lows this morning. Market was down almost three percent, but has come back since then. So the reason we see this is because the tech sector has been one of the biggest winners post-pandemic, with the digital world speeding up four to five years. There’s a fundamental shift in the way we approach work in our daily lives. And in the short run, we think that the market is discounting this maybe a bit too much, which is why we’re seeing it take a bit of a breather this week.
Justin Hahn : [00:01:22] There’s a reason that these tech companies are doing better and it’s due to the changing environment and make it, and many companies looking to make this work from home permanent. We don’t think see things. We don’t see things going back to the old way with the whole everyone going back to the office. And also the market is discounting the fact. So we still view this tech sector positively in the long run, despite this week’s weakness.
Leslie Cliff : [00:01:46] So I just want to remind people, Wayne always divides the stocks into the serious covid losers, the hotels and cruise ships, the current winners, which are the technology stocks and health care stocks which have done so well, and then he calls them of the covid losers. But they’re not the serious losers. There are the economically sensitive stocks, the value stocks, the banks, the energies, material, those companies that are sensitive to the economic cycle, they’re still below their highs. Well, the overall market is above the highs, barely now, but it’s because the tech sector is seriously above their high, their highs last February. So I always tell people to think of their dividend fund as their value stocks, their covid losers, if you want to think of it that way, the higher yielding ones, but not not the sexy ones. And in days like today and yesterday, those value stocks will outperform our CanGlobe where we have more of an exposure to growth stocks. So we have this barbell portfolio and have had since about June. And so we’re going to continue with that. We’re not exiting out of these tech stocks. But I think it’s fair to say the VIX index, which is an index of volatility, is back up almost to thirty, thirty five. So we do expect more volatility in these, particularly as we go towards the election and just the crowding out and so on. So we won’t be surprised to see continued volatility, will we Justin?
Justin Hahn : [00:03:20] No. We we expect to see more volatility, especially during the election.
Leslie Cliff : [00:03:25] Yeah. So we had a great question from a client and it’s a question we’ve asked before, but it’s such a good question we’re asking again, and I suspect we’ll be asking it again and again. And that is I know Canada’s credit rating has already been downgraded, but I wonder, is Canada alone in this or other countries in the same boat? Where does it end and what will happen aside from a massive debt load in Canada and the provinces for decades?So.
Justin Hahn : [00:03:55] So the spending done by Canada in the first tranche was actually amazing. Canada managed to double their debt in a very short period of time. There’s likely still going to be uncertainty going forward in how to deal with this debt and if there’s going to be more debt issued in order to help stimulate the economy. And it’s probably going to be the focal point for the next elections. In the meanwhile, it had to be done in order to keep the Canadian economy afloat. And it seems to be recovering. And the impacts have actually had a very positive impact thanks to the fast actions from the fiscal and monetary side.
Leslie Cliff : [00:04:29] Is this because other countries around the world are doing the same thing? Canada’s not alone.
Justin Hahn : [00:04:33] Yes. So most countries have are going to be forced to do the same thing. And that’s an important thing to know . And they’ll be facing this kind of issue due to the pandemic. They’ll have to face the issue of drawing down some of their debt that they have borrowed in order to help stimulate the economy. Again, the analogy we like to use, it’s easier to keep the economy going through fiscal stimulus rather than restart it as a whole. Kind of like a fire.
Leslie Cliff : [00:05:00] Last week, Paul also made a big announcement about the change in the way the Federal Reserve is going to look at inflation and measure inflation. And how can you explain that change in lay language that our clients can understand? And why is that profound?
Justin Hahn : [00:05:17] So there three reasons why the Fed’s talk about the inflation target changes is important. The first, they’re admitting that they have not done a very good job at creating inflation. Secondly, they were admitting that their current tools that they have tried to use are not working. And thirdly, they’re more concerned about the income inequality and only seeing it being rectified with a lower unemployment rates. It will take an inflation rate of higher than two percent, maybe even three percent, in order to drag unemployment rates lower and to create income inequality in terms of broad market impacts, this would be a positive for stocks, specifically cyclical stocks, as there’s much more liquidity in the markets and lower interest rates for borrowing.
Leslie Cliff : [00:06:02] So just in, Japan’s been working on this for a decade and they have found it very difficult to raise inflation. Why this announcement of we’re willing to let inflation go above two percent? Why why will that increase inflation just by by Jay Powell saying that?
Justin Hahn : [00:06:21] So with the market, it’s very important that the Fed explicitly tells the market what they’re doing and what their plans are, a lot of markets are based on expectations and future rates and future earnings. So if the Fed has explicitly told the markets that they’re going to let inflation rise to a higher rate of more than two percent, then the markets are becoming a bit more stable as they’re able to plan more further in advance without the worry of a shock with the rates rising another twenty five or 50 basis points.
Leslie Cliff : [00:06:53] Now, that’s really interesting, because that’s another example of Jay Powell really talking the market, doing an excellent job as a leader in this environment. So thanks for that.
Leslie Cliff : [00:07:05] Great. Well, it’s we want to keep these short, so we’ll leave it at that kind of a technical review this week, but we basically expect the markets to stay volatile and we’re still positive on the markets, that’s for sure. So we’ll wrap this up and we want to end it with a very special message. Go, Canucks, go.
Justin Hahn : [00:07:28] Yeah,
Leslie Cliff : [00:07:29] And we’ll see you next week. Thank you.
