Friday Market Insights – Strong consumer confidence and GDP predictions propelled the stock market

Leslie Cliff: [00:00:03] Welcome, everybody, to the Genus Weekly Insights. It’s Friday, March the 12th. My name is Leslie Cliff. I’m here with Wayne Wachell, our other co-founder and CEO, chief investment officer and CEO of Genus. Wayne, what happened this week?

Wayne Wachell: [00:00:22] Well, more good news. Number one, the Biden administration passed and signed the one point nine dollars billion covid-19 bill. Great news. And investors see that as actually jacking up global growth this year. And we’re seeing forecasts by some economists in the U.S. of nine percent growth this year. That’s the highest growth since the 1950s. And on the flip side, inflation was lower than expected, came out this week. And that’s a good thing for now. And today, just today, the consumer confidence popped higher than expectations. So good news all the way around, I would say. And on that, markets hit record highs in the middle of the week and value just kept on chugging along another good week for value, pushing up financials and energy and tech, which had a bad week last week, rebounded this week smartly, and that helped push the overall market to new highs. So a pretty good week.

Leslie Cliff: [00:01:17] Yeah, I see the Bank of Canada also came out and we’re talking with the short term, but still poor long term labor situation. So they’ve kept rates where they are as well. So.

Wayne Wachell: [00:01:32] They’ve also mentioned, too, that they’re going to maybe taper and stop buying government bonds or buying less of them, at least sooner than most other central banks. So that was interesting news, I thought, in terms of there’s there’s that’s a pretty optimistic perspective. I think from them they’re very good. The Bank of Canada, I believe in terms of compared to other central banks around the world. And so maybe they’re a bit ahead of the curve here in terms of buying less of less of our bonds going forward.

Leslie Cliff: [00:01:57] I also not sure clients really are aware of the health of the Canadian government versus the US government. We’re actually in much better debt situation. Maybe just our debt to GDP is I forget the numbers, but better.

Wayne Wachell: [00:02:12] Yeah, it’s you know, if you look at, you know, we had a problem with the debt to GDP and both the liberal and conservative governments got that take. They took care of that. And right now we’re running around between 50 and 60 percent of debt to GDP. The US now is pushing through a hundred on the way to one hundred and twenty. You got Italy at probably one eighty, Japan a 200 plus. So we look pretty good with the same sort of ballpark as Germany, and that’s pretty good. So, you know, we’ve taken there’s been strong fiscal measures in the past. And so that’s going to help us right now. As you pile on more debt right now. I can’t go on forever, of course, but we’re in good shape, I would say, in terms of our balance sheet.

Leslie Cliff: [00:02:49] Now, Wayne need one other thing I don’t think clients really grasp is when interest rates go up and they have a 10 year, interest rates have gone from like point six to one point four, something like that, some say on the way to two percent in relatively short order. What does that mean for the price of bonds?

Wayne Wachell: [00:03:06] Well, if you look at this, this year in Canada, the bond index is down over four percent year to date. And that’s because yields are backed up by 60 basis points in the course of this year. So yields go up, prices go down. And that’s why we’ve seen a lot of tech companies get hit because higher interest rates impact on call, long duration stocks. So it’s hurt growth stocks. But on the other hand, value stocks, they see the growth coming forward. They see higher earnings and they’ve been doing very well and coming back and value stocks. For example, this year up 10 percent, small caps at the rate as they see a stronger economy as well. They’re up 18 percent and the TSX is doing well this year. It’s outperforming the S&P because banks are doing so well. We have a lot of banks in there. We also have retail stocks. So the economic sensitive names do really well when bond yields go up and the growth ones don’t fare as well.

Leslie Cliff: [00:03:59] And I can’t let this up. I don’t do these videos every Friday. I can’t let this opportunity go by without giving you a longer term question, which really interests me is that, you know, you and I and most certainly we’ve lived through 40 years of deflation, 40 years of declining interest rates, and we’re probably been through the turning point of decades now of increasing interest rates and really, really profound. And what does it really mean to the backdrop of investing and?

Wayne Wachell: [00:04:29] Well, I think we’re seeing a sea change here. As you mentioned, 40 years of disinflation. I would argue that last decade the central banks dropped the ball. They were too tight. We didn’t get enough inflation. They weren’t aggressive enough, especially the Europeans and even the Fed, that Powell has confessed to being being too restrictive, not producing more inflation. So when you want your inflation, you need a little bit inflation, but not too much. We haven’t had enough inflation to keep the overall economy growing. And so it can be a good thing if it’s controlled, but it gets out of control, that then there’s a problem. Then what happens is the bond market vigilantes come back, inflation expectations go up and yields go up. That’s a that’s really a threat to everything. Longer term, longer term stocks. If there is no inflation issue, we start looking for inflation. Hedge hedges and stocks are definitely a better inflation hedge than bonds. And so you want to keep your bond short. You want to invest in more equities, more value strategies, more acid driven companies that do well during inflation and more commodities could be introducing more commodities into your portfolio going forward. That’s a possibility. So it’s it’s a fine line. We hope there has to there will be more inflation going forward. The question is, will be out of control. I think two or three

Leslie Cliff: [00:05:44] Percent saying it’s going to be out of control and they’ll do a good job. But it is a change to forty years of running the streets and you come to your financing, your home or like it’s just a backdrop of a different backdrop that you’re making decisions in and we’re thinking about. So, Wayne, what do you think’s interesting that’s going on out there?

Wayne Wachell: [00:06:09] Well, I think the big thing right now, it’s on the back of my mind is what will the central banks do? How will the central banks keep longer term rates down? They can keep Short-Term rates every year, but how will they keep buying bonds? And this and yesterday the European Central Bank said they’re going to buy more bonds. They’re concerned about the bond rates getting too high, cost the government more money for other interest cost. And obviously, so will the central banks start buying more of those bonds? And how will how governments react to a stronger economy? Will they tighten in their fiscal policy? They’ll have lots of revenue, obviously. How will they balance that? So it’s going to be there to see how that plays out in terms of as we see this growth come through, what’s the reaction of governments and central banks and how do they react and try and keep interest rates low for for themselves and for lenders?

Leslie Cliff: [00:07:01] Great. Well, that’s a great way to finish it Wayne. We will report on all those issues as time goes by. And our Friday Insight sessions, thank you very much for watching. We’re here in British Columbia. If you’re here, we’re very happy. Dr Henry said ten people can gather outside. So that’s a big joy for me, particularly celebrating my dad’s 90 second birthday tomorrow outside with many family members.

Wayne Wachell: [00:07:23] It’s great.

Leslie Cliff: [00:07:24] Very Fun.

Wayne Wachell: [00:07:24] Good stuff. Bye now

Leslie Cliff: [00:07:25] Anyway, I’ll see you next time. Thank you.