Lexicon Financial Group Weekly Update — August 28, 2024
“Note, besides, that it is no more immoral to directly rob citizens than to slip indirect taxes into the price of goods that they cannot do without.”
From the desk of Craig Swistun, CIM, MFA-P, Portfolio Manager, Raymond James Investment Counsel, and Wayne Hendry, Client Relationship Manager, Raymond James Investment Counsel
Looking Around
As you undoubtedly know by now, putting together the weekly update is a team effort. Ultimately, I get to put my name on the finished document but it doesn’t get this way without the contributions (knowingly or unknowingly) of many authors. Unfortunately, they would be too numerous to list each week.
That’s because the update is, in part, an amalgamation of ideas and conversations that we have internally as well as externally. I’ve mentioned before how, each week, fellow portfolio managers Antoine Natale and Louis Gervais come together to discuss portfolio positioning and what changes, if any, we should be making to client portfolios. Of course, Wayne is a great partner in creating these updates, but the biggest source of inspiration for what we write about comes from our audience.
For a long time, we’ve stated that one of our goals was to remove industry jargon from the conversation about investing and investments. That’s because we see so many examples of jargon in the financial press. I’m not sure who the intended audience is, but it certainly can’t be real people. Wayne is away this week, enjoying a much needed vacation, so I was inspired because of a question I was asked about the difference between a tax and a tariff.
Tariffs are being discussed on both sides of the border at the moment. In Canada, the government is looking to impose a 100 per cent tariff on electric cars made in China. South of the border, at recent campaign events, Donald Trump has mused that he might impose additional tariffs – 60 per cent on all goods originating in China and 20 per cent on all other imports. The Biden administration is no stranger to tariffs themselves and, in fact, has tariffs to China as well as Canada, on the imports of softwood lumber, for example.
But what are tariffs anyway and what purpose do they serve?
Generally, tariffs are put in place by a government to make the goods or services imported from another country more expensive. In this sense, it could be a source of revenue for the government. On the other hand, a tariff can create a barrier to international trade, with an eye to supporting domestic industry. Free market economists would call this protectionist.
Let’s take a closer look.
Here are the possible benefits:
Imported goods that are in high demand will generate revenue for the government as it collects the tariff.
The imported goods are now more expensive. The higher price being charged in the market may present sufficient incentive for businesses to invest in producing those goods domestically. The domestic goods would not be made more expensive by the tariff, giving a domestic supplier a competitive advantage.
The domestic manufacturer creates jobs in the local economy, which is net positive.
But what about the costs?
The imported goods become expensive.
Consumers pay more for those goods, which may lead to higher ongoing costs and could theoretically push inflation higher.
Domestic suppliers who invest in businesses are competing against artificially inflated prices (price + tariffs = imported price) and may not be able to survive without the benefit of tariff protection.
Government policies, including tariffs, can and do change. This level of uncertainty may prevent entrepreneurs from investing in a space when the future competitive landscape is less certain.
Whatever the reason behind imposing the tariff may be, in almost all cases, a tariff will make the cost of an imported good more expensive for consumers.
I appreciate that the governments have a lot of factors to consider when making decisions that impact the economy. There may be valid economic or political reasons for imposing a tariff – I’ll let the policy analysts discuss this in whispered tones. What is clear, though, is that the cost of a tariff is ultimately borne by the consumer.
So… yes, that Chinese EV you’ve had your eye on just got more expensive.
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Looking Back
For the week ending August 23, 2024, Canadian stocks were up and down, although they finished the week strong due to the tailwind created by an anticipated rate cut in the U.S. Which is interesting, because, of course, the Bank of Canada had already cut domestic rates earlier in the year (the Bank of Canada is also expected to cut rates before the end of the year). Friday’s stock rally was led, in some part, by stocks that are more sensitive to interest rates, for whom relief would be welcome.
So, does the Canadian economy hold its breath and wait for the U.S. to make the next move on interest rates? Probably.
News out of Canada is mixed. Gross Domestic Product (a measurement of an economy’s economic output) grew 2.1 per cent between April and June, beating industry and government estimates. And the stock market has largely responded, coming close to record high levels. Rate cuts typically help spur an economy, so even if the third quarter is sluggish, a cut in September could pave the way for the economy to do well in the fourth quarter.
In the United States, both the bellwether Dow Jones Industrial Index and the S&P 500 index inched closer to record highs. Investors seem all but convinced that the Federal Reserve will be cutting interest rates in the very near future, which should spur economic activity across a wide variety of sectors. Consequently, gains were seen across multiple sectors. Savvy readers will recall that, for the better part of a year, gains had been constrained to the high-flying technology sector. (1)
Of note, smaller companies outperformed larger companies. Historically and over long periods of time, smaller companies do have a performance edge over larger companies. That’s in part because large companies were once small, and that growth is often reflected in those numbers. This is something to watch, as well as in the past, small caps have been seen as a leading indicator of strong economic growth. (2)
Over in Europe, the STOXX Europe 600 index ended higher. This is undoubtedly spurred on by the hope that interest rate cuts will be coming soon (not soon enough for some, though). The U.S. continues to be the driver of global capital, so if the U.S. cuts rate, European central banks are almost sure to follow.
It’s not all rosy in Europe. Coming of the high of the Paris 2024 Olympics, there is growing unrest in France. While France certainly lags Germany in terms of its importance in the European economy, it’s something we need to watch. Growth in Germany has also been slowing.
It was only a few weeks ago when Japan went through a bout of series market volatility. No predictions here – but things seem to be returning to normal. The Nikkei 225 rose just under 1.0 per cent for the week. The volatility, you may recall, was caused by a sudden *increase* in interest rates. That may have scared off the central bank from making more increases, more often.
Recall, too, that the global stock market volatility we saw earlier in August was caused because speculators were borrowing money in Japan at rates lower than in their home country, and investing the difference. Exposed to currency risk, things went sideways. Japan’s rates are still low when compared to developed economies.
The opinions expressed are those of Craig Swistun and not necessarily those of Raymond James Investment Counsel which is a subsidiary of Raymond James Ltd. Statistics and factual data and other information presented are from sources believed to be reliable, but their accuracy cannot be guaranteed. It is furnished on the basis and understanding that Raymond James is to be under no liability whatsoever in respect thereof. It is for information purposes only and is not to be construed as an offer or solicitation for the sale or purchase of securities. Raymond James advisors are not tax advisors, and we recommend that clients seek independent advice from a professional advisor on tax-related matters.
Dow Hits New Record High As Stocks Rally Despite Nvidia’s Slump, Antonio Pequeno IV, Forbes, August 29, 2024
What’s driving the rotation into small-cap stocks?, Alan Wynne, J.P. Morgan Private Bank, July 19, 2024
German economy shrinks as consumers shy away from spending, Piero Cingari, EuroNews, August 27, 2024
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Looking to Learn?
If you want to know more about some of the topics we wrote about this week, just click on the links below:
The Basics of Tariffs and Trade Barriers
Looking to buy a Tesla? Here’s what Canada’s tariffs on Chinese-made EVs could mean
Tariff Tracker: Tracking the Economic Impact of the Trump-Biden Tariffs