Lexicon Financial Group Weekly Update — July 24, 2024
“For me, geopolitical issues are becoming more important, because how can you understand economy if you don’t understand geopolitics? People think economists just deal with spreadsheets and charts. That’s a narrow-minded caricature.”
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
So…the Bank of Canada (BoC) did what it was widely expected to do this week and lowered interest rates to 4.5 per cent by implementing a 25 basis points (0.25 per cent) cut. It also signalled that more cuts could be coming in a few months’ time. The cut brings some relief to borrowers who have been struggling to make regular interest payments.
In his remarks, Bank of Canada Governor Tiff Macklem justified the decision by citing a pullback in household discretionary spending on both consumer goods and housing. The decrease in discretionary spending is mainly being driven by households having to allocate a larger amount of their income to servicing their debts. Less disposable income also translates to less demand for high-sticker price items like motor vehicles and travel abroad.
Geopolitical events, elections in the United States, and general uncertainty in the markets could also push inflation back up, so the Bank of Canada will need to watch all of these things closely, going forward. The next BoC policy rate announcement is scheduled for September 4, 2024. (1)
Unlike the Canadian economy, the United States (U.S.) economy continues to show signs of resilient growth while inflation pressures subside. According to the latest S&P Global Flash U.S. Composite Purchasing Managers Index (PMI), business activity grew at its fastest pace in 27 months during July. The composite PMI, which captures activity in both the services and manufacturing sectors, came in at 55 in July, up from 54.8 in June. This was higher than the 54.2 expected by economists (a number above 50 represents an expanding or growing economy).
This growth happened alongside lower price increases. Average prices charged for goods and services rose at the slowest rate since January and the second-slowest rate since October 2020, according to S&P Global's report. This is the latest in a line of data points that have investors increasingly more confident about a Federal Reserve (Fed) cut in interest rates, which would keep the much-spoken-about "soft landing" outcome to the Fed's hiking cycle on the radar. As per the CME FedWatch tool, investors this week are pricing in a 100 per cent chance the Fed cuts rates in September. The emphasis here should be on “chance” as it is a possibility of something happening rather than a probability. (2)
Talking about chances, technically, every candidate running for election has a chance to win a seat. And there is a chance that every economic theory actually plays out as predicted.
Try this one on for size. There is a theory that equity market returns follow a predictable pattern each time a new U.S. president is elected. The theory traces its origins back to the "Stock Trader's Almanac," a book and newsletter series originally founded by Yale Hirsch in 1967. Using data going back several decades, Hirsch contended that U.S. stock markets perform weakest in the first year of a term, then recover, peaking in the third year, before falling in the fourth and final year, after which point the cycle begins again with the next presidential election.
Read and Watch
Want deeper insight into topics in your Weekly Update? Then, read and/or right click:
Stock Markets Before the Election: Rotation or Regrouping?
With odds of a Trump win rising, here’s what it could mean for Europe’s economy
Video: China’s economy is stagnant and shows no signs of growing: Dennis Unkovic
Japan economic outlook, July 2024 – Deloitte Global Economics Research Center
Hirsch posited that this happens because, the president focuses on the most important policy proposals and indulges the special interests of those who got them elected, in the first year or two. As the next election looms, however, the model suggests that presidents focus on shoring up the economy in order to get re-elected. Consequently, the major stock market indices are more likely to gain in value. According to the theory, the results are fairly consistent, regardless of the president’s political leanings.
There are numerous factors that can impact the performance of the stock market in a given year, most have nothing to do with the president or Congress. However, data over the past several decades suggest that there may, in fact, be a tendency for share prices to increase as the leader of the executive branch gets closer to another election. Over the last eight-plus decades, the third year of the presidency saw an average stock market gain of more than 16 per cent, although the limited number of election cycles makes it difficult to draw reliable conclusions about the theory. Theories like these have notable limitations, including the fact that cyclical trends in market performance are more likely a matter of correlation than causation. (3)
For us, theories are all good and well, but they are not what influences our investment decision-making. For that, we need to rely on other points of data and a disciplined investment process that respects the values of diversification.
Looking Back
Canada’s main stock index finished slightly up last week, as companies and organizations around the world grappled with outages stemming from a faulty CrowdStrike software update. This faulty update sent by cybersecurity firm CrowdStrike to Microsoft Windows computers disrupted flights, banks and more around the world. (4)
Weekly North American Market Statistics
| Index | Week's Change | Year to Date |
| S&P 500 | -2.0% | 15.4% |
| Nasdaq Composite | -3.6% | 18.1% |
| Dow Jones Industrial Average | 0.7% | 6.9% |
| S&P/TSX Composite Index | 0.1% | 8.3% |
Source: Associated Press and Morningstar Direct 07/19/2024
The global disruption to computer systems due to CrowdStrike’s faulty security update had little impact on U.S. trading last week, as major indices in the U.S. ended the week mixed. The rotation in market leadership to small-cap and value shares continued, as the narrowly-focused Dow Jones Industrial Average outperformed, with value stocks outpacing growth stocks.
Source: FactSet, Dow Jones Industrial Average and Nasdaq Composite Index, through 7/18/2024
The underperformance of growth stocks was mostly due to a sharp decline in chip stocks last Wednesday, on news that the Biden administration had told allies it was considering severe export curbs if companies such as Tokyo Electron and the Netherlands’ ASML Holding continued providing China with access to advanced semiconductor technology. Can anyone say “geopolitics?” Chip giants Taiwan Semiconductor Manufacturing, Broadcom, and NVIDIA also fell sharply.
Last week’s economic calendar generally surprised on the upside. Retail sales, excluding the volatile gas and auto segments, jumped 0.8 per cent in June, well above consensus and the most since January 2023. Building permits also rose 3.4 per cent in June, bringing an end to three consecutive monthly declines.
In local currency terms, the pan-European STOXX Europe 600 Index ended 2.68 per cent lower amid rising trade tensions between the U.S. and China. Germany’s DAX dropped 3.07 per cent, France’s CAC 40 Index lost 2.46 per cent, Italy’s FTSE MIB surrendered 1.05 per cent while the U.K.’s FTSE 100 Index declined 1.18 per cent.
Japan’s stock markets lost ground last week, with the Nikkei 225 Index falling 2.7 per cent and the broader TOPIX Index down 1.2 per cent. Technology stocks suffered on rising concerns about tighter U.S. restrictions on exporters of advanced semiconductor technology to China which includes several Japanese chip makers.
Chinese equities rose, as investor sentiment was not affected strongly by weaker-than-expected economic growth in the second quarter. The Shanghai Composite Index was up 0.37 per cent, while the blue chip CSI 300 added 1.92 per cent. In Hong Kong, the benchmark Hang Seng Index retreated 4.79 per cent.
China’s gross domestic product expanded a below-consensus 4.7 per cent in the second quarter from a year earlier, slowing from the 5.3 per cent growth in the first quarter. China’s new home prices fell another 0.7 per cent in June, which extended losses for the 12th consecutive month. This suggests that the property rescue package implemented by the Chinese government in May has done little to turn around the property market slump. This slump continues to be an anchor on the Chinese economy and has forced it to be more dependent on exports for growth. (5)
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.
Bank of Canada cuts interest rate again and signals more to come, Jordan Gowling, Financial Post, July 24, 2024
U.S. economy showing signs of 'Goldilocks' to start third quarter, Josh Schafer, Yahoo!finance, July 24, 2024
Presidential Election Cycle Theory: Meaning, Overview, and Examples, Jennifer Cook, Investopedia, July 5, 2024.
S&P/TSX composite index moves lower Friday, U.S. markets also down amid global outage, Rosa Saba, The Canadian Press, July 19, 2024
Global Markets Weekly Update, T. Rowe Price, July 19, 2024
SUBSCRIBE
If you’d like to automatically receive the weekly Market Update by email, enter your email address in the box below.
We respect your privacy, and you can always remove yourself from the mailing at any time.
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:
What Happens To Stock and Bond Prices When Rates Fall?
Global inflation rate from 2000 to 2022, with forecasts until 2028
Worst Cases of Hyperinflation in History
Interest Rates Likely to Return Toward Pre-Pandemic Levels When Inflation is Tamed