Global markets have been relatively resilient through a summer period that has had its fair share of uncertainties. More specifically, renewed political and geopolitical uncertainty, a fourth (and in some countries fifth) wave of Covid-19, moderating global economic growth, and a U.S. Federal Reserve that appears to be on the verge of fine tuning its ultra-accommodative approach to monetary policy. We offer some brief thoughts on the latter three issues that remain central to the investment outlook.
The general economy continues to learn how to function amidst a pandemic that is nearly 1.5 years old. That’s not to say things are back to normal, particularly for some pockets of the economy. But, consumers, households, and many businesses have figured out how to make do, for the most part. Vaccinations have helped too. And while new cases are rising across many jurisdictions, the impact on hospitalizations and the economies of many countries has become less pronounced with each successive wave of the virus. As a result, markets aren’t as fussed as they once were and that trend may continue barring any meaningful change in transmissibility and morbidity.
Economic growth in recent months has begun to slow. Undoubtedly, part of this is driven by new waves of the virus, but much of the slowing has to do with a reversion that was inevitable. The slowing explains the recent weakness of late in some pockets of the global markets such as commodities, cyclical sectors, and even currencies like the Canadian dollar.
Growth bounced back so strongly last year as a result of the reopening, pent up demand, excess savings, and government support, but the pace was always destined to fade to something more normal. The question is whether growth is simply leveling off to a more sustainable level or whether the slowing could turn into something more prominent. The former may be more likely based on recent economic data points and other factors.
Furthermore, the global economy has yet to reach its full potential and could do so should the pandemic eventually turn into something milder, or even end completely over the next year. So, there is still room for improvement.
One of the primary supports that has been in place for the global economy and markets has been the central banks. This is particularly true in the U.S. where the Federal Reserve has emphasized it would do whatever it could within its means to ensure a functioning credit market and sustainable economic recovery. This includes a program by which they purchase billions of dollars of bonds every month to keep bond yields, and the cost of financing, relatively low. The Federal Reserve is likely to modify this program in the not too distant future given the progress made since last year. Regardless of timing, a change is in order, and it will mark the beginning of a gradual unwind of its stimulus. While noteworthy, it does not suggest the conditions that have been so supportive to the recovery are set to deteriorate. Moreover, any interest rate hikes still remain well more than a year away. In other words, the transition from accommodative to more restrictive monetary policy is more likely to take a few years to unfold.
The aforementioned issues have all bubbled to the surface in recent months. Yet, they haven’t deterred global equity markets, with many still sitting near their highs. The outlook remains constructive given the diminishing impact from the virus, an economy that should continue to grow at a reasonable pace, and a monetary policy backdrop that remains very supportive. But, investors may want to temper their expectations with respect to investment returns. The sharp market rebound since last year combined with valuations that are generally above average suggest forward looking return potential, while still reasonable, may be more moderate.
Covid and Vaccine Update:
As we become more vaccinated as a population one of the interesting trends is the number of fully vaccinated Covid positive cases now making up a larger percentage of overall cases. Unless vaccines were 100% effective, which we knew wouldn’t be the case, this was completely predictable. As more of us become vaccinated, and more of the unvaccinated obtain natural immunity, cases will surely become relatively more prevalent among the vaccinated.
Ontario provides some great data according to vaccination status so we will look at their numbers. 25-30% of daily positive cases for the last week in Ontario were at least partially vaccinated, which seems concerning at first glance. In Ontario the ratio of vaccinated to unvaccinated population is over 3:1, and a large part of the unvaccinated group are young children who are far more likely to be asymptomatic when Covid positive and therefore be missed when they aren’t tested. If you look at per capita numbers the story is very different and heavily favours vaccines.
The unvaccinated in Ontario are 13 times more likely to test positive for Covid, 15 times more likely to be hospitalized and 21 times more likely to be in an ICU.
Have a great weekend.
Andy, Sacha and Mike