In this week’s economic update, we are unpacking what was an eventful number of weeks in the news and markets. We are looking at how sector rotation and technology spending are playing a part in weakening the global equities market. We are also examining the impacts of U.S. elections and developments have impacted markets – including the role that Congress has to play.
We are also sharing the latest episode of The 10-Minute Take, where RBC economists Claire Fan and Carrie Freestone discuss the Canadian labour market and how immigration – as well as other factors – are playing into recent trends.
Lastly, a friendly reminder that our Summer Hours are in effect. Please see the details below.
Economic Update
First and foremost, our thoughts go out to those that have been impacted by recent wildfires, in particular those in Jasper National Park.
On the investing front, it has been an eventful few weeks. The Bank of Canada cut interest rates for the second consecutive time. Meanwhile, global equities have been weaker, driven by a classic sector rotation rather than broad market weakness. More specifically, large-cap technology stocks have sold off, while other sectors and smaller stocks have seen gains. In some ways, this development has been overdue and may be a healthy shift as “tech” has dominated market returns for a long period of time.
Technology spending and interest rates having impacts on global equities
There are a few catalysts driving the rotation. First, the increasing probability of a U.S. Federal Reserve rate cut in September, which may benefit rate-sensitive and cyclical sectors, such as housing and construction. Additionally, the second-quarter earnings season is also well underway, and expectations for “tech” have left little room for disappointment. Unfortunately, updates from a few high-profile tech companies were not well received by investors. The concern has not necessarily been the earnings reports themselves, but rather the significant sums being spent on artificial intelligence-related research and development, and growing scrutiny around the future returns on those investments. Below, we take a closer look at the other “big” story: the U.S. elections.
New uncertainty introduced by U.S. Elections
Financial markets have not responded too strongly to the historic events that have unfolded in Washington over the past few weeks. However, the appointment of Vice President Kamala Harris as the Democratic nominee, set to be made official at the party’s national convention next month, has introduced new uncertainty with respect to the outcome of the November elections.
U.S. Congress races will also influence markets
Markets tend to focus on policy and priority differences among the parties, the likelihood of meaningful legislation being passed, and any potential impact on the country’s growth and fiscal position. While the potential President-elect understandably gets the lion’s share of media attention, congressional elections are also important. The U.S. Congress is deeply involved in making new legislation and changing existing ones, and the president must sign its bills in order for something to become law. Therefore, Congress shares authority over financial and budgetary policy and national defense, among other federal government functions. It also has extensive investigative powers over government agencies that the president controls and can initiate special inquiries involving the president and other officials.
History of Congress and increasing common “gridlock”
Currently, of the two chambers of Congress, the Democratic party controls the Senate, and Republicans control the House of Representatives, both with razor-thin margins. This configuration is often referred to as “gridlock” or “divided government” because passing meaningful legislation becomes more challenging, as laws must pass both chambers and be signed by the president to be enacted. Gridlock has been much more common in recent decades. Since 1953, one party has controlled both chambers of Congress and the presidency only 37% of the time, compared to 85% of the time from 1900-1952.
Summary
We will be paying close attention to the elections to get a better sense of any major policy shifts and their implications for future growth and government debts and deficits. Given the unpredictable nature of the election thus far, it is premature to make any real assessments at this juncture. We will follow up as we gain greater clarity. In the meantime, we continue to digest the earnings season that is taking place and expect to offer some takeaways in the near future.
Podcast: What is behind Canada’s rising unemployment if it’s not immigration?
The recent deterioration of the Canadian labour market comes at a time when immigration and population growth have also increased significantly. Many have put the two together, and attributed rising unemployment solely to the increase in the labour force due to newcomers. On that, The 10-Minute Take Podcast has a different view.
In the latest episode of The 10-Minute Take, RBC economists Claire Fan and Carrie Freestone unpack trends in the labour market, starting with how immigration fits into it all. You can find this episode wherever you listen to podcasts, or by clicking the link below:.
You can listen to the episode by clicking here.
Summer Hours Continue
A friendly reminder that Elinesky Schuett Private Wealth is recognizing summer work hours. Until September 6th, our office will be closing at 4pm on Fridays. Thank you for your understanding.
As always, we are available to connect with you personally. Please don’t hesitate to contact us at 519-822-2024 or elineskyschuett@rbc.com.