Global equity markets experienced some weakness this week, though the decline was sparked by no obvious catalyst. The week was also highlighted by a combination of hope on the vaccine front and global economic data for the month of August that suggest the recovery is continuing, albeit at a pace that has moderated. We share our thoughts below.
The selloff that occurred was notable because it was accompanied by a meaningful jump in volatility, though levels remain well below the extremes seen earlier this year. Furthermore, the selloff was led in particular by the so-called “growth” stocks that have been responsible for leading the global markets higher in recent months. But the ingredients for this week’s decline may have started to come together weeks ago as there was growing evidence that fewer stocks were making new highs despite the market itself moving higher. This is often regarded as a lack of “breadth”, which can sometimes foreshadow future weakness.
Covid-19 trends remained largely the same over the past week. More specifically, the number of new cases in the U.S. continues to grind lower. Other jurisdictions are also seeing progress in the form of relatively stable numbers, namely Australia, the African continent, and Russia. Elsewhere, some are grappling with high or accelerating new cases: India, Spain, and France for example. From the market’s perspective, these trends are not surprising, and it may view the lower fatality rates in recent months and measured approaches governments have taken as a sign that economies can function and even recover while the virus is out there. Furthermore, hope remains on the vaccine front. This week, it was revealed that the U.S. Center for Disease Control and Prevention reached out to all states to ensure they are ready to distribute a vaccine as early as November, should one be ready. It remains unclear as to if and when a vaccine will be approved, but the gesture alone understandably ignited a dose of optimism.
On the economic front, there was much to digest this week. The global services sector, which includes businesses in areas like hospitality and leisure for example, was hit particularly hard this year given the nature of the health crisis. But, data for the month of August across Europe, Asia, and North America suggested that this part of the global economy is continuing to recover. However, the pace has moderated. This slowing may be a function of a normal levelling off following a strong initial rebound in recent months, or it could be a result of something more worrying such as renewed concern on the part of consumers or localized lockdowns in certain areas that have faced a resurgence of the virus.
Separately, employment figures across North America suggest a similar trend of ongoing recovery but moderating momentum. Canada and the U.S. both saw another month of employment gains in August. Inevitably, some investors will focus on the fact that nearly half of the jobs lost across North America during the peak of the pandemic have now been recouped (to be precise, more than half of the jobs lost have been regained in Canada). Others are likely to emphasize the fact that millions of people still remain unemployed and are depending heavily on government programs. We think it’s important to recognize that meaningful challenges remain, but to also understand that we are in a period of healing and recovery that will take time.
This week marked the beginning of September. As a result, we are turning our focus to the fall season and the issues that could have important consequences for the economic and investment outlook. These include the return to school, which promises to be unlike any other. Meanwhile, the widely used Canadian Emergency Response Benefit (CERB) transitions to new and more permanent programs at the end of the month. A throne speech from Prime Minster Justin Trudeau, also later this month, may prompt a confidence vote and offer an opportunity for opposition parties to respond. Lastly, the U.S. elections take place in less than two months and will undoubtedly garner much investor attention in the weeks to come.
Chairman Jerome Powell announced changes emphasizing the importance of both inflation and labour within its mandate. But what are the risks of shifting from an inflation target of 2% to an average of 2% over time? And how will a renewed focus on employment affect interest rates and growth into 2021? On the latest “10-Minute Take” Tom Porcelli, RBC Capital Markets’ Chief U.S. Economist, shares his take on how the Fed’s new approach could play out in markets and the economy.
What you’re cooking in lockdown depends on your situation. For today’s tip here's a list of 10 meals that take 10 minutes, and 10 that take 10 hours!
Enjoy the long weekend!