Gallivan Wealth Management: Report on September 2021
A few topics our newsletter touches on this month:
- Our Thoughts: Keeping an Eye on Earnings (plus US Debt, China and Bond yields)
- Interesting Reading: Global Insight Monthly, WHO interview, Canada’s housing supply, RBC Inflation Watch and Election result breakdown
Our Thoughts: Keeping an Eye on Earnings
The Canadian Federal election resulted in a “status quo” result that looks remarkably like the parliament we had before the writ dropped. Markets are similarly seeing a return to normal volatility levels after months of relative stability and growth. As a result of this volatility, many global markets have experienced some pressure in recent weeks, although the bouts of weakness have generally been orderly in nature. We highlight three key variables that might be of interest: US debt, China & Evergrande, and Bond yields. While all of these attract the majority of media coverage, we continue to keep an eye on earnings, which still look constructive for equities.
By the numbers (September): The TSX was down 2.2 % while the S&P 500 was down 4.2% (4.7% in US dollars). the Europe, Australia & Far East index (EAFE) was down 2.7%. The Canadian bond universe was down 1.4%.
U.S. government funding and debt: The U.S. government has been grappling with yet another case of political gridlock in recent weeks that had it teetering on the edge of having to shut down. These episodes are more common that one would expect, with the government having done so fourteen times since 1980, with the most recent experience just a few years ago.
More concerning is the risk of government default. The U.S. government is approaching its debt ceiling, a limit on the amount of money it is allowed to borrow. As a result, it needs to raise the limit, like it has so many times before, or risk default. We expect one of two outcomes, though we acknowledge it may come down to the wire. Either an agreement may eventually be reached between the two sides or the Democrats may lift the limit on their own (they control both chambers of congress).
China and Evergrande: China’s second largest property developer, Evergrande, has been under stress this year, with its bonds and share price selling off significantly, suggesting high risk of bankruptcy.
There are a few reasons this is important for global investors: 1) the risk of financial contagion given the sheer size of the property developer and the interconnectedness of global credit markets; and 2) the risk to the Chinese economy, which is the world’s second largest.
Encouragingly, global credit markets, where bonds of companies from around the world are bought and sold by investors, are behaving relatively well in the face of the Evergrande debacle. This suggests the risk of contagion outside of Chinese financial markets may be low. The bigger risk may be the Chinese economy which has already seen its momentum wane this year.
Bond yields: In the past week, Canadian and U.S. government bond yields have abruptly risen. A rise in bond yields suggests investors are selling bonds, thereby driving prices lower. Sharp moves in bond yields tend to impact “high growth” stocks like those in the technology sector which are particularly vulnerable to bond yields and the interest rate outlook given how future cash flows are valued by investors.
We suspect the recent bout of bond yield volatility can be attributed to two main issues. First, the U.S. Federal Reserve recently confirmed that it will reduce its monthly purchases of bonds given there is less need to support the lending markets and overall economy. It also indicated that it may begin to raise interest rates later next year. Secondly, inflationary pressures continue to mount, and are being exacerbated by supply chain issues across the globe. Not surprisingly, growth stocks have borne the brunt of the equity market weakness through this recent move higher in bond yields, just as they did earlier this year.
We believe the inflation outlook is difficult to assess. As a result, we expect periods of volatility and an ongoing tug of war between growth and so-called value or cyclical stocks, something we continue to be prepared for as we move through the rest of the year and into 2022.
Interesting Listening/Reading
- To check out our Global Insight Monthly for September find the link here.
- From RBC Thought Leadership:
- Election results: Great election post-mortem from the Globe and Mail.
Wishing you a Happy Thanksgiving and please do not hesitate to reach out to any member of our team to discuss your portfolio or financial plan.
Mark, Peter, Sarah, Corinne & Nathalie
Gallivan Wealth Management Team