It's spring and everything is coming up roses. Or so it would seem.
The TSX has staged a remarkable recovery from its miserable start to the year. The loonie briefly moved over 78 cents (U.S.) last week, up more than 13 per cent from its low of 68.69 cents on Jan. 19. The price of oil is over $40 (U.S.) and it appears we may have seen the bottom.
To top it off, the Bank of Canada came out with a moderately positive view of the economy last week. In announcing it is holding the line on the key overnight lending rate at 0.5 per cent, the Bank raised its forecast for GDP growth this year to 1.7 per cent, from 1.4 per cent in January. That's not a particularly strong number but it's better than the previous estimate.
In its statement, the Bank commented: "the positive forces at work in the economy are starting to outweigh those that are negative." Those are the most encouraging words we've heard from Governor Stephen Poloz and his associates for some time.
Among the positive factors cited was the fact that new jobs continue to be created, especially in the service sector, despite the continued weakness in commodities in general and energy in particular. Household spending is holding up well and business investment is expected to turn positive later this year. The Bank also noted the fiscal stimulus measures contained in the March budget, which it said "will have a notable positive impact on GDP".
In his opening remarks at a press conference following the release of the April Monetary Policy Report, Mr. Poloz said he and his colleagues aren't entirely certain of the impact the budget will have over time but are convinced it will be enough to offset weakness in global growth, continued cuts in energy capital spending, and a higher-than-expected rebound in the loonie.
That seems to be asking a lot, especially since, in Mr. Poloz's words, much "will depend on how households react over time". The main focus of the budget was a wealth transfer to the middle class. If people go out and spend most of that money, it will act as an accelerator to the economy. If they decide to save it or pay down debt, the economic impact will be more muted.
There were all kinds of caution flags in the Bank's statement and Mr. Poloz's remarks. The target for global economic growth has been cut to 3 per cent for this year. Particularly worrisome is the Bank's view of the U.S. economy, which it says "is expected to regain momentum, but with a lower profile and a composition that is less favourable for Canadian exports."
The run-up in the value of the loonie isn't helpful in that regard. Mr. Poloz said "the higher assumed level of the dollar contributes to a lower profile for non-resource exports in our projection, as does lower demand from the U.S. and elsewhere".
There's no doubt things are better than they were back in bleak January, and let's be thankful for that. But there are still a lot of uncertainties out there that will weigh on the markets.
At this stage, I can't be optimistic that the strong showing of the TSX in recent weeks will continue as we move into late spring and summer. The financial sector, the largest component of the S&P/TSX Composite at 37.9 per cent, remains in the doldrums (Scotiabank announced a new round of job cuts last week). Energy stocks (19.3-per-cent weighting) rallied as the oil price moved higher but without some significant worldwide production cuts it is hard to see that upward momentum continuing. If the Bank of Canada is right about the trend in U.S. exports, that could have a negative impact on industrials.
So don't get too excited about the good news. It's a nice change from the doom and gloom of winter but there's still a long way to go before the economy gets back to anything resembling normal.
Gordon Pape is Editor and Publisher of the Internet Wealth Builder and Income Investor newsletters. Follow him on twitter @GPUpdates and on Facebook.
Gordon Pape