Briefing highlights
- Why U.S. stock rally may stall
- What’s behind the surge
- Markets at a glance
- Retail sales fall in August as …
- … inflation remains tame
- Airbus sees C Series as hot seller
- GE revenue up, profit down
- P&G profit climbs
Whither U.S. stocks
The U.S. stock surge is likely to run out of steam, some market observers say.
And even if it doesn't, David Rosenberg is adamant that it's not a so-called Trump rally.
U.S. President Donald Trump would have you think otherwise, having taken credit for the spectacular run in tweets that highlighted the gains since his election.
But Mr. Rosenberg, chief economist at Gluskin Sheff + Associates, isn't alone in citing other reasons for the rapid boost to stock prices.
Last week, it was Bank of Nova Scotia economist Derek Holt who took issue with Mr. Trump's bragging. This week, in one of his daily notes to clients, Mr. Rosenberg said the rally isn't because of the Trump administration, but rather "despite the White House."
More on that later. As for the rally itself, market observers question its sustainability.
"The MSCI World Index (of developed-market equities) has surged to a record high this week, with much of its strength this year due to a broad-based improvement in expected earnings," said Capital Economics markets economist Oliver Jones.
"We think that the outlook for earnings remains bright in most of the developed world – but not in the U.S.," he added.
Earnings expectations among U.S. companies had "increased significantly" over the past several years, while those of non-American concerns had lagged.
That, Mr. Jones said, was because of the strength of the U.S. economy compared to others. Which means, he added, that the U.S. cycle is now "at a relatively advanced stage," with wage growth soon to perk up and eat into corporate profits.
So he doesn't see expectations continuing to drive the market higher.
"This is part of the reason why our forecast is for the S&P 500 – which the MSCI USA Index tracks closely – to end 2018 just below its current level," Mr. Jones said.
"Admittedly, the Republicans' proposed tax reforms might boost corporate earnings if they are implemented. But a lot of good news already appears to be discounted on this front."
Look, too, at volatility, as illustrated by the VIX, known in markets as a fear meter, which is exceptionally low but has recently inched up, noted John Higgins, the chief markets economist at Capital Economics.
"This suggests that investors are growing anxious that the rally will run out of steam soon and be followed by a correction," Mr. Higgins said, adding that "the recent rise in the VIX is a warning sign that a bout of profit-taking may lay around the corner."
We'll see what Mr. Trump has to tweet when and if that happens.
As for what's behind the rally, Mr. Rosenberg said "it almost seems like a miracle that" U.S. stocks could be at or testing record highs given the "relentless friction" between the administration and Congress, the president's failure to actually make his economic pledges reality, the move toward "a xenophobic immigration stance" and away from the stability of trade agreements.
Mr. Trump did get one win late Thursday as Senate Republicans backed the budget.
Mr. Rosenberg took no shots at the president. Nor did he refer to the tweets. His comments, rather, were about the nature of the run-up.
As always, you've got to love how Mr. Rosenberg puts things.
"Is this still a Trump rally?" he said. "The answer is still no. In fact, one can argue that all classes are performing inversely to his presidency."
Obviously, stocks have surged. But here's Mr. Rosenberg's year-to-date evidence behind his argument, based on where things stood early Thursday:
1: "The stocks in the highest quartile of corporate tax rates have underperformed the lowest quartile by around 400 basis points."
2: The U.S. dollar index has dropped about 9 per cent.
3: Bond markets are "range-bound" but the 10-year Treasury yield has dropped by 10 basis points.
4. Tech stocks are soaring, far outpacing others. Investors were told to stay away from tech given the industry's lack of support for Mr. Trump and "this is the part of the economy most sensitive to reduced cross-border trade flows and disruptions to global supply chains."
5: Other stocks are far outpacing financials, the "poster child for deregulation."
6: Gains in large-cap stocks are eclipsing small-cap shares – those that were "supposed to benefit more from an 'American First' protectionist policy."
The rally, Mr. Rosenberg said, is being pushed by the lower greenback, the Federal Reserve outlook, the economies of Asia and Europe, and higher oil prices, among other things.
Read more
- David Rosenberg: Markets no longer experiencing a Trump rally
- Follow Inside the Market
- Tim Shufelt: Canadian stocks catching up to rising profits
- Things you should know as the Toronto Stock Exchange rouses (and Trump can’t even take credit)
- A test of (market) IQ: Scotiabank economist finds Trump wanting
- David Berman: Canadian bank stocks no longer cheap, but still worth owning
- Rob Carrick: How dividend growth can push your stocks higher in price
- John Heinzl: My new dividend portfolio is off to a flying start
Markets at a glance
Read more
Sales down, inflation up
Canadians are shopping less, and the prices they're paying remain tame.
Retail sales slumped 0.3 per cent in August after a 0.4-per-cent gain in July, Statistics Canada said today.
Annual inflation, meanwhile, picked up to 1.6 per cent in September, following August's 1.4 per cent. On a monthly basis, consumer prices rose 0.2 per cent last month, mirroring August's rise.
On the retail side, food and beverage outlets slumped the most, down 2.5 per cent because of a pullback at the grocery store. Gas stations, on the other hand, gained by more than 3 per cent, primarily because of prices.
When you strip out the price effects, overall retail sales fell 0.7 per cent by volume.
Prices at the pump also factored heavily into the inflation reading, rising more than 14 per cent in September from a year earlier. That, remember, was the result of Hurricane Harvey's hit to refining.
"Canadian consumers have had a tremendous year so far, so one softer month for retail trade won't spoil the party," said Nick Exarhos of CIBC World Markets.
As for consumer prices, he noted that "underlying inflationary pressures remained MIA" despite the higher annual pace.
The loonie slipped in the wake of the reports.
"A very slow turn in prices, and what looks like another ho-hum month for GDP augurs for a dovish take on the Bank of Canada on Wednesday next week," Mr. Exharos said.
More news
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