By Scott Blair
Here we are in the middle of the summer doldrums and yet equity markets continue to grind higher, climbing the wall of worry. With the exception of a couple of short lived pullbacks in March and May the S&P, Dow and TSX seem to hit new highs almost daily. So what happens next?
Here's what we are looking at. In the U.S. there has been a jump in core inflation to 4%. This spooked the market and continues to do so to a certain degree. It seems counterintuitive to have elevated inflation while high unemployment persists. 5.4% in the U.S. and 7.8% in Canada. Through the pandemic, workers left their jobs in number triggering wage inflation for employers trying to hire. It has been dubbed “The Great Resignation”. Companies are trying techniques never used before to attract employees, these include:
- More flex time for those preferring to work from home and make their own hours.
- “Daily food kits”, offered by Ford, that workers can take home to prepare dinner.
- Couches with coffee bars at tech firms, who are removing cubicles.
- Paying new candidates to show up for an interview.
All of these and more seem like employees have generated new demands over the period of COVID. Fewer workers choke the supply chain and add to rising inflation. It is a spiral. There is however hope in the U.S.
There are two specific groups in the U.S. that have created the lions share of those exiting the work force. Those that are comfortable living off of subsidies from the government and women, typically mothers or caregivers who left the workforce to care for the kids during school closures and home learning.
In September, most of the federal subsidies will come to an and. In addition, kids are going back to school as they are here. The hope is that the combination of these two events will allow these folks to get back to work and the participation rate will improve. That’s the hope.
The major impediment is of course the spread of the COVID variants. Florida for example has a nine fold increase in the number of cases just since the beginning of July.
Canada has also seen inflation, which you have likely witnessed firsthand at the grocery store, and is experiencing similar employment trends. The reason we look at the US is simply the scale of their impact on the global economy and the sheer size of their equity markets.
Fundamentally, the renewed spread of COVID won’t likely stop the growth in the U.S. and Canada but more likely just slow it down. Countries around the world have committed to massive infrastructure projects which will promote further growth and prosperity and keep commodities buoyed up. In short, as much as a delay of back to normal is frustrating, we are still very positive on the equity markets throughout the remainder of this year and into next.
Happy Summer everybody. Enjoy.
As always, we’re happy to discuss this further with you.
Photo by Shane Rounce on Unsplash