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The Stock Market is Not the Economy

Investment Insights economy

Some say it's been a good  year for the stock market - and at the same time a terrible year for the economy. How does that make sense? Watch this timely video with Steve Paikin talking to Frances Donald, managing director, Global CEconomist & Global Head of Macroeconomic Strategy for Manulife Investment Management; and Brian Milner, freelance business and economics writer.

Key Points from the Video:

A good year for the stock market may be true for the US, but not for the Canadian market.  According to weekly market data (WMD 2020-09-21.pdf)  year to date returns as of Sept 21, 2020 (in C$) show the S&P500 is up 4%  and the NASDAQ up 22%.  However, the S&P/TSX Canadian market is -5% and the MSCI Europe index is -6%. Each market index behaves differently, based on various exposures to sectors and companies.

While it's true that a stronger economy usually means better corporate earnings, it is not true that the market is representative of the economy.   According to Frances Donald, it is more true that the stock market represents a share of the economy, and we need to disabuse the notion that buying an index is buying the broad economy.

The Canadian market performance is largely resource and banking stocks, not correlated to the general economy.  If you havae  a thesis, look at which index best represents it.  For example, if you are optimistic on energy or transportation, you would get that exposure in Canadian market.  If you are optimistic on technology or healthcare, you would look at the US equity markets.  

In the US, the 50% of the market capitalization of the S&P 500 market index is from the manufacturing sector, yet manufacturing is less than 10% of jobs.  The US stock market has been driven by  five -six  technology stocks, which account for about a fifth of the earnings of the S&P 500 index.  While these have dominated the market returns, they do not represent the economy as a whole.  In past recessions, all sectors were weakened, but in the recession triggered by COVID-19, the service sector has been hurt more greatly while the manufacturing sector has been less affected. 

The stock markets have been rebounding  quickly, in part because of the rising global middle class, and pension or institutional managers seeking investment opportunities.  The continued low interest rates and low returns on bonds mean a rising demand for equities, which continue to outperform over the long term, and to provide dividends and liquidity.  To achieve target rates of return, investors are looking at higher-risk options, sometimes in companies that are valued on intangible assets, sometimes new ideas such as infrastrucure, emerging markets, real estate, gold, alternative products.  These speculative areas need more risk tolerance and a longer investment time horizon. 

With your investment advisor, discuss your risk tolerance, goals, time horizon, and look at thematic picture, and which companies or mutual funds are part of that longer term view.  At the moment, energy, commercial real estate, transportation, travel and banking have lower earnings and thinner margins, while technology stocks have been rising and could be overbought.  However with few investment alternatives, money may continue to remain in these high-return stocks until interest rates rise and lower-risk investments become more attractive.  It is risky to time the market, or to guess where the market will be on a given day.   For this reason, as your investment advisors, we access economists and professional portfolio managers and make  asset allocaton recommendations that suit your personal goals.  

While Ontario continues to limit the size of gatherings, our joint advisor team has been working with clients  by phone, email, and video-chat.  This month, we re-started meetings in person, with masks on.  Please contact us should you wish to discuss your portfolio or any of the ideas in this video. It's another way that we are here for you.

  • Elaine Kelly, MBA CFP, FCSI,  Senior Investment Advisor, Manulife Securities Incorporated
  • David Wyatt, BA, B.Comm, CFP, Senior Investment Advisor, Manulife Securities Incorporated 
  • Katlin Wyatt, BA, Investment Advisor, Manulife Securities Incorporated
  • Diana Kancko, Executive Assistant, Manulife Securities Incorporated
  • Terry Wyatt, Executive Assistant, Manulife Securities Incorporated

Source:  https://www.tvo.org/video/the-stock-market-is-not-the-economy