As we come to the close of the seventh trading month of the year, I think most of us are glad to see it go. The weather was beautiful, the global capital markets not so much. The equity markets saw general declines globally amid a lot of news out of Greece, China and here at home as well.
We are amidst the “dog days of summer” where trading volumes on the global capital markets is traditionally light, so sometimes the economic or political news that comes out has a greater effect than it may otherwise, but all in all we expect August to much of the same that we saw in July as much of the world is on holiday. With the real markets coming back in September as we prepare for what are traditionally the two most volatile trading months of the year, with this year being of particular importance as the U.S. Federal Reserve expected to begin lifting off from a Zero Interest Rate Policy (a.k.a. ZIRP).
While the start to rising interest rates is widely expected, there is still some debate as to whether Janet Yellen and the other FOMC voting members will begin in September or wait until December. If we were placing bets we would say that September is a slight best bet on that, but either way, interest rates are going up in the United States and the markets are adjusting to a new Federal Reserve policy environment.
We are also coming to the close of the second quarter earnings reporting for the S&P 500 reporting companies, where we have seen modest earnings growth and forward earnings guidance. As mentioned last week earnings growth has been led by the Financial Services, Consumer Discretionary and Technology sectors, and we will be looking to increase these holdings on behalf of clients as we move into the fall.
A couple weeks ago we spoke of the Bank of Canada’s outlook for the Canadian economy, and this morning we saw confirmation of their reduced outlook as Canadian GDP fell 0.2% for the month of May. On a year-over-year basis our economy has only grown 0.5%, led by the obvious slowdown in the oil and gas sector along with weaker manufacturing in Ontario. However, a bright spot noted in the report was that support services for both the mining and energy sectors witnessed an increase of nearly 3% in drilling and rig servicing activities.
Turning our eye towards the global economy it is becoming time for the emerging market country central banks to also play their hands. Since the global financial crisis of 2008-2009, global economic activity has been characterized by very short cycles. Each time, growth slowdowns have been met with easing monetary policy from the U.S. Federal Reserve and European Central Bank. But now with the developed market central banks at zero interest rates the onus will be upon the major emerging market central banks, notably the People’s Bank of China and Reserve Bank of India to stimulate credit.
While both have already cut rates this year, reflation has lagged the decline in inflation so that real rates in these emerging markets remain high, having a punitive effect on re-accelerating global growth. As the emerging market central banks complete their own easing cycles it would be expected that the re-acceleration we see in the American economy to become more global in nature. This will naturally take some time to work through the economic system, but does fit in with the Bank of Canada’s comments regarding seeing greater Canadian GDP growth next year.
Tonight we will see a second full moon during the month of July. This phenomenon is known as a Blue Moon, as occurs approximately once every 2.7 years. So the next time someone tells you “once in a blue moon” you can expect whatever it is to happen about every two and a half years.
Whatever you decide to do this long weekend, have a great time.
We never forget that working for our clients is an expression of your trust, and we promise to always uphold that trust. Thank you.
As always, we welcome your feedback.
Have a great weekend.
The Dekker Hewett Group