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U.S. markets have been trading in record territory recently. However, as signs of economic weakness persist, can that rally last? Justin Flowerday, Head of Public Equities at TD Asset Management, discusses Wall Street’s recent performance and the outlook going forward.
Greg Bonnell: US markets in record territory amid some more signs that inflation is easing without doing too much damage to the economy. But we do have plenty of warnings about a potential recession on the horizon. So, can the rally last? Joining us now to discuss, Justin Flowerday, Managing Director and Head of Public Equities at TD Asset Management. Justin, great to have you back on the show.
Justin Flowerday: Great to be here, Greg.
Greg Bonnell: So let’s talk about, namely, the S&P 500. The Dow has made new highs. What is going on in the market right now?
Justin Flowerday: Yeah, it’s been a strong start to the year for the market, Greg. We really haven’t skipped a beat since Q4 and ending on a strong note last year. And if you think about this current rally, it really started towards the end of October last year. And it was on the back of an inflection lower in rates.
And since then, rates have continued to trend lower. And you’ve started to see some of the leading economic indicators kind of rebound. And so you’ve seen initial jobless claims, which started to tick up towards middle to end of last year. They’ve been hovering around 200,000, which is a really strong level.
You’ve seen PMIs forming a bit of a bottom. And then you’ve seen financial conditions really start to loosen. And with that, credit spreads have come in. So credit spreads are probably sitting around a two year, in terms of being narrow. And you’ve also seen a bunch of other financial conditions, such as real rates, come in.
And we’re just trending towards 2% in terms of real rates. So all of this speaks to kind of short term economic momentum for the real economy.
Greg Bonnell: When we talk about the market rally of last year, one of the criticisms– and you said it was continuing to this year– one of the criticisms that there wasn’t a lot of breadth, right? That you were talking about the Magnificent Seven– if you weren’t in those names, you didn’t take part. Are we starting to see a little more breadth in the market?
Justin Flowerday: Yeah, you are. And I think this has to do with the fact that some of the money that was sitting on the sidelines is slowly making its way into the market. You still have a ton of money on the sidelines sitting in cash and GICs waiting, waiting for a better entry point. But you’re starting to see some move into the market.
And it’s moving broadly. And you can look at breadth in a bunch of different ways. One of the ways we look at it is in terms of number of stocks or percentage of stocks, where your 50-day moving average is above the 200-day moving average. And going across the board for the S&P 500, you’re seeing about 60% of stocks right now with their 50-day moving average above their 200-day.
That was probably at around 30% of stocks back about three months ago. So broadly, more stocks are moving higher. It still is quite concentrated within the tech sector. But even so, outside of the Magnificent Seven within tech, you’re seeing broad, broad gains across semis, across software, and different areas of technology. So yeah, absolutely broadening out.
Greg Bonnell: OK, so on the macro side, which we are talking about, we have inflation, signs of cooling in the States, the economy is not getting damaged too much, yields have come off of their highs from last October. But we’re also in the thick of earnings season. And some companies will just earn their way, or, perhaps, not earn their way, based on what they’re handing in. What are we seeing so far?
Justin Flowerday: Yeah, it’s still early. We still are yet to reach kind of the peak of earnings season. The next week, we’re going to see a whole bunch of the really large technology companies’ report. But we have heard from a mishmash of companies in industrials and some consumer.
And the banks really did start things out about a week and a half ago. And if you look at the banks and what they had to say, I think there’s a couple of things you can probably take away from that. One is on the consumer. And so when you think about the large US banks of the world– the JPMorgans, the Wells Fargos, the Banks of America — I mean they really do provide a window into how the consumer is doing in terms of a financial position.
And they had some interesting comments. There’s still pressure in some areas, the low-end consumer. But on average, we’re seeing deposit balances still around 30% higher than they were pre-COVID. And we’re seeing spending trends continue to move in the right direction. And so in general, I think we heard a bit of a positive signal from management teams at the banks that the consumer is in somewhat of a healthy position.
Greg Bonnell: Now, we’ve been talking a lot about the US market. The S&P 500 grabs headlines when it makes new all-time highs. What about the Canadian market? We’re not quite there yet.
Justin Flowerday: Yeah. So the Canadian market, certainly, hasn’t been able to keep up with the US market. And if you look at last year, for example, the S&P 500 was up something like 25%. The Canadian market, the TSX, was up, but it was up about half that. And so it continues to lag.
And when you dig down and you think about the reasons why it’s lagging, it’s actually quite simple, which is we really just don’t have the size of a technology sector that the US does. And so, look, our tech stocks in Canada are doing great, right? Shopify (SHOP) doubled last year– more than doubled.
Constellation Software (OTCPK:CNSWF) was up 60%. But the size of the tech market in Canada isn’t nearly as large as the tech market in the US. And the big chunks of the market in Canada, like the banks, and like the commodities sectors, and other financials, they just haven’t been able to keep up.
And so Canada has lagged. Going into 2024, I think there’s an argument to be made that the setup looks pretty decent from a valuation standpoint– very, very attractive valuation levels. From a sentiment standpoint, not too many folks are really, really excited about Canada. And I think if you add to that the fact that we may start to hear signs that the global economy, outside of North America, is going to start to strengthen, in 2025, 2026, that would play into Canada’s strengths. A lot of our leading companies have exposure to the global economic cycle. And so there is potential set up for Canada to perform a little better going forward.
Greg Bonnell: Speaking of the global perspective, I wanted to ask you about China. For the past year, the markets have not performed well. I saw a little life got kicked in today– it seems that China, perhaps, wants to stimulate or help out the property sector. Obviously, one day of action does not make a trend. But what are we seeing there?
Justin Flowerday: Yeah. So China’s had a really, really, really tough go. And if you look at from the peak of the market in 2021, at which point they were really keeping up with the US, they’ve lost about $6 trillion in market value over the last couple of years. And we’re actually sitting at around a five-year low in China.
And what you’ve heard recently is a couple of different things. Some rumors, some have actually been announced. One of the things that was announced was a 50 basis point reduction in the reserve requirement ratio, which speaks to the amount of reserves banks have to keep on their balance sheet in terms of every time that they lend. And that should provide a little bit more stimulus for lending and for economic activity.
But, look, they’re plagued by a property sector that has been having difficulty for quite some time. They’re having difficulties in terms of trade wars with the US, and now, it looks like, trade wars, potentially, with Europe. They’ve got some demographic issues. They’ve got some leverage issues– and so lots of things to overcome.
They’re going to probably have to do a little bit more than just cut the reserve requirement ratio. There’s chatter about potentially a $280 billion injection directly into the stock market. And this really does tell you how concerned the government is about the stock market.
And, really, it speaks to the fact that this is a public lens into the health of the economy and in terms of the health of the market in China. And it’s interesting because when you think about the net worth of Chinese individuals, the majority of their net worth is tied up in property. And not as much nearly, compared to the Western societies, is tied up in stock markets.
But the stock markets are very public lens into what, potentially, the health of the economy and the markets are doing. And so they really want to see a little bit of support for the stock market. And they want to see things move in a different direction.
