The U.S. stock market indices have been paying little attention to the struggles of the overall economy of late.
Since May, the Dow Jones Industrials (DJI), S&P 500 and NASDAQ have all been moving upwards. Each ended August within 2.0% of its 52-week high.
The year-over-year increases have been remarkable. NASDAQ is +18.9%, followed by the S&P 500 at +15.4% and the DJI, +12.7%.
Versus their 52-week lows, the leader has also been NASDAQ, ahead by one-third (+33.4%). The S&P 500 is +30.9% and the DJI +25.8%.
The slack in the U.S. labor market has proven to be a boon for corporations. During the latest quarterly reporting period, 70% of firms in the S&P 500 exceeded analysts’ earnings expectations even though sales often didn’t meet targets. Companies were able to realize stronger profits through lower labor costs.
For Canada’s headline stock market index, the TSX Composite, the song hasn’t been nearly so cheery. The August closing of the TSX was 6% below a year ago and 7% below its 52-week high.
Profits have been driving equity prices. They’ve generally been rising in the U.S. while falling in Canada. A weaker resource sector has accounted for the fall-off north of the border, although the banks are now turning in surprisingly strong numbers.
On a more macro level, both the U.S. and Canadian economies have been performing sluggishly. Both will be fortunate to record annual growth rates of between 2.0% and 2.5% at best.
U.S. second quarter growth was 1.7% annualized after a 2.0% performance in the first quarter.
U.S. consumer confidence, as reported by the Conference Board, fell slightly in the latest month (to an index value of 60.6 in August from 65.4 in July), as did the measure of manufacturing activity provided by the Institute of Supply Management (ISM). The ISM’s Purchasing Managers’ Index (PMI) in August slipped to 49.6% from 49.8% in July.
A reading above 50.0% indicates both the manufacturing sector and the overall economy are expanding. Between 42.6% and 50.0%, the economy is growing but manufacturing is contracting.
Below 42.6%, nobody’s having a good time.
Based on the historical relationship between the PMI and “real” (i.e., inflation-adjusted) output growth, the current 49.6% figure corresponds with a 2.4% annual gain in gross domestic product (GDP).
That +2.4% figure for U.S. GDP growth is interesting because it closely matches what is happening in Canada. For example, our industry-based GDP in June was +2.4% versus June of last year.
The second-quarter GDP result in Canada was +2.5% versus the second quarter of last year.
The annualized quarter-to-quarter change in real GDP in the April to June period was +1.8%, the same as in Q1 and only slightly down from +1.9% in Q4 of last year.
All of the indicators for GDP growth track in a range about half what it should be. The full output increase, when all sectors are in successful party-mode, is about +4.0%.
The Quebec Election and the Greek Experience
Canadian stocks have been handed another possible set-back on account of the provincial election in Quebec. On September 4, the Parti Quebecois was returned to power in la belle province.
The new Premier, Pauline Marois, is a dyed-in-the-wool separatist. The margin of victory in the 125-seat legislature was thin, a plurality rather than a majority, with 56 seats going to the PQ, 48 to the Liberals and 19 to the newly formed CAQ (Coalition Avenir Quebec).
During the campaign, both the Liberals under dethroned Jean Charest and the CAQ led by Francois Legault made clear their opposition to another referendum on the province’s separation from the rest of Canada.
The PQ must form alliances to take charge within a minority government. This will restrict its ability to undertake measures that are too radical.
There’s a growing body of opinion that the cost to Quebec of removing itself from the federation would be prohibitive. The Greek experience has shed a great deal more light on what it takes to be a responsible sovereign nation.
On a per capita basis, Quebec is Canada’s most heavily indebted province. It’s also the recipient of massive equalization payments from the other regions.
If the province leaves (and polls suggest minimal support for such a step among Quebecers), it will have to assume its share of the national debt and take on additional burdens in policing and defense.
Quebec’s social programs are heavily subsidized and the new government intends to freeze university tuition fees as well as expand benefits in other areas.
In light of the foregoing, the premium on stand-alone Quebec bonds might be shocking. Ms. Marois approaching Stephen Harper for bail-out money would make for an interesting photo-op.
If an independent Quebec were to stick with the loonie, it would need to enact massive austerity measures. If it established its own currency (say the “hab” or the “nordique”), there would be a vicious depreciation that would see the cost of imports (e.g., oil) skyrocket.
But all of this is speculation and, frankly, too depressing to contemplate. For a final comment, let’s return to the U.S. economy. Lower consumer confidence notwithstanding, it is a very big plus that the U.S. housing sector is shaking off its bondage.
Starts, permits and prices are all on a gradual upswing. As this trend becomes more entrenched, the entire negative tone of the present North American economic discourse will undergo a positive adjustment.
|INDEX||52-WEEK LOW||52-WEEK HIGH||YEAR AGO
(AUG 31, 2011)
(JUL 31, 2012)
|Latest Month-end Closing Prices
(AUG 31, 2012
|PER CENT CHANGE,
|52-WEEK LOW||52-WEEK HIGH||YEAR AGO||MONTH AGO|
| Dow Jones Industrials
|Oct 4 11 10,404||May 1 12 13,360||11,614||13,009||13,091||25.8%||-1.9%||12.7%||0.6%|
S & P 500
|Oct 4 11 1,075||Aug 21 12 1,427||1,219||1,379||1,407||30.9%||-1.4%||15.4%||2.0%|
|Oct 4 11 2,299||Mar 27 12 3,134||2,579||2,940||3,067||33.4%||-2.1%||18.9%||4.3%|
|S & P/TSX Composite
|Oct 4 11 10,848||Feb 28 12 12,789||12,769||11,665||11,949||10.1%||-6.6%||-6.4%||2.4%|