Market Update - The Uneasy Recovery

The equity markets in much of the developed world continue their upward rally. Year to date, the TSX is up <green>+18.06%<green> while the S&P500 is up <green>+20.41%<green> [1].

Economic Recovery

As much as we would all like to put the pandemic behind us, Covid-19 remains a source of uncertainty for the global economy. The latest indicators point to a slowdown in the economic recovery we’ve witnessed earlier this year. Even as the world finds renewed optimism in Covid-19 vaccinations, the new Delta variant proves difficult to contain. Some parts of the world are back in lockdown. This is most notable in China, where new Covid-19 infections led to the closure of a major port, the Ningbao-Zhoushan port, for a period of two weeks. The Ningbao port was one of the world’s busiest by container volumes, connecting to over 600 ports in 100 counties, and its temporary closure provided yet another setback to the recovering global supply chain [2]. Similarly, lockdown measures have been re-introduced in places such as New Zealand and Australia [3].

There are signs that the Delta variant is having a tangible impact on the nascent business recovery. Numerous businesses warn of short term pain ahead. Southwest Airlines recently cautioned that it has experienced a deceleration in close-in bookings and an increase in close-in trip cancellations in August [4]. Meanwhile, Airbnb also warned about the potential adverse impact on its booking due to Covid-19 [5]. There are also indications of dampened momentum in high frequency data; traffic at restaurants, grocery stores, gas stations, and retail outlets all fell starting in late July, after initially surpassing 2019 levels earlier in the summer. Business confidence is also suffering as a result. A recent survey found that small-business confidence fell in August to its lowest levels since March, as only 39% of business owners expect U.S. economic conditions to improve over the next year, down from half in July and two-thirds in March [6].

Despite these negative developments, the uncertainty is much lower compared to last year. For one thing, the vaccine is drastically slowing the number of patients who develop severe symptoms, thus reducing people’s fears of going about their daily lives [7]. Vaccination rates in the developed world, such as in Canada and the US, are also climbing higher as one would expect [8]. Furthermore, although still highly uncertain and subject to fluctuations, there is hope that the Delta surge may have peaked in some of the outbreak’s original hotspots [9].

The labor market in the world’s largest economy also shows encouraging signs. Despite disappointing August numbers, the recent U.S unemployment and job growth numbers still point to a strong recovery [10]. The more optimistic statistics comes from the new U.S Census survey which finds that worker’s fear of Covid-19 is declining. The number of Americans who aren’t working for fear of Covid-19 keep falling, from a high of 5.5 million in January to 2.8 million in June and 2.5 million in late July and early August [6].

Finally, the market is optimistic about the excess savings consumers and businesses have accumulated during the pandemic. Oxford Economics estimates that, as of June, American households have saved an extra $2.5 trillion as a result of the pandemic. Consumers are eager to spend this cash, and when they do, it will help boost the recovery by unleashing pent up demand unto the economy [6].

Federal Reserve Tapering

Aside from Covid-19 related concerns, the market continues to monitor the Fed’s announcement of potentially winding down its $120B monthly asset purchases program, known as Quantitative Easing (QE), before year end.

The U.S Federal Reserve, along with other central banks, effected drastic measures to keep the economy afloat during the early days of the pandemic. The Fed took its benchmark interest rate down to near zero and implemented a quantitative easing program, which ended up swelling its balance sheet to nearly $8.4 trillion, almost double where it was in March 2020.

Nonetheless, now that the economy is showing more signs of life and the labor market is fast recovering, the Fed believes the economy no longer needs such radical policy supports. The U.S unemployment rate in August was 5.2%, drastically down from April 2020 highs of 14.8%, yet still hovering above its February 2020 rate of 3.5% [10] [11].