U.S. Portfolio Strategist Tony Dwyer reviews August and sets out his strategy for September by addressing four key questions:
- Was the August decline a “crash”? Yes, based on the rarity of a 10-day Rate of Change (ROC) dropping to minus 10.
- Is the U.S. still in a fundamentally driven bull market? Yes; the core thesis remains in place with the economy likely to expand for the next three years.
- Will the August low get retested? Yes; history says by late September/early October investors are going to have to deal with a decline back to August low, but not much if any below it.
- How meaningful is the post retest rally? BIG. The three months following a post-crash retest show gains of at least 16% (chart below).
North American Portfolio Strategist Martin Roberge notes this was a week when equity market strength had to be sold and weakness bought. The net result is a slight advance for the S&P/TSX and S&P 500. Uncertainties with regards to China and the Fed continue to loom above financial markets, and this week’s S&P downgrade of Brazil’s credit rating to junk status serves as a reminder that EMs’ fundamentals remain shaky. Encouragingly, the broad commodity complex seems to be stabilizing, with copper surging 5% this week on the back of Glencore’s announcement of a 400k-tonne output cut. Also, oil prices are holding on to recent gains on news from the IEA that non-OPEC production will fall by about 500k barrels a day next year. Last, on the central bank front, the BoC kept its policy rate steady at 0.5%, hoping that simulative effects from previous rate cuts filter through the economy in H2. Interestingly, the Bank of England, which enjoys robust domestic economic conditions like those in the US, refrained from raising rates, citing increased risk from China and other EMs.
Martin’s focus this week is on Canada’s national account Q2 statistics, which came out this morning. Martin’s Chart of the Week shows that households have taken on more debt. As a result, leverage, as measured by household credit market debt to disposable income, rose from 165.3% in Q1 to a record high of 167% in Q2. While this measure looks frightening, when we account for the low level of interest rates, the household debt-service ratio stands 14.1% (slightly above historical average) and the interest-only debt ratio fell to new all-time lows at 6.4%. These two statistics suggest that the key risk to the Canadian housing market is not so much rising interest rates but jobs. In other words, fire-sales and lower homes prices are more likely to result from people losing their jobs rather than facing a cash. Canadian home prices are more likely to go through a lateral and time correction rather than imploding.
The Canaccord Genuity research included in the Legacy Wealth Weekly is solely for Canadian residents. To subscribe to our weekly newsletter,click here.
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