Juggling Dynamite

Consumer spending drives just under 60% of Canadian GDP growth and consumer spending fell across all categories in June–discretionary and essential (shown below courtesy of RBC). Warm weather and declining interest rates did not entice spending as hoped. Overall, second-quarter retail sales were negative.

Fewer Canadians have renovated their homes amid a sluggish housing sector, while food services spending posted weak growth on a three-month moving average. Hotel spending softened and tourism demand is still sitting below pre-pandemic levels. Canadian Treasury bond prices have been rising since last October (lowering yields and fixed-term loan rates) and the Bank of Canada began easing short-term rates last month. Still, the year-over-year growth in residential mortgages has been the weakest since the 2001 recession, 23 years ago (courtesy of the latest CMHC report and chart source). With unemployment at 6.4% and expected to rise through 2025, and households heavily indebted (Canadian household debt to GDP ratio below since 1970 in red, versus the US in blue), lower interest rates are unlikely to stimulate spending for some time. The average annual interest payments per Canadian household have risen 66%+ in the past 2 years, by far the sharpest increase in more than 24 years (shown below since 2000).

Canada has dug itself into a period of tough slog. RBC explains in Warmer Temperatures Failed to Ignite Canadian Consumer Spending in Q2:

“…we don’t expect a turnaround in the near term. While the Bank of Canada’s cutting cycle is underway after an initial 25 basis point cut in June, interest rates are still very restrictive as homeowners grapple with the impact of mortgage renewals. It will take time for the impact of BoC cuts to ease consumer pain.

Similar problems are undermining US consumption (which drives 70% of US GDP growth and the world’s largest economy). See Big Banks Warn of Weakness among lower-income Consumers):

Consumer sentiment remains “stubbornly subdued” and fell to an eight-month low of 66, according to the latest University of Michigan survey released on Friday.

Profits at Citi’s US consumer lending business, which includes credit cards, plunged 74 per cent from a year ago. The bank’s chief financial officer, Mark Mason, said consumer spending was slowing overall, with account balances now lower than they were before Covid.

US consumers were more cautious than they had been in a while, he added. “We are not seeing the same growth in consumer spending that we had in prior quarters,” said Mason. “There was less traffic in the retail venues that we partner with.”

Best to accept facts, respect the business cycle, and be prepared for opportunities that inevitably come out of the depths of recessionary periods.

The US CPI, -0.4% month over month in June, has declined for four months in a row. The year-over-year trend is –1.1% from +2% a year ago. This, along with rising unemployment, has opened room for a Fed-cutting cycle to begin in 2024.

Danielle was a guest with Jim Goddard on Talk Digital Network, talking about recent developments in the world economy and markets. You can listen to an audio clip of the segment here.

In the second quarter of 2024, big tech companies drove the S&P 500 up 4.3%, while the Russell 2000 index of economically representative small and midsize stocks fell 3.6%.

The five most expensive S&P 500 companies now make up a record 29% of the US market capitalization–the narrowest concentration since 1965 and more extreme than in the 2000 tech top (chart below courtesy of Jim Bianco).
It’s worth remembering that 1965 was followed by a secular bear market (Dow Jones Index below from 1966 to 1982, courtesy of Crestmont Research) where stocks tumbled 25 to 45% four times and took 16 years to grow back losses as prices compressed from 21 times earnings in 1966 to 8 times by 1982.
By 1982, when return opportunities were finally the most attractive in decades with dividend yields above 8 percent, most who held stocks when prices were rich had exited with losses and a lasting disdain for the asset class.

Today, even more than in 1966 and 2000, households are holding the highest percentage of their financial assets in equities in at least 70 years (shown below courtesy of The Daily Shot).
Trying to track the gains of stock indices, the majority of professional asset manglers managers are also at record equity allocation, offering dismal risk management for their customers.
Meanwhile, most asset holders are over 50 years old with shrinking time horizons and a low loss tolerance, whether they realize it yet or not. Years of trying to grow back losses will have a negative life impact for most.

The 28-month (7-quarter) time lag since the start of the Fed hiking cycle in March 2022 has lulled many into unjustified complacency with financial risk. In reality, recessions have followed the first Fed rate hike by a range of 4 to 14 quarters (average of 10) since 1958.

From the Fed’s last rate hike—most recently 12 months ago in July 2023—the onset of recession has taken 1 to 18 months, as shown below since 1960 (courtesy of Apollo).
Longer-than-average lags in the last four cycles were also followed by larger-than-average bear markets. These are facts for thought.