FLS Market Watch May 2021

Global financial markets reached record all-time highs in May, following reports that for the fiscal year 2022, President Joe Biden would pursue a spending plan of $6 trillion for federal expenditures. May turned out to be a solid month for equity markets. Still, politicians are confronted with inflation pressure as the underlying recovery continues to struggle for momentum. Moreover, remarks by many Fed representatives show a changed central bank tone. A month ago, Fed President Jerome Powell stated that it was “not yet” time to talk policy tapering or slowdown in asset purchasing. Recently, officials have recognized that they are closer to discussing how to reduce funding for the program.

The S&P/TSX Total Return Index was up 3.44% in May as Canada’s economy could this year be in a significant upswing, based on an improved OECD (Organization for Economic Co-operation and Development) economic outlook.

The OECD revealed that it now expects the Canadian economy to increase by 6.1 percent in 2021. The forecast represents an increase from the previous growth expectation of 4.7 percent. According to the OECD, the upswing will be driven by decreased COVID-19 limitations in the second part of the year and high foreign demand. Higher commodity prices and anticipated increases in demand due to the March fiscal package in the U.S. also contribute to the country’s economic recovery.

The Canadian loonie rose 1.83% to a six-year high against the greenback as all kinds of commodities Canada exports are at record highs or multi-year highs. The central bank’s hawkish shift, substantial economic growth expectations also lifted the currency close to its 2021 peak.

Furthermore, The Bank of Canada has held its benchmark overnight interest rate at 0.25 percent for more than a year. It stated that it intends to keep it near zero until the economy has recovered sufficiently for inflation to attain its 2 percent objective on a sustainable basis. According to the central bank’s most recent projection, that might happen in the second half of 2022—earlier than a prior prediction sometime in 2023. Last month the central bank decreased its bond-purchasing program from C$4 billion every week to C$3 billion, putting it the first group of seven central banks to cut economic support. It also increased its advice on when its overnight interest rate benchmark may begin to rise from the present level of near-zero.

The S&P 500 Total Return Index was up 0.70% during May. The United States economy will be growing at its quickest rate in over four decades this year, owing to significant government incentives and rising rates of COVID-19 immunization, the OECD stated.

The OECD anticipates US GDP growth of 6.9% by 2021, the biggest gain since 1984. The latest predictions are more bullish than this earlier year’s outlook: The OECD projected that the U.S. economy would increase by 6.5% in March. This rise constitutes the speedier distribution of this vaccination and marks the Democrats’ $1.9 trillion rescue package in March. The American Rescue Plan gave a stimulus check of $1,400 to most citizens, increased unemployment benefits by $300 a week, and provided the State and local authorities $350 billion.

On the economic front, the U.S. economy expanded by 6.4 percent in the first quarter of 2021, powered primarily by U.S. consumers. This increase is likely to continue this summer as more vaccines are distributed, and COVID-19 cases continue to decline. Meanwhile, the economy added a disappointing 266,000 jobs, as the unemployment rate rose from 6 percent to 6.1 percent, while the U.S. Initial Jobless Claims fell again last week to their lowest level in more than a year.

President Joe Biden is scheduled to reveal a budget that will raise federal expenditure to $6 trillion in the next fiscal year, bringing the U.S. to its highest continued level of federal spending since World War II. This plan aims to support a broad policy that will include significant new investments in education, infrastructure, and combating climate change.

According to the plan, expenditures would grow to 8.2 trillion dollars by 2031, while government debt increases in the next ten years to 117% of GDP. Democrats have tight majority positions in the House and the Senate. Legislators from both sides have shown that Biden’s plan is improbable to be fully adopted.

Regarding monetary policy, Fed Vice-chairman Randal Quarles has indicated that the U.S. Federal Reserve intends to initiate discussions on limiting its bond purchasing programs as the economy moves forward and prices increase. In addition, Fed Vice-chairman Richard Clarida suggested the Fed could minimize inflation and create a “soft landing” without disrupting economic growth.

The MSCI ACWI Ex-US Total Return Index was up 3.08% during May as the OECD adjusted its projection for global economic growth in 2021 to 5.8%, up from 4.2% in December 2020. The enhancing prospects for the global economy would make it easy for countries to go from general emergency relief to more specific measures, the OECD said.

The updated predictions show that the U.S. economic outcome by the end of 2022 will be somewhat higher than anticipated in November 2019 with its fiscal stimulus and COVID-19 immunization programs. The same goes for China and Germany to a lesser degree. However, the output is far lower than the pre-pandemic level in many European countries, especially tourist-dependent countries.

The gap in developing countries will grow further: India’s output is approximately 10 percent lower than projected in November 2019, like many emerging markets economies with sluggish vaccine distribution, newer COVID-19 breakouts, and economically restrictive containment methods, thus diminish chances for a fast recovery.

The comments contained herein are a general discussion of certain issues intended as general information only and should not be relied upon as tax or legal advice. Please obtain independent professional advice, in the context of your particular circumstances. This newsletter was written, designed, and produced by Factor-Based Inc. for the benefit of Bryan Muir who is a Portfolio Manager for iA Private Wealth and does not necessarily reflect the opinion of iA Private Wealth. The information contained in this newsletter comes from sources we believe reliable, but we cannot guarantee its accuracy or reliability. The opinions expressed are based on an analysis and interpretation dating from the date of publication and are subject to change without notice.  Furthermore, they do not constitute an offer or solicitation to buy or sell any of the securities mentioned.  The information contained herein may not apply to all types of investors. The Portfolio Manager can open accounts only in the provinces in which they are registered.  iA Private Wealth Inc. is a member of the Canadian Investor Protection Fund and the Investment Industry Regulatory Organization of Canada. iA Private Wealth is a trademark and business name under which iA Private Wealth Inc. operates.