The Week in Review

Weekly Market Recap: U.S. and Canada

One glance at the weekly stock chart here will tell you that it was a wild ride for the markets this week. The S&P 500 and Nasdaq (down 0.83% and 2.56% respectively) fell for the second consecutive week amid choppy trading, while the Dow, on a positive note, saw its fourth straight weekly gain. This TSX finished in positive territory with a gain of 0.55%.

S&P 500 Returns | Week At-a-Glance

TSX Returns | Week At-a-Glance

COMMENTARY

This week’s economic news was lead by the Bank of Canada’s decision to cut rates for the second meeting in a row, and with the US seeing stronger than expected GDP growth and a possible tick up in inflationary pressures.

Major Economic Stories

📉 Bank of Canada Cuts Rate to 4.5%

The biggest domestic economic news this week was, of course, the decision the BoC made to cut its overnight rate by another 25 basis points. You can read a full report on this decision in the story below.

📈 US Economic Growth Beats Expectations in Q2 2024

In the second quarter of 2024, the US economy saw strong growth, expanding by an annualized rate of 2.8%, up from the 1.4% recorded in the first quarter and coming in above the anticipated 2%.

Let's have a look at some of the major components:

• Consumer Spending: Increased to 2.3% from 1.5%, with a notable rebound in goods consumption, particularly motor vehicles and recreational goods, up to 2.5% from a previous decline of 2.3%.

• Private Inventories: Contributed 0.82 percentage points to overall growth, reversing previous declines, primarily fueled by the wholesale and retail trade sectors.

• Nonresidential Investment: Accelerated to 5.2% from 4.4%, with equipment investments soaring to 11.6% from 1.6%.

• Government Spending: Rose to 3.1%, driven largely by increased defense expenditures.

📉 Some sectors saw drops:

• Residential Investment: Declined for the first time in a year, falling by 1.4%.

• Net Trade: Continued to drag on growth, as imports increased by 6.9% compared to exports' slower growth of 2%.

📈 US Core PCE Price Index Edged Higher in June 2024

In June 2024, the US core PCE price index, which is the Federal Reserve's preferred inflation measure, saw a rise of 0.2%, coming in above the market's expectation of a 0.1% increase.

This is a change from the 0.1% increase we saw in May, which was the lowest since November 2023.

A more detailed look at the numbers:

• Month-on-Month Increase: The core PCE rose by 0.2%, indicating a pickup in underlying inflation pressures.

• Headline PCE Growth: Increased by a modest 0.1%.

• Annual Core PCE Inflation: Remained steady at 2.6%, consistent with the previous month's rate.

👂 What is this telling us?

This uptick is a sign that we may be seeing a slight intensification of inflationary pressures. But it’s a mixed message. The annual core inflation rate held steady, aligning with the Federal Reserve's long-term target.

🌰 Overall Impact, in a Nutshell

Key takeaways from this week’s economic reports:

1. Bank of Canada's Rate Cut: The Bank of Canada‘s rate cut might be a sign that the bank is trying to fend off a deeper economic slowdown and may also be a signal that the Bank is concerned about the potential for recession, especially given continuing retail sales declines. It’s a very fine balancing act.

2. US Economic Growth in Q2 2024: The US GDP growth rate of 2.8% in the second quarter was significantly above expectations. This strong showing might reflect a rebound in consumer confidence and spending, which is crucial as consumer expenditure drives about 70% of the US economy. The growth was supported by strong rebounds in consumer spending on goods and nonresidential investments, which suggests continued business confidence as well.

3. US Core PCE Price Index: The slight increase in the core PCE index indicates rising inflationary pressures, and could be interpreted that underlying inflation isn't subsiding as quickly as hoped. No doubt this will be a factor in future Federal Reserve decisions on interest rates. The stability of the annual core inflation rate at 2.6%, though, aligns with the Federal Reserve's target, and suggests the US is still operating in a controlled economic environment.

THIS WEEK’S POLL QUESTION
(Results in Next Week’s Newsletter)

Most Overbought Stocks

The Relative Strength Indicator (RSI) can provide a signal that suggest a stock is either overbought or oversold. A stock that has an RSI over 70 is considered to be in “overbought” territory. This might suggest that the stock is due for a pullback, however it is not a recommendation to sell. Always perform your own due diligence.

Most Oversold Stocks

A stock that is trading with an RSI below 30 is considered to be in “oversold” territory. This might suggest that the stock is due for a recovery, however it is not a recommendation to buy. Always perform your own due diligence.

THE ECONOMY
Bank of Canada Cuts Interest Rates Again: More to Come?

The Bank of Canada announced on Wednesday this week that it was trimming its key interest rate to 4.5%, marking the second consecutive reduction amid cooling inflation. Here’s what you need to know:

🚨 Rate Cut Details

Bank of Canada governor Tiff Macklem announced the latest rate cut during a news conference and indicated there was room for further potential cuts if inflation continues to drop.

This decision follows June’s cut from 5% to 4.75%, the first since March 2020. Despite some analysts’ initial doubts due to May’s inflation bump to 2.9%, June’s dip to 2.7% eased concerns.

BMO Global Asset Management’s Earl Davis noted that it wasn’t much of a surprise, because inflation is coming down.

💵 Consumer Impact

Lower interest rates mean Canadians could see reduced interest on credit cards and variable mortgages, potentially putting more money back in their pockets. For those with upcoming renewals on fixed-rate mortgages, the rate cut will take a bit longer to work its way into the system.

📉 Economic Outlook

In his commentary, Macklem stressed the Bank’s approach is cautious, not fixed, with the next rate decision set for September 4. The Bank faces a balancing act: while inflation is expected to gradually decline, housing costs remain a challenge.

So while it’s nice to see some relief in certain areas, especially with housing, senior deputy governor Carolyn Rogers warned against expecting interest rate cuts to solve the housing market woes entirely, noting that other costs like rent and maintenance are still rising.

The Bank of Canada will no doubt remain watchful and adjust future rates as economic conditions evolve, with the overriding objective of steering inflation towards its 2% target.

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WEALTH DISPARITY
Global 1% Captures $42 Trillion in New Wealth Over Past Decade

So we’re all here because either we are investors now or are wanting to get started down that path. We’re used to hearing big numbers.

But, even if you have investments in multi-trillion-dollar companies, it’s hard to grasp that a staggering $42 trillion in new wealth has been accumulated by the global 1% over the past decade, this according to a new analysis by Oxfam.

Here’s the breakdown:

🚨 Wealth Inequality

The richest segment of the global population has amassed $42 trillion, nearly 34 times more than the bottom 50% of the world’s population combined.

According to Oxfam’s report, this wealth surge has been fueled by tax cuts for the ultra-rich, making global inequality even worse and posing severe threats to democracy and the planet.

📉 Tax Evasion and Policy Failures

Oxfam's analysis highlights how global billionaires have been paying a tax rate of less than 0.5% of their wealth. The group's head of inequality policy, Max Lawson, criticized governments for failing to protect people and the planet from inequality’s catastrophic effects.

The organization calls for a global tax on billionaire wealth to counter decades of regressive taxation policies. Economist Gabriel Zucman from UC Berkeley has proposed a 2% minimum tax on billionaire wealth, which could generate up to $250 billion annually for critical investments like climate action and education.

🌍 Global Response and Challenges

Support for higher taxes on the super-rich has been growing, but G20 nations are hesitant to adopt a global billionaire tax. Instead, they have favoured additional research on taxation and inequality, which has delayed potential policy changes.

Also an advocate for more even wealth distribution, Brazilian President Luiz Inácio Lula da Silva has championed the global billionaire tax but has faced resistance from powerful nations like the U.S., which hosts the highest number of billionaires.

🔍 The Bigger Picture

Don’t get me wrong; I’m not against billionaires. In fact, I hope to be one some day. Ok, I’m joking 😁.

But it’s not that we’re seeing more and more billionaires just because the pie is growing and their slice is getting bigger, it’s just that that group is increasingly getting a bigger and bigger slice of the pie.

While billionaires' wealth grows, widespread misery persists. The United Nations' FAO report estimates that up to 757 million people faced hunger last year, highlighting the dire need for structural policy changes.

As Oxfam’s food policy expert Eric Munoz says, “The world’s poorest people are paying the highest price of hunger. We need deeper, structural policy and social change to address all of the drivers of hunger, including economic injustice, climate change, and conflict.”

So, the global wealth gap widens, with the richest 1% accumulating unprecedented wealth while millions struggle with hunger and poverty. There is something very wrong with this picture.

HOUSING
Toronto Condo Investors Facing Major Losses: A Bleak Outlook

Last week, I wrote about how the Toronto condo market had hit a 27-year low in new unit sales, and this week I wanted to recap an article that shows that more than 80% of new condo investors in Toronto are currently losing money, unable to cover the increasing costs of their properties with rental income. Here’s what’s happening:

🚨 Financial Strain for Investors

A new report shows that over 80% of new condo investors in Toronto are "cash flow negative." meaning their rental income isn’t enough to cover mortgage and ownership costs.

A report by Urbanation Inc. president Shaun Hildebrand and CIBC deputy chief economist Benjamin Tal paints a challenging picture:

The average monthly cost of owning a new condo has surged to $3,250, up 21% from 2022 and 54% from 2021. Meanwhile, average rental rates have hit a record $2,700, still insufficient to break even.

📉 Market Impact

As noted in this newsletter last week, the preconstruction condo market is in dire straits, with sales hitting a 27-year low. Investors are shying away from buying new units, which has led to to a significant drop in sales.

Historically, developers passed rising costs onto buyers. But, with a glut of cheaper, already-built condos available, investors are taking a pass at the high prices of new builds.

💡 Future Projections

If rental income continues to fall short, investors might be forced to sell, increasing the supply of condos and potentially driving prices down further. It goes without saying that those with multiple units are most vulnerable.

Residential construction costs have nearly doubled over the past five years, and the price of a 550-square-foot preconstruction condo in Toronto is now around $841,000. In contrast, a resale condo averages $746,298.

🏘️ Housing Market Ramifications

So here’s where we get to the crux of the problem.

Toronto has an affordable housing shortage, yes, but even high new condo rental prices remain out of reach for a lot of people. New condos do add to the rental stock, accounting for 35.5% of the market. However, the current investor pullback could stall new housing projects, exacerbating the housing crisis.

Urbanation estimates that developers have postponed 76 projects, totaling 24,335 condo units in the Toronto and Hamilton area over the past year.

The Toronto condo market is facing significant challenges and the outlook remains uncertain as the market adjusts to these pressures. This won’t be a quick fix.

RETAIL
Walmart Canada Boosts Wages for 40,000 Workers

Walmart Canada has decided to give a financial boost to its workforce, raising hourly wages for approximately 40,000 employees across its more than 400 stores nationwide.

This comes as Walmart enhances its investment in the U.S. to retain more employees, including raising the average salary and bonuses for U.S. store managers and offering bonuses to hourly store workers in its pharmacy and Vision Center stores.

📉 Economic Context

This wage increase arrives at a time when Canada's inflation rate is easing more than expected, though the unemployment rate has hit a 29-month high. This suggests that, as a lot of Canadians feel, job losses are occurring as the labour market struggles with a growing population.

💼 Employee Investments

Walmart isn’t just focusing on wages. The retailer is also investing in digital handheld devices for store associates, aimed at helping them locate items faster and improve overall efficiency.

🌍 Broader Impact

By raising wages and investing in technology, Walmart is aiming to create a better work environment and retain its workforce, which is even more crucial than normal today, given the challenges in the current economic landscape.

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