Julian Hoyle
August 10, 2021
Economy Commentary Quarterly update Quarterly commentaryClosing Out the First Half With Gusto
The second quarter of 2021 has continued with much of the same tenacity and vigor that we saw in the first few months of the year. The economy has trudged along building on its reopening momentum, and the lives we are used to (at least in this part of the world) have slowly come back into focus, allowing us to take advantage of more freedoms and opportunities. That being said, as we push into the summer there are lingering concerns and questions we must be aware of.
The market specific stories have been much of the same. As it was the in the last quarter, value stocks have outperformed growth names, the price of oil has been increasing, and Canadian markets have outperformed their US counterparts (especially considering the strength of the Canadian Dollar against the US Dollar). Year to date, the S&P/TSX Composite index is up 17.30% against S&P 500 returns of 12.02%. On a quarterly basis the relative returns of these two indices are 8.55% and 6.95%. Once again, this push was lead by Financials (23.35%) and Energy (37.04%) stocks, which make up a large portion of the TSX constituents. A surprising third leader has been the Real Estate sector (21.74%) and the multiple REITS available in Canada. As we watched the sector over the last year we were pleased to see that rents were generally being paid, and cashflows were turning out better than expected. Still, we had concerns about what “re-opening” would really look like, and how these names would hold up. Thankfully, we have seen the sector rebound with strength and generally hold yields (there were certainly some exceptions to this).
Meanwhile the Energy sector pushed higher on the back of rising oil prices. What was already strong continued so, with the price of oil up 47.18% year to date, and WTI Oil Futures closing June at $72.77 per barrel. The Canadian Dollar, being a Petro-currency, was buoyed somewhat by this rise, closing out the quarter up 2.88%.
One of the greatest concerns on our horizon is the growing variant cases of COVID-19 and what they mean for economies and markets around the world. What we do know is that the Delta variant seems to be more contagious, and is being discovered more and more. We also know that countries with superior vaccination records are seemingly able to keep this variant in check. This bodes well for the continual opening of Canada (which boasts a stellar vaccination record), but would be concerning for the US. That being said, during the thick of the first few waves of COVID-19 the US reopening plan trudged forward despite rising case counts, and we don’t see this time being any different, if indeed things do get out of hand.
Once again we will close with a note on inflation. We said last quarter that inflation should be monitored as a precursor to rising rates. Well, this quarter was full of inflation hysteria, and we seem to be right where we were 3 months ago. There are multiple factors that could serve to push inflation higher, but these all could be temporary in nature, and it is difficult to make a call on the rates we will see either way. As we often do, we can defer to the monetary policy professionals, the central banks, who are holding their rate forecasts steady. Evidently nothing they are seeing is too concerning or unexpected.