North American equity market and interest rate outlook

Equity market in North America

Every observer of North American equity markets is painfully aware of the sharp increase in volatility in recent months. Thus, the VIX (the S&P Volatility Index) had been in an unusually long period of low volatility. From October 2016 through the end of January 2018, the VIX never surpassed the 20 level. In much of February, March and April 2018, it was above 20 with a very elevated high of 50 in early February but with an April 13th close of 17.40.

Both the S&P 500 and the TSX hit all-time highs in January – at 2,873 for the former and 16,421 for the latter. In early February, both indices hit lows of 2,532 and 14,786 respectively. Technical analysts feel happier when stocks or indices retest lows but fail to break below them. That has been the case to date with both the S&P 500 and the TSX. The former bottomed again at 2,553 in early April while the TSX bottomed at 14,990 also in the first week of April. Technicians would be more encouraged by the fact that the S&P 500 – as at April 13th at 2,656 - is above its 200-day moving average of 2,615 while the TSX at its April 13th close of 15,273 is still below its 200-day moving average of 15,645.

The obvious question is: where do we go from here? This economic cycle is now nine years old and we are getting late in the cycle. With interest rates remaining extremely low by historical standards, it is hard to envisage a North American recession in the near term and, as we have pointed out in previous Strategy Notes, North American bear markets have coincided with U.S. recessions nine out of the last 10 times. We have recently interviewed four of the major five Canadian banks (with a BNS interview due later this week). RBC’s CEO put it best when he said that the U.S. economy is likely in the eighth inning of this cycle although it could well go into extra innings. None of the four banks we have spoken to foresaw a U.S. or Canadian recession before 2020 at the earliest.

In addition, we were surprised in these interviews about the various banks’ optimism about their operations in the U.S. For example, the head of TD’s U.S. operations had recently visited all the bank’s main operations between Florida and Massachusetts. He was very encouraged by the positive outlooks expressed by both their corporate and individual customers. The recent business and individual tax cuts flow straight to the bottom line and are immediately visible. Fears about the deleterious impact on the U.S. federal deficit are valid but are not impinging on favourable sentiment in the short term. 


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