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US markets have been trading in record territory recently. However, if signs of economic weakness persist, can that rebound last? Justin Flowerday, head of public equities at TD Asset Management, discusses Wall Street's recent performance and future prospects.
Greg Bonnell: U.S. markets are in record territory amid some more signs that inflation is easing without causing too much damage to the economy. But we have plenty of warnings about a possible recession on the horizon. So can the rally last? He joins us now for a conversation with Justin Flowerday, CEO and Head of Public Securities at TD Asset Management. Justin, it's great to have you back on the show.
Justin Flowerday: Good to be here, Greg.
Greg Bonnell: So let's talk, specifically, about the S&P 500. The Dow Jones has reached new highs. What is happening in the market right now?
Justin Flowerday: Yeah, it's been a good start to the year for the market, Greg. We really haven't missed a beat since the fourth quarter and ended on a strong note last year. And if you think about this current rally, it really started in late October of last year. And it was as a result of a downward trend in rates.
And since then, rates have continued to fall. And we have started to see a recovery of sorts in some of the major economic indicators. And then we've seen initial jobless claims, which started to rise towards the middle and end of last year. They've been hovering around 200,000, which is a really strong level.
We have seen that PMIs have hit bottom. And then we've seen financial conditions really start to relax. And with that, credit spreads have increased. So credit spreads are probably around two years, in terms of being tight. And it has also seen many other financial conditions emerge, such as real rates.
And we are just trending towards 2% in terms of real rates. So all of this speaks to some sort of short-term economic boost for the real economy.
Greg Bonnell: When we talked about last year's market rally, one of the criticisms, and you said it will continue this year, is that there wasn't a lot of breadth, right? That you were talking about the Magnificent Seven... if you weren't in those names, you didn't participate. Are we starting to see a little more breadth in the market?
Justin Flowerday: Yes you are. And I think this has to do with the fact that some of the money that was on the sidelines is slowly coming into the market. You still have plenty of money on the sidelines in cash and GIC sitting around, waiting for a better entry point. But you're starting to see some movements in the market.
And it is making great progress. And you can see the breadth in many different ways. One of the ways we look at it is in terms of number of shares or percentage of shares, where its 50-day moving average is above the 200-day moving average. And overall, for the S&P 500, we see about 60% of stocks right now with their 50-day moving average above their 200-day moving average.
It was probably around 30% of the stock about three months ago. Generally speaking, more stocks are going up. It is still quite concentrated in the technology sector. But still, outside of the Magnificent Seven within technology, very broad gains are being seen in the semifinals, in software and in different areas of technology. So yeah, absolutely expanding.
Greg Bonnell: Well, on the macroeconomic side, which we're talking about, we have inflation, signs of cooling in the United States, the economy is not suffering too much damage and yields have moved away from their highs from last October. But we are also in the middle of earnings season. And some companies will simply get away with it, or maybe not, depending on what they are delivering. What are we seeing so far?
Justin Flowerday: Yes, it's still early. We have yet to reach the peak of earnings season. Next week we'll see a ton of reports from big tech companies. But we have heard about a hodgepodge of companies in the industrial sector and some in the consumer sector.
And the banks really started working about a week and a half ago. And if you look at the banks and what they said, I think there are a couple of things that you can probably take away from that. One falls on the consumer. And so when you think about the big American banks in the world - JPMorgan, Wells Fargos, Banks of America - I mean they really offer a window into how the consumer is doing in terms of their financial situation.
And they had some interesting comments. There is still pressure in some sectors, the low-end consumer. But, on average, we see deposit balances still around 30% higher than pre-COVID. And we're seeing spending trends continue to move in the right direction. And overall, I think we've heard a somewhat positive signal from bank management teams that the consumer is in a pretty healthy position.
Greg Bonnell: We've been talking a lot about the US market. The S&P 500 makes headlines as it hits new all-time highs. What about the Canadian market? We haven't reached that point yet.
Justin Flowerday: Yes. So the Canadian market certainly hasn't been able to keep up with the US market. And if you look at last year, for example, the S&P 500 was up something like 25%. The Canadian market, the TSX, was up, but it was up about half as much. And that's why it continues to lag behind.
And when you dig deeper and think about the reasons why it's lagging, it's actually pretty simple: We just don't have the size of a technology sector that the United States has. So look, our tech stocks in Canada are doing very well, right? Shopify (TRADE) doubled last year: more than double.
Constellation software (OTCPK:CNSWF) rose 60%. But the size of the technology market in Canada is not as large as the technology market in the United States. And large sectors of the Canadian market, such as banks, commodities sectors and other financial sectors, simply have not been able to keep pace.
And that's why Canada has been left behind. Looking ahead to 2024, I think you can argue that the setup looks pretty decent from a valuation standpoint - very, very attractive valuation levels. From a sentiment standpoint, not many people are really excited about Canada. And I think if you add to that the fact that we can start to hear signs that the global economy, outside of North America, is going to start to strengthen in 2025, 2026, that would benefit Canada's strengths. Many of our leading companies are exposed to the global economic cycle. Therefore, there is a chance that Canada will perform a little better in the future.
Greg Bonnell: Speaking of the global perspective, I wanted to ask you about China. Over the past year, markets have not performed well. I have seen a bit of life today: it seems that China, perhaps, wants to stimulate or help the real estate sector. Obviously, one day of action does not set a trend. But what are we seeing there?
Justin Flowerday: Yes. So China has had a very, very, very difficult situation. And if you look at the peak of the market in 2021, when they were really on par with the United States, they have lost about $6 trillion in market value over the last few years. And we're actually at the lowest level in five years in China.
And what you've heard recently is a couple of different things. Some rumors, others have actually been announced. One of the things that was announced was a 50 basis point reduction in the required reserve ratio, which speaks to the amount of reserves that banks have to keep on their balance sheet each time they lend. And that should provide a little more stimulus for lending and economic activity.
But look, they are plagued by a real estate sector that has been struggling for quite some time. They are having difficulties in terms of trade wars with the United States and now, it seems, trade wars, potentially, with Europe. They have some demographic problems. They have some leverage issues and therefore a lot to overcome.
They will probably have to do more than simply reduce the required reserve ratio. There is talk of a possible injection of $280 billion directly into the stock market. And this really shows how concerned the government is about the stock market.
And it actually speaks to the fact that this is a public view of the health of the economy and the health of the market in China. And it's interesting because when you think about the net worth of Chinese people, most of their net worth is tied up in property. And not so much, compared to Western societies, it is tied to the stock markets.
But stock markets are very public lenses into what they are potentially doing to the health of the economy and markets. And so they really want to see some support for the stock market. And they want to see things move in a different direction.
