In the Macro
- Prices continue to rise across North America
- Canada’s fiscal update shows a declining deficit
In the Micro
- Yet another record close for the S&P500
In the Macro
Prices continue to rise across North America
Inflation continues to be one of the most prominent headlines in the financial markets. Before you roll your eyes and mumble, “what else is new,” let me stop you as it appears that higher inflation is sticking around for a while longer. Even the Federal Reserve has finally decided that transitory is no longer the correct word to describe the situation since it implied rising prices were a short-term issue.
According to the US Labor Department, the consumer price index for November jumped by 6.8% year over year. For reference, the last time we saw inflation growth this high was over 39 years ago, in 1982!
Source: BNN Bloomberg
Energy prices have been a significant contributor to rising prices recently, with gasoline up a shocking 58.1% from November 2020. Anyone in the market for a vehicle can tell you, prices have also surged for automobiles in the past year. Purchasing a new vehicle now will cost Americans 11% more than in late last year, and the price for a used car or truck is over 31% higher. Food prices also added to the growing cost of the CPI, going up another 0.7% last month.
With food and energy costs fluctuating over the short term, economists often remove those effects and turn to core CPI for a less volatile inflation reading. For November, core CPI set a new 30-year record showing prices rose 4.9% year over year.
The Federal Reserve is meeting on December 14, and 15 and investors are closely watching to see how the central bank will react. According to William English, a former Fed economist, “there are meetings where you make small changes, and there are meetings where you make larger changes. And this feels to me like a meeting where they’re making larger changes.” Stay tuned.
Up north of the border, Canada’s inflation came in at 4.7% for the month of October. While lower than the inflation rate in the US, this rate represents the greatest increase in prices since 2003.
Source: BNN Bloomberg
Despite inflationary pressures, the Bank of Canada recently announced that it would not substantially change its current 2% inflation target. The wording changed slightly in the mandate, allowing for a range of 1% to 3% to help support employment. While this essentially means a 2% target, it does add a level of uncertainty. Unfortunately, if there is one thing we know that financial markets do not like, it is uncertainty.
Canada’s fiscal update shows a declining deficit
Prime Minister Justin Trudeau’s government just released its fall fiscal update for the country. The update shows the federal budget deficit for the 2021 to 2022 fiscal year will be lower than predicted in its spring update. A range of estimates was provided due to uncertainty surrounding the Omicron variant and the significant economic impact of the flooding in British Columbia. In the spring, it was expected the federal deficit would be $154.7 billion, with the update revising the expected amount to be between $142 and 147.9 billion. Last year’s budget deficit, encompassing historic pandemic stimulus, peaked at $327.7 billion.
Source: Globe and Mail
Reduced government spending is partially responsible for the declining debit, though revenue is expected to grow as well. Income taxes will account for an additional $12 billion in annual income for the government.
Inflation, unsurprisingly, will also have a significant impact on nominal GDP. According to the update, goods and services will witness up to a 7.6% bump from rising prices. This means that since the spring budget, the predicted increase of $87 billion in nominal GDP will be mainly from inflationary forces.
In the Micro
Yet another record close for the S&P500
If it seems like just yesterday, we were discussing the Black Friday sell-off, that is because it was. In the few weeks since stocks have risen and, on December 10, the S&P500 closed at a record high, yet again. Despite a volatile year, the index has seen a record closing price 67 times this year! The last time it saw this many new records was back in 1995 when the S&P500 closed at a record 77 times during the year.
Last week marked the best since February for both the S&P500 and the Nasdaq. The indices gained 3.8% and 3.6%, respectively, over the week alone.
As of December 10th market close, year-to-date returns were 25.5% for the S&P500, 21.3% for the Nasdaq, and 17.5% for the Dow. The main winners within the S&P500 so far this year are the technology heavyweights Microsoft, Alphabet, Apple, Nvidia, and the social media star Tesla.
We still have a few more weeks until year-end, though, and we continue to see volatility in the markets. Stocks looked on track for a great year as of last week’s close, but investors are nervous again, worrying about Omicron and, of course, inflation. Regardless of what happens over the next couple of weeks, we encourage all investors to stay the course. Performance numbers are just a representation of how the market is doing at any one point in time, and they do not always show the impact of a long-term investment approach. Stay the course, ignore the day-to-day movements of the financial markets, and focus instead on your upcoming holiday plans.
As always, if you have any questions or would like to discuss further, please do not hesitate to reach out. Feel free to share with your friends and family too, as referrals are the best compliment we can receive.