The Top-Line
In the Macro
- Will Congress raise the debt ceiling?
- What the election means for the Canadian economy
In the Micro
- A September sell-off; What happened in the markets this month?
The Bottom-Line
In the Macro
Will Congress raise the debt ceiling?
It is a big week for the Biden administration and the United States government in general. Not only is a vote expected on the $1 trillion infrastructure bill, but it is also up to Congress to fund the government and raise the debt ceiling.
The debt ceiling limits the amount that the government can borrow and, if raised, will allow spending to continue as is. If it is not, the government would need to operate on an essential services only basis, and the US could default on its bills.
Source: Yahoo Finance
On September 19th, Treasury Secretary Janet Yellen wrote a piece in the Wall Street Journal saying that unless Congress acts soon, “sometime in October—it is impossible to predict precisely when—the Treasury Department’s cash balance will fall to an insufficient level, and the federal government will be unable to pay its bills.” Should this occur, Yellen predicts a “historic financial crisis.”
So, what has happened since then?
The House of Representatives approved a bill last week to fund the government through the next few months and lift the limit on borrowing until late 2022. Now it is up to the Senate to finalize the bill, which looks to be unlikely at this point.
America has never reached the point of default in the past, though it came close in 2011 when the fallout led to the government’s debt receiving a rating downgrade to AA+. The stock market, of course, took a tumble following the news, though the S&P500 still closed that year with a positive return of 2.11%.
Over the past 61 years, Congress has acted to raise the debt ceiling 78 times. We have seen the debate around the debt ceiling before, and we can expect to see it again. For now, there is no reason to assume the worst.
What the election means for the Canadian economy
As we all know, the election wrapped up last week with little change on Parliament Hill. The Liberal party stays in power with a minority position, and Justin Trudeau will keep his Prime Minister title. Since the snap election is over, let’s look at what this means for the Canadian economy going forward.
The Liberal campaign promised an increase in spending of $78 billion over five years, though it is worth noting that all major parties committed to fiscal stimulus. Government spending at this level should contribute to economic recovery across the country. It may also renew fears of higher inflation in the longer-term.
The Liberals plan to hike taxes for both the financial services sector and individuals in the highest tax bracket to fund their spending initiatives. Over time, we could see the impact of this play out in the real estate, banking, and luxury sectors. There is also speculation that the party could change the capital gains inclusion rate from 50% to 75% as a bargaining chip to gain the support of the NDP. This risk may cause a bumpy year-end as investors could begin to lock in their gains at the lower rate.
Overall, Trudeau has seen the S&P/TSX rise throughout his time in the PM chair. In fact, the index’s total market cap soared approximately $700 billion during his second term! All eyes are on him to see if he can keep that momentum going during his next term in office.
Source: National Bank of Canada
In the Micro
A September sell-off; What happened in the markets this month?
While the market trend over the years is generally positive, the same cannot be said over the short term. With this in mind, September has not been smooth sailing in the markets. After hitting a new high on September 2, the S&P500 has moved lower ever since. Last week we got the worst of it on September 20, with intraday trading seeing the index fall 5% lower than its early September high. Throughout the day and the remainder of the week, it managed to post a modest recovery. As markets closed on September 29th, the American index was down 2.9% month to date.
The story remains similar when we turn to the Canadian markets. At the end of trading on the 29th, the S&P/TSX is 1.97% lower for September, marking the third week of consecutive losses and nearing a fourth.
Weak performance and increased volatility have been blamed on fears surrounding the debt ceiling in the US and potential fallout from the situation with China’s Evergrande. The real estate conglomerate is at risk of defaulting on its debt, causing concerns about global contagion. So far, as pointed out by RBC Wealth Management, there remains little evidence that credit has been impacted outside the Asian markets.
Source: RBC Wealth Management
Though it has been a rough few weeks and some uncertainty remains, we would like to point your attention to the more extended performance of the indices. All remain well into the positive territory for the year. As we begin the final week of September, the TSX shows Canadian stocks are higher by 17% year-to-date. The S&P500 is up an astounding 18.6%, while the NASDAQ has gained 16.75% for the year so far.
We continue to encourage investors to stick to their long-term strategy rather than get wrapped up in the day-to-day volatility in the markets.
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.
