Truth is like Poetry. And Most People HATE Poetry

While I can’t profess to fathom their opinion on poetry, I do know that both equity and bond markets HATE uncertainty.  High degrees of uncertainty make it difficult for market participants to forecast earnings for companies and growth rates for nations.  In highly uncertain times equity markets are prone to sell off.  Yes, Bears typically thrive in uncertain times.

Since mid-2015 a heightened level of uncertainty has existed due to a trifecta of interrelated concerns:

1) China – Has growth of the world’s second largest economy slowed or stalled? Given the nature of China’s government, can their figures be trusted? How will this impact the demand for many of the raw materials that Canada exports?

2) The United States – Is the world’s largest economy growing fast enough to tolerate an increase in interest rates (up form zero)?  Will rates and the US dollar continue to rise? Can the domestic economy tolerate the rise in the US dollar?  Can developing economies (who’s debt is often denominated in US dollars) adjust in an orderly fashion?

3) Oil – Saudi Arabia has abandoned production quotas in an attempt to regain market share. By increasing global supply of oil higher cost producer are being forced to cut costs, merge or go out of business.  How low will oil go? How long will this take?  - Personally, I believe we’re just getting started in this process and any recovery in price will be modest.

As a consequence of these factors, Canada is now faced with what is likely to be an extended period of low global oil prices, as well as a lower Canadian dollar/high US dollar.  While some regions will suffer significantly (energy producing provinces), a lower dollar should help spur exports of goods and services.  This should be a net positive for Central Canada.  Further, lower energy prices should be mildly simulative to the country as a whole.   Domestic interest rates are almost sure to remain lower for longer for all Canadians.  

How will this all play out?  No one can be sure. However, greater stability and higher levels of certainty will return. But it will take time

Until the clouds of uncertainty start to clear, and until we start to see the what the new economic “Truth” for both Canada and the world will be, equity markets are going to be about as enjoyable as listening to “Beowulf”.