July 26 to 30, 2021

What happened last week

Markets were choppy, as investors weighed the outlook for growth

Investors had a lot of news to digest with the release of Canadian inflation data, Canadian and U.S. gross domestic product (GDP) reports, and a monetary-policy update from the U.S. Federal Reserve (the Fed). Chinese regulatory changes, and earnings reports from big-tech companies, weighed on market sentiment.

U.S. equity markets finished in record territory on Monday, capping the best five-day stretch of gains since March. The Dow Jones Industrial Average, the S&P 500 and the Nasdaq all set new closing highs. With corporate earnings in full swing, and several top organizations already releasing better-than-expected second-quarter profits, optimism was running high.

Financial markets in China and Hong Kong didn’t fare as well, with the Shanghai Composite Index and the Hang Seng Index dropping 2.3% and 4%, respectively. The heavy declines came amid a regulatory crackdown by the Chinese government on private-education and technology companies. The rout extended into Tuesday, sending shockwaves through global markets and, ultimately, ending the run of gains for the U.S. benchmark indices. Stock prices for Apple, Microsoft and Alphabet Inc. led the way, tumbling before the release of their earnings reports later in the week.

Canada’s TSX, which was up and down to start the week, found some strength late Wednesday. This was following the release of Shopify Inc.’s second-quarter earnings, which showed adjusted profits per share that doubled analysts’ expectations. The Canadian tech giant, which surpassed US$200 billion in stock-market value the week prior, saw its growth accelerate rapidly throughout the pandemic – as retailers shifted to online sales, utilizing the company’s software and online storefronts.

The Fed held interest rates at historic lows

In its latest monetary-policy update on Wednesday, the Fed held interest rates steady and left its bond-buying program unchanged. The central bank’s official statement read: "With progress on vaccinations and strong policy support, indicators of economic activity and employment have continued to strengthen." In a news conference following the meeting, Fed Chair Jerome Powell also noted that officials took their first deep dive into how the bank might taper its massive financial-support program.

Canadian inflation data showed that prices continued to climb in June

Statistics Canada made headlines on Wednesday, with their consumer price index (CPI) showing a June gain of 3.1% from a year earlier. While slower than the 3.6% pace in May, the June reading came in higher than the Bank of Canada’s 1-to-3% target range for inflation. Rising rental and new-home prices, coupled with pandemic-related supply-chain disruptions, drove the increase. In an editorial published in Thursday's Financial Post, Bank of Canada Governor Tiff Macklem urged Canadians not to overreact to "temporary" price increases, noting that: "Over the next few months, there may be more disturbances and sharp price movements as we return to more normal activities." Macklem also reinforced the bank's pledge to keep interests rates low until the economy fully recovers, which it forecast for the second half of 2022.

Canadian and U.S. economies grew in the second quarter

According to an initial estimate from the Department of Commerce on Thursday, U.S. GDP expanded by 6.5% in Q2. This was lower than economists expected, with the post-pandemic boom in consumer spending being offset by supply-chain bottlenecks. The Dow and the S&P rose to intra-day highs and the 10-year Treasury Yield climbed following the release; investors anticipated that the low reading would encourage the Federal Reserve to maintain supportive monetary policy for the economy.

On Friday, Statistics Canada released growth data for May, along with a preliminary reading for June. This data showed that following a .3% drop in May, the Canadian economy grew .7% in June as vaccination rates climbed and lockdowns were eased. For the second quarter, growth is on pace to come in near 2.5%, just above the Bank of Canada’s 2% forecast.

The stock and bond market*
S&P/TSX Composite 20,287.80 0.49% 16.37%
Dow Jones Industrial Avg. 34,936.13 -0.36% 14.15%
S&P 500 Index 4,395.26 -0.37% 17.02%
NASDAQ Composite 14,672.70 -1.11% 13.85%
10-yr GoC Yield 1.20% -0.01% 0.53%
10-yr U.S. Treasury Yield 1.24% -0.06% 0.31%
WTI Crude Oil (US$/bbl) 73.95 2.61% 52.41%
Canadian Dollar US$0.8024 0.91% 2.16%
Bank of Canada Prime Rate 2.45%

*Weekly performance ending July 30, 2021. Sources: www.bloomberg.com, www.bankofcanada.ca and www.treasury.gov.

What’s ahead

Employment data: On Friday, when employment figures for July are released, investors will gain further insight into the pace of economic recovery in Canada and the U.S.

Circle these dates

  • September 6: Canadian and U.S. markets closed for Labour Day
  • September 8: Bank of Canada interest-rate announcement.
  • September 21 to 22: U.S. Federal Reserve meetings and statement

Key take-away

Take the emotion out of investing. Sound investment decisions are based on logic, whereas poor investing is most often the result of emotion. Following a philosophy and process that makes sense for your long-term horizon provides the right peace of mind through any type of market scenario.

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