The Power of Economic Sentiment
“Have we all just become economic snowflakes?”1
This question emerged from a recent study analyzing the text of 200 million newspapers spanning almost two centuries. It concluded that both economic and non-economic sentiment have substantially declined over the past 50 years, despite far fewer economic setbacks.2
In the not-so-distant past, recessions were seen as natural business cycle occurrences. Some market observers suggest this view shifted after the Global Financial Crisis, with policymakers now striving for the aversion of economic pain as a top priority.
Indeed, it appears that the long-feared recession in the U.S. may be far from arriving. While Canada’s economic output has been lacklustre, our economy has remained relatively resilient. Labour markets have been one reason for this resilience, with unemployment continuing at relative lows. This has largely supported GDP growth south of the border, where Americans have lower debt obligations and continue to spend; consumer spending comprises over two-thirds of U.S. GDP. We’ve needed a boost in Canada with our higher indebtedness and declining labour productivity rates. Yet, consider that wealth, wages and employment are higher today than they were before the pandemic began.
Still, for many, optimism continues to be in short supply. However, there are benefits to being more positive about the economy. One interesting observation from the same study that questioned our collective resilience suggested that positive economic sentiment can drive economic growth.2
It’s a view that merits perspective. Perhaps we’d be better off focusing on positive sentiment. We are living through a pivotal time, where advances in the availability of big data, high-powered computing and artificial intelligence (AI) are expected to lift productivity. While recent U.S. equity market gains have been driven by the handsomely-rewarded tech stocks, AI is in its early innings and its productivity and growth potential is far reaching — well beyond the tech sector.
Canada’s stock market has trailed due to its more cyclical nature, but is poised to benefit from interest rate stability and declining long-term rates. Corporate earnings may be driven by higher margins through efficiency gains and lower input costs, particularly as inflation moderates. While Canadian economic output has been sluggish, the strength of our largest trading partner should help provide near-term momentum. And, the potential for interest rate cuts may provide further tailwinds to equity markets.
This is not to suggest that short-term setbacks won’t occur. There are continuing signs of slowing economic growth closer to home and abroad; the latest GDP data for the UK, Japan and Germany has been negative or close to zero. Yet, slower growth is part of the cycle and sometimes necessary for economies to cleanse excesses or reset — or even spark innovation and new growth.
Seasoned investors accept that both financial markets and economies will ebb and flow. This feature comes with progress of any sort. It is also one reason to support diversification in portfolio management and a good reminder of why we continue to invest with a view to the longer term. Looking forward, continue to focus on the many positives. Here’s to the warmer and longer spring days ahead. Please let us know how we can be of assistance with any investing matters.
1. https://www.ft.com/content/af78f86d-13d2-429d-ad55-a11947989c8f; 2. https://www.nber.org/system/files/working_papers/w32026/w32026.pdf