It seems Canadian Prime Minister Justin Trudeau’s government is off to a shaky start. Analysts have said that Canada’s economic numbers look anemic at best. Does this mean it’s going to get worse before it gets better? Lisa Dudzik takes a view on the matter for today’s blog entry.
This month, the Toronto Stock Exchange index continued to climb, reaching its highest point over the year. The move is seen to have been fueled by the sudden bullish trend in the gold sector which started at the beginning of the year. Since about 14% of the TSX is comprised of gold mining companies, this can help explain why money is flowing into the stock market despite the gloomy economic data.
The apparent disconnect between the TSX and the economy doesn’t completely make sense at first. On the one hand, the economy has clearly taken a beating based on various metrics—decreases in employment, stagnant hourly wages, a record high trade deficit, low oil prices, and other dismal figures such as those from the manufacturing sector. Yet on the other, investor sentiment remains relatively positive in the market, so which picture is telling the truth?
The truth is, as many analysts might point out, money continues to be sucked in the market because there is nowhere else for it to go. An investor looking for yield may choose to invest in real gold or gold mining companies. This is because alternatives to equities such as bonds and bank savings offer little to no yield at all—one reason why investors have become a little restless, taking on the bet for gold and other commodities.
One caveat to investors, though: the Federal Reserve’s Janet Yellen continues to be hawkish, expressing intentions for the Fed to push through with its planned rate hike. Any move that can strengthen the US dollar will definitely kill the rosy sentiment over gold.
In short, while the TSX has a lot to gain from gold, Canada’s economy also has a lot to gain from a stronger US dollar, since its economy is heavily tied to the US. This is what being stuck in between a rock and a hard place looks like, and for Canada, there seems to be little that can be done, especially during a time when the global economy is in a general slump.
For the construction industry in Canada, the slowing economy will definitely have unpleasant effects. Businesses will control spending and cut costs wherever and whenever it can. On the whole, what Canada needs to do to save the economy is the very thing it is scared to do the most—spend money to get the economic ball rolling again. Businesses are never the first to do such, which is why all eyes are on Canadian PM Justin Trudeau and his government’s bold promises to create jobs and grow the economy.
In the end, how well the Trudeau government weathers this economic storm remains to be seen. To be safe, investors will not be faulted to expect things to get worse before they get better.
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