MarketWatch

Written by Sid Mohapatra

Risk markets remain muted with steady gains pricing in the economic recovery outlook. The TSX gained slightly more than 1% while the S&P 500 added 2% for this week. Although this bull market began a little over a year, it has clocked sharp gains and significant mileage in that period.

The future path for equity markets will be largely driven by the following three factors in the near term:

1. Recovery of the labour market: As unemployment rates continue to drop in the US and Canada, we will see consumption and demand driving the economy forward. Unemployment rates have dropped as much as 9% and 6% in the US and Canada respectively.
2. Slower growth of earnings: The S&P 500 earnings will be under pressure as the bond markets reprice the cost of money with higher interest rates reflecting heightened inflation expectations thereby narrowing the attractiveness of equities vs fixed income. Further, the pace of increase in stock prices is greater than the earnings growth leading to softening the earnings and lowering yields/returns on equities.
3. Fed Rate Hikes: There is a strong precedent of increasing rates causing volatility in risk markets and the Fed has its work cut out in terms of communicating a consistent message of their stance on rate increases and the extent. Clearly, the dot plots are not effective in convincing the bonds market on the future path of rates which seem to drive the Fed’s hand and push them to an undesired corner by sending Treasuries lower as a signal.

The TSX closed at 19,228 gaining 1.2% and the S&P 500 racked up a healthy 2.7% to close at 4,129. This puts the TSX is up 10.3% on a YTD basis and the S&P up nearly 10% in the time frame. Bond markets finished at 1.67% remaining range-bound but still with prospects of selling off in the near term.