Which can help you to Make more Informed Investment Decisions
Financial markets have shown a historical correlation to the wider economy. Although market movements are typically driven by the forces of supply and demand, this relationship is highly sensitive to current economic news.
A great example is how global markets, including Canada’s, reacted to news of the COVID-19 pandemic. At the start of the year, most markets were experiencing a boom; demand was high and prices were soaring across the board. However, as soon as news broke out about global economies being shut down due to the health crisis, panic selling took over. Some markets are yet to fully recover.
S&P/TSX Composite Index reacting to News of the COVID-19 Pandemic Outbreak in March | Source: tradingview.com
Real estate investing in Canada was also affected, albeit briefly. The spring market was slower than usual, which resulted in a brief decline in property sales. However, this was then followed by a surge in property prices due to interest rate cuts and pent up demand in the summer and fall months.
That being said, chasing the news is hardly an ideal investing strategy. Savvy investors try to anticipate an event and profit from it rather than react when the event is eventually reported by the media. Still, the effect of economic news on investor behaviour cannot be discounted, especially when dealing with leading indicators that can be used to predict future trends.
Economic News and Market Behaviour
Investment banking professionals and other sophisticated investors discount all future cash flows to arrive at the present value of an investment. This is done to determine if an asset is priced fairly. Therefore, they often look far into the future, as opposed to what the current headlines are saying. Nonetheless, economic news does affect market behaviour and creates knee jerk reactions in the financial markets.
Negative economic news often results in investors offloading their assets. Poorly executed fiscal policies, economic and political uncertainties, rapidly rising inflation rates, and any form of sudden unfortunate occurrences can translate to increased selling pressure in the financial markets, effectively lowering the prices of many traded securities.
On the other hand, positive economic news will often buoy investor confidence, which may result in increased buying of stocks, bonds, real estate, and other alternative investments. Favourable monetary policies, lower interest rates, positive economic indicators, and even government endorsements- can translate into increased buying pressure and rising prices of assets.
However, economic news is only one piece of the puzzle. There are many other factors that affect market prices. These include individual company fundamentals, changing demographics, technological changes, and many others.
When Bad News Is Good News
It’s not a hard and fast rule that negative economic news always leads to a market sell-off. Where there are losers, there are most likely also gainers waiting to mop up the excess liquidity.
For instance, while most stocks and indices have been bleeding since news of the COVID-19 pandemic hit the media airwaves, Zoom Video Communication Inc and other tech company stocks have been on a steady rise year-to-date. That’s because many now work completely remotely and rely on technology and web conferencing tools.
Zoom stock price has been rising even amidst the massive selloff following the COVID-19 crisis | Source tradingview.com
Similarly, the real estate market has shown some interesting trends amid the COVID-19 pandemic, with buyers preferring single family homes over condominiums in downtown cores. With many transitioning to working from home, space became more important than location, to some extent.
Is Economic News a Good Indicator of Market Performance?
No doubt current news can influence investor behaviour, but is the correlation between them substantial enough to be a reliable indicator? Not necessarily. Here’s why:
1. Other Factors
There are several other factors outside of economic news that influence market movements. This is one of the most common reasons why the stock market can do well even in a declining economy. Company quarterly performances, price to earnings ratios, technological advancements, political and regulatory developments — these are just some of the factors to consider outside of current news reports.
2. Investor Mindset
Another thing to note is the investor’s motivation for participating in the market in the first place. A typical buy-and-hold investor isn’t concerned about current news. In fact, unless you’re an active day trader, you’re usually focusing your attention on the future.
3. Major Indices Are Not Reflective of the Economy
The S&P/TSX Composite Index, which is the benchmark Canadian index, does not necessarily follow the Canadian economy. As such, even if financial markets are influenced by economic news, there’s always bound to be a divergence.
The economy is mostly driven by consumer demand and supply, whereas the S&P/TSX contains mostly industrials, financial services, and natural resources companies. Only a select few cater directly to the consumer.
Anticipating News to Make Profitable Investments
Professional traders and experienced investors tend to focus more of their time on anticipating the next news cycle, so that they can make profitable investments before the real numbers are released.
There are a number of information sources in this effort:
Government Economic Reports
Statistics Canada provides a concise roundup of selected economic events in Canada. Here are some highlights from the September 2020 edition:
The Government of Ontario plans to freeze rent in 2021 through the Helping Tenants and Small Business Act. This could mean more disposable income for individuals living in that area, which they could use to boost their existing investment portfolios.
The Bank of Canada has reiterated its commitment to continuing its quantitative easing (QE) program, following the financial market fallout in March 2020. To this end, the Bank will maintain its overnight rate at 0.25% and continue to purchase a minimum of $5 billion worth of Canadian government bonds every week. It’s not a good time to be a bondholder in Canada since the interest income is very low. It may be a good time to be a private lender who invests in private mortgages, though. That’s because they’ll likely generate greater returns than other passive cash flowing products and fixed income securities.
The Bottom Line
At the end of the day, informed investors are smart investors. And while it’s true that economic news doesn’t hold much sway over market movements, it is an indispensable aspect of investing.
What Next?
The CMI Group will continue to analyze the Canadian economy and any resulting market changes and provide regular updates to keep you informed. To learn more about investing in our private mortgage products, simply call 1-855-778-2175 or fill out our contact form.
