Much of the market sentiment up to this point has been one of ‘bad news is good news.’ When economic numbers came in showing weakness, investors took heart because a slowing US or Canadian economy should prompt interest rate cuts. As cuts come and economic news continues to show weakness, however, Taylor expects that markets may shift back to a ‘bad news is bad news’ position, bringing greater volatility with it.
Taylor is already seeing signs of this shift with a rotation away from the mega-cap stocks that have dominated market performance for the past 18 months towards some of the value smaller-cap names which have underperformed. While he thinks that AI will remain a big factor going forward, he says that some investors are beginning to wonder if the trend has overrun somewhat. Economic weakening, he says, may have signalled to equity investors that the time for the rotation is now.
That rotation may already be reflected in the recent run we’ve seen in the TSX. After lagging US markets for years, the TSX outpaced the S&P 500 slightly in the past few weeks. Taylor says that’s largely reflective of investors taking a more favourable view towards the sectors overrepresented in Canada like energy and financials, and away from the tech names which Canada still has a dearth of.
Taylor’s current outlook for interest rate cuts is that the Bank of Canada will likely cut this week and pause in September to see what the US Fed does. The Fed, he says, is more likely to hold interest rates at its meeting next week before cutting in September.
Following the BoC meeting this week, Taylor is listening for Macklem to acknowledge that the Canadian consumer is feeling some weakness. Macklem’s overall view of the economy and the housing market will be key as well. Next week he’ll be listening for Fed Chair Jerome Powell to talk about fiscal policy and the role that spending plays on inflation.
