Trends in the U.S. stock market this year will have significant economic and fiscal reverberations north of the border, analysts cautioned.
In particular, expectations abound that the United States Federal Reserve will be cutting interest rates soon. Such a move will likely be mirrored by the Bank of Canada, although to a lesser degree.
“While we see the Fed easing towards the end of 2019, the market appears to be overpricing in the chance of cuts before then,” CIBC economist Katherine Judge and analyst Taylor Rochwerg told The Globe and Mail.
“U.S. equities could therefore face a rough ride ahead, as markets recalibrate towards later and less easing than currently expected,” the duo added. “The story is similar in Canada, with the BoC cut not likely in the cards until Q2 2020, also potentially limiting Canadian stocks gains in the meantime.”
Judge and Rochwerg assured, however, that any “insurance cuts by the Fed and BoC will prevent a more pronounced slowdown in growth, a positive for equities alongside lower interest rates in 2020.”
So far, CIBC is the only entity among the Big Six that has forecast a BoC benchmark overnight rate cut, ranging from 0.25% to 1.5%.
Earlier this week, RBC Global Asset Management chief economist Eric Lascelles warned that any North American recession will make itself much more manifest on Canada than anywhere else in the continent.
“There’s just no latent capacity to spend or to buffer a shock in Canada, and the U.S. is very well positioned,” Lascelles told Bloomberg in an interview. “You could lose your job and you would be okay in the U.S., or rates could go up and you’d be fine, or the economy could turn down and spending could continue. In Canada, you can’t really say that.’’
Much of this will stem from Canada’s current household debt levels. As of the end of 2018, the nation’s debt-to-income ratio was 176%, considerably above the U.S. level of 133%.
“If there were to be a recession, whether it’s in 2019 or 2029, or sometime in between, you can imagine Canadians getting hit a little harder than Americans,” Lascelles added. “They just have less room for error, less room to cushion any kind of hit with spending, before they would actually fall into outright dissavings.”