The Big Picture
Why do we really care about all this economic data anyway?
We as businesses, consumers and investors are continually forced to make decisions on how we will best utilize our money.
As investors we need to have confidence that the investments that we put our hard earned money into will give us a reasonable return through growth of the value of the asset that we purchase and / or a reasonable amount of income payment that is regularly generated and distributed back to us.
When we lack confidence, we tend to put off making our economic decisions, this is human nature.
Since the great recession of 2008 - 2009, businesses have been focused on preservation more than growth. Consumers have been more focused on saving and paying down debt rather than saving. (Canada may be an exception). The consumer represents 60-70% of the global economy.
In order to force investors from the sidelines, central banks have continuously added monetary stimulus to the global economy driving the value of "safe havens" (government bonds) to record highs and interest rates to record lows.
As time has passed money has moved to the equity markets because it is the only place to get returns greater than the rate of inflation:
- Rising equity markets have given investors confidence.
- Businesses have begun to start spending on the their own growth (hiring new employees).
- Consumers have grown more confident.
"Shocks" that upset our confidence have appeared from time to time (oil price shock most recently, other economic and geo-political events before that) and this is signaled by the spikes in volatility.
Central bankers have been quick to respond to ensure that order is restored and that confidence returns.
Money continues to flow into equity markets and many have been pushed to record highs.
Investors remain confident that the prices that they pay today for equity assets still represent value.
However, if and when interest rates start to move higher (because economies are growing at sustainable levels) investors are going to have more choices and they will be re-examining the prices that they are paying for equity assets.
This is why we are so focused on the "next move" by the central banks.
When will the Fed start to raise rates?
What will the BOC say in today's rate announcement.
The views expressed are those of the author, Scott Tomenson, a Raymond James Financial Advisor, and not necessarily those of Raymond James Ltd. It is provided as a general source of information only and should not be considered to be personal investment advice or a solicitation to buy or sell securities. Investors considering any investment should consult with their Investment Advisor to ensure that it is suitable for the investor's circumstances and risk tolerance before making any investment decision. The information contained in this blog was obtained from sources believed to be reliable, however, we cannot represent that it is accurate or complete. Raymond James Ltd. is a member of the Canadian Investor Protection Fund