Wall Street investors are not convinced that the U.S. stock market rally in the last two months, and the record job gains in June 2020 are blueprints for a quick recovery. They see uncertainty prevailing and turbulence still to come; the situation could turn ugly in July.
The market is hard to read, although a spate of factors lends credibility to the pessimism. These factors should also weigh on Canada’s stock market, which has been surging lately.
Rising COVID-19 infections
COVID-19 is the thing that will spook investors. A resurgence in infections can nullify the second-quarter gains and pull down the stock market once more.
Canada is crushing the curve better than the United States. However, Ontario’s regional health units are still reporting pockets of new cases. So far, the government has resolved 87% of all confirmed cases, while posting the lowest increase in death since March.
Residents can now travel between the Atlantic provinces following the lifting of travel restrictions on July 3, 2020. We’ll see if cases will spike since passengers need not self-isolate for 14 days after arriving.
Canada’s unemployment rate climbed to a record-high 13.7% in May 2020 that eclipsed the 13.1% in December 1982. As businesses reopen, some Canadians are returning to the workforce. Millions more, however, are still looking for jobs.
Based on the International Monetary Fund (IMF) forecast, the country’s unemployment rate by December 2020 and 2021 will be 7.41% and 7.21%, respectively. The Ministry of Labour has yet to release the June jobs report.
Rising budget deficit
Canada is on its way to posting its largest budget deficit in history. The Parliamentary Budget Officer (PBO) estimates the deficit will swell to $252.1 billion due to the massive emergency fiscal measures to combat the COVID-19 pandemic. It will lower Gross Domestic Product (GDP) by 12%.
The impact of the rising budget deficit and lower GDP is a 48.4% increase in the federal debt-to-GDP ratio in 2020-21.
Emerging tech superstar
The technology sector is propping up Canada’s stock market, although the weight of tech stocks on the benchmark is not even 10%. Technology adoption and online engagement are the best practices in the new normal.
Kinaxis (TSX:KXS) is emerging as a tech superstar. The stock price reached a 52-week high of $205.80 at the start of July. Kinaxis shares climbed 9.5% in June and are now up 99% year to date.
The business of this $5.35 billion provider of supply chain management software progresses tremendously during the pandemic. Companies need agility and efficiency to track shipments following COVID-19’s disruption of the global supply chain. Lockheed Martin and Unilever are among the top clients.
Kinaxis CEO John Sicard admits the company is playing a critical role in 2020. He said, “There’s never been a time where we’re more relevant, and especially under this particular crisis where all supply chains are experiencing a tremendous amount of volatility and disruption.”
Analysts are saying market volatility will persist not diminish this month. The factors mentioned above can tip the scales. Some strategists, however, point to previous market rebounds. When an index posts its best quarter, it will repeat in the short term.