Consumer and wholesale inflation numbers seem to be finally cooling down after remaining at high levels and hurting investors’ sentiments for over a year. The latest consumer price index reports from the United States and Canada have clearly reflected a downward trend in inflationary pressures.
But can this easing inflation help the Canadian stock market make a big comeback in the coming months? Before we discuss that and look at a top TSX stock to buy right now, let’s quickly review how inflationary pressures have affected the stock market movement in the last few years.
What kept the Canadian stock market shaky
For a little background, the COVID-19 woes badly affected investors’ sentiments in the first quarter of 2020, triggering the massive stock market crash. But after tanking by 21.6% that quarter, the TSX Composite benchmark recovered sharply later during the year, helping it and the year on a positive note with 2.2% gains.
On the one hand, many businesses faced big operational challenges due to the global pandemic-related restrictions and shutdowns. On the other hand, these restrictions massively increased the demand for products and services of some growth companies, especially from the tech sector. A spectacular rally in these growth stocks was the main reason the TSX index managed to end 2020 in the green territory. Shopify (TSX:SHOP) was one of these growth companies, as its stock popped by 178% that year.
We must note that the central banks in the United States and Canada slashed interest rates on multiple occasions in 2020 to help the economy recover from the pandemic-driven challenges. While low interest rates kept the stock market optimism alive in 2021, they eventually led to high inflation. These inflationary pressures became more evident at the start of 2022, forcing the Federal Reserve and Bank of Canada to take immediate measures to curb inflation. As a result, central banks started rapidly raising interest rates that year, badly affecting investors’ sentiments and leading to a massive decline in growth stocks. These developments explain why the TSX Composite dived by 8.7% in 2022.
As macroeconomic challenges due mainly to high inflation and rapidly rising interest rates continued in 2023, the main TSX benchmark failed to recover. At the end of September 2023, the index was trading with less than 1% year-to-date gains.
Will easing inflation help Canadian stocks rally?
Clearly, high inflation and related factors have played a key role in hurting the stock market movement in the last couple of years. On the positive side, we have now started seeing early signs of easing inflation, which should encourage the Bank of Canada and the Fed to soon ease their monetary stance. This is the primary fundamental indicator that Canadian stock investors have watched closely for a long time. If this easing inflation trend continues, I expect most TSX stocks, especially growth stocks, to stage a handsome rally in the near term. That’s why it could be the right time for investors to consider adding some quality growth stocks to their portfolio before it’s too late.
Speaking of quality growth stocks, despite more than doubling in value in 2023 so far, Shopify could still be a great stock to buy on the TSX today, as it’s still about 58% off its all-time highs. Moreover, SHOP’s financial growth trends remain very strong, with its revenue and gross profits jumping 25% and 36% year over year, respectively, in the latest quarter. In my opinion, Shopify’s solid financial growth and its increasing focus on long-term growth initiatives could get higher appreciation from investors, as the macroeconomic environment improves.
