TSX Composite Index Unlikely To Undergo Near-Term Correction Given Liquidity

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Global stock markets are at a record high. The S&P/TSX Composite Index touched 20,000 for the first time in June this year. Such events usually occur when macroeconomic indicators are strong, corporate profits and wages are rising, and there is no political or geopolitical upheaval to create any roadblock in the way of economic growth.

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In contrast, macroeconomic indicators are in the red. Employment in Canada has yet to reach its pre-pandemic level, and the economy contracted in the second quarter of 2021. Inflation is rising, and wage growth is subdued. Corporate profits are a mixed bag. Canadian banks are shining, prompting politicians to call for new a tax on them in their snap election campaigns, while other players are saddled with supply chain disruptions and high costs of operations. A snap election is due this month, and analysts cannot predict any clear win for either the Liberals or Conservatives. Despite a range of negative forces, the stock market is thriving.

The Role Of Keynesian Economics

John Maynard Keynes, an English economist, suggested an approach to lift economies out of a slowdown in the wake of the Great Depression.

Keynes favored the creation of demand in the economy through fiscal and monetary policy measures. This is achieved by infusing liquidity by ways of public investment by the government, coupled with the central bank keeping interest rates low to encourage borrowing. The concept must sound familiar. Although the government and the Bank of Canada have not expressly mentioned the term Keynesian economics in their policy documents, the theory has been adopted in practice. The government is pumping money into the economy through support measures including an emergency wage subsidy, a rent subsidy and similar other actions. For its part, the central bank has maintained policy rates at a record low.

It is not in Canada alone. From the US to the UK to Australia, governments across the world have infused liquidity through fiscal policy measures. Even in the wake of high inflation and skyrocketing home prices, the Bank of Canada or the Fed have yet to undertake any major tampering in quantitative easing (QE).

The Role Of Online Discount Brokerages

Investing in stocks or similar investment instruments was never so easy and cheap. With the arrival of online discount brokers like Questrade and Wealthsimple in Canada, and Robinhood in the U.S., retail investors could start with a few dollars without having to pay heavy commissions on trades.

Until a few years ago, retail investors with anything less than 10,000 dollars were rarely a priority. Stock investment was a space for institutional investors and high net worth individuals. The entry of discount brokerages liberalized trading and brought retail investors to the fore. Today, these amateur investors are using all the tricks of the game, including options trading, to create wealth.

The development has had its share of criticism as well. Retail investors have led to the rise of meme stocks trading, which defies fundamentals and relies on sentiments made on social media platforms. Regulators are calling out discount brokers for using diverse ways to earn profits in lieu of offering trades without charging any commission.

Had it not been for this ease of trading and the possibility to start with a few dollars, the hyper-volatile crypto space would not have attracted such an investor frenzy.

Liquidity Means Demand, Demand Means Growth

It is no puzzle why global stock markets, including the Toronto Stock Exchange (TSX), are scaling new peaks amid uncertainty over economic revival owing to new strains of Covid-19. Stocks are a product like any other good. Prices are a factor of demand and supply forces. The more the demand, the higher the price. It is the same liquidity being pumped in by governments and central banks that is creating demand in stock markets.

Earlier this year, CIBC reported that Canadians may have C$100 billion in excess cash despite lockdowns and restrictions on economic activities. The survey stated that nearly 40 per cent of Canadians favored investing more, and over 30 percent wanted to build savings with this extra cash.

Stock markets were an attractive destination. TSX gained over 10 per cent between September 2020 and February 2021. We must also recall that the S&P/TSX Composite Index had plummeted 37 per cent in a matter of just one month during the initial outbreak of Covid. The descent, however, did not sustain and a V-shaped recovery followed.

Despite cities entering lockdowns and more Canadians losing jobs, the stock market’s recovery is a subject of debate. But it is easy to understand that stock prices relied on upbeat demand which in turn was owed to the liquidity created through Keynesian economics and the flocking of investors to discount brokerages.

No Correction, Let Alone Crash, Imminent

Both parties, Liberal and Conservative, have pledged to spend more in their election platforms. The leader of the Conservative party, Erin O’Toole, has repeatedly criticized the fiscal deficit and debt levels. He has claimed that the Liberal government is pushing generations of Canadians into debt. However, he treaded cautiously during his campaign by saying his party will balance the budget without cuts to spending on public services.

Be it the Liberals or the Conservatives forming the government after the snap election, liquidity is here to stay regardless of how the economy shapes up in the near future. A part of this liquidity will get parked in the stock market, thanks to the growing formidability of retail investors and their risk appetite.

A correction, or a crash, is nowhere in sight, at least in the near-to-medium term.

About the Author

Mr. Kunal Sawhney, CEO, Kalkine Group

Kunal Sawhney: Entrepreneur with revolutionary ideas; financial professional with wealth of knowledge in Equities, aiming to transform the delivery of equity research through tech-driven digital platforms

With his knowledge, skillset, and overarching vision, Kunal established one of the fastest growing equity market research firms across Australia in year 2014; and subsequently, in other emerging & developed markets – Kalkine - A business that is based on Digitally Powered Architecture and Extensive Data Science led Premium Research. Kunal’s entrepreneurial and commercial skills backed by the passion to establish a tech-empowered research platform, helped in building Kalkine’s global presence across diverse geographies - Australia, New Zealand, Canada, and the United Kingdom. Further, the plans for the US launch in 2021, have set the premise for attaining an all-encompassing client reach for Kalkine’s Subscription and Media Operations.

With a Master of Business Administration degree from University of Technology, Sydney; Kunal’s business acumen has enabled his brainchild, Kalkine, help clients navigate through equity related matters in a proficient and seamless manner.

Kunal is featured regularly on CNBC, Sky Business, Biz News, Daily Mail, Yahoo Finance, KCBS Radio (Audacy), Bloomberg, Sydney Morning Herald, Global Banking and Financial Review and many more.