With another quarter of Chart Attack sent to inboxes (you can sign up to the free email list for Chart Attack here), we want to take some time to highlight some charts that jump out at us compared to the prior quarter.

Canadian Stock Market P/E Ratio and Total Market Value

There are two metrics being reviewed in the graphs above; one is the P/E ratio for the Canadian stock market over time (top chart), and the second is the Canadian stock market values over time (bottom chart). We can see that in the top graph, even as P/E is dropping most recently from a level above 20X to the current 16.8X value, the bottom graph indicates that the stock market has continued higher. This demonstrates that the underlying companies in the Canadian stock market have been improving their earnings results at a faster rate than price appreciation. This further supports the fact that the Canadian economy is recovering. 

Canadian Inflation Measures

One of the largest macroeconomic fears of 2021 has certainly been inflation. This chart showcases the headline CPI (all inflation values) against the core CPI (all inflation values excluding food and energy). One persistent trend that we can see against past periods is that headline inflation is much more volatile than core inflation. The biggest driver of the recent increase in headline CPI has been energy, and more specifically, non-durable goods (fresh food, gasoline, etc). This may not come as a surprise given the surge in the price of oil over the past year. This contrasts with the increase in core CPI which has been led by increased housing prices, clothing, and auto sales (due to supply chain issues with semiconductors). Fears of further increases in inflation may be quelled by housing prices that are beginning to stagnate/decline slightly, and potentially lower auto prices as supply chain issues are resolved. 

Canadian Consumer Confidence

The Consumer Confidence Index is a leading indicator and shows us how confident Canadians are in future consumption. The data above shows us that compared to historical levels, there appears to still be more upside in consumer confidence. This indicates that there is likely going to be increased consumer spending and economic growth in the future, and therefore this acts as a tailwind for the broader Canadian market. In reviewing past consumer confidence levels, the biggest return on investment opportunities were seen during or shortly after consumer confidence levels dropped below 50 (early 2016 and early 2020). 

Canada 10Y-2Y Bond Spread

The iconic 10-year less 2-year government bond spread is a measure used in predicting recessions. Once the 10Y-2Y spread turns negative, as can be seen in 2000, 2007, and 2019, a recession has followed each occurrence within 6 to 24 months following. A negative 10Y-2Y spread means that the yields on 10-year bonds are less than on 2-year bonds, indicating that investors anticipate interest rates will decrease in the future. We can see that in the graph above, the spread has increased drastically since 2020, and this is an indicator that investors now believe interest rates will be increased in the future. Increasing interest rates means that economic activity is good enough to warrant higher rates and to entice consumer savings as opposed to consumer spending.

Did You Miss the Latest Chart Attack?

We recently sent out the latest edition of the free Chart Attack e-mail highlighting various hard-to-find charts on a quarterly basis. If you are not yet on the list, you can join for free here and view the charts.

Take care,