Could the bad news for the economy become good news for the markets?

Today has brought a couple of devastating pieces of economic news from North America. Statistics Canada has just reported that the Canadian GDP in the first quarter this year dropped 0.6%, the biggest decline in almost six years. Apparently, the oil price shock is having a more profound effect on our economy than most people had thought as market experts expected a GDP growth of 0.3% in the first quarter.

Although the U.S. economy is more diversified than the Canadian one, similar news came out today south of the border. The U.S. GDP dropped 0.7% in the first quarter. In addition to this, other economic news from the U.S. has also been less than impressive – corporate profits in general have contracted by 5.9% in the first quarter 2015б while May’s consumer sentiment is at a six-month low (both from marketwatch.com).

These kind of developments have soured market sentiment in both Toronto and New York. The U.S. and Canadian stock indices are down between 0.7%-1.0% today. At the same time, what is bad for the economy may not always be bad for stocks. The markets had been growing strongly in 2009-2014 while the economic recovery has actually been quite fragile – in the past four years, the U.S. quarterly GDP growth has been in the negative territory three times already.

The growth of the markets has been largely due to the quantitative easening implemented by the Federal Reserve and the Bank of Canada which has flooded the markets with liquidity. Most observers expected that the Fed would raise interest rates this year, but the current economic weakness is likely to push these plans further into the future. This may well support the stock valuations in the months to come.

Ukrainian Credit Union Limited