Unemployment Rate Rises To 7.1% – But Outlook Says Stay Invested

Unemployment Rate Rises To 7.1% – But Outlook Says Stay Invested

The unemployment news for June was a bit of a surprise to economists as Canada lost 9000 jobs and saw the unemployment rate rise to 7.1%. This now marks the highest level in 6 months and continues to point to weakness in the Canadian economy. While US politicians complain bitterly about the perceived slowness of employment in the United States, their rate is now at 6.1% and continues to decline while the Canadian economy is moving the opposite way. As well the labor force participation rate is now at 66.1% which means 33.9% of employable Canadians are not working. This non-participation rate is far above the US rate of non-participation. However Canada’s youth aged 15 to 24 have an unemployment rate of 13.3% which is far below the US rate for the same age range. Unemployment among women aged 25 and older is at 5.7% in Canada as of June.

The June report shows that there has been little improvement in unemployment in over a year. The June report was the poorest since February 2010. On the good news front, 33,500 full-time positions were created while part-time jobs dropped 43,000. Meanwhile public jobs numbers declined by 11,900 which was a good move toward reducing taxpayer costs to maintain government employees, benefits and pension plans.

No Marked Improvement

You can see in the chart below from Stats Canada that the unemployment rate is actually stuck sideways. There has been no real improvement in a year.

Canadian unemployment rate shows a marked sideways momentum with no real improvement. Source is Statistics Canada

Canadian unemployment rate shows a marked sideways momentum with no real improvement. Source is Statistics Canada

No Rise In Interest Rates

The remainder of this article is an opinion piece.

I believe the June unemployment report gives the Bank of Canada room to maintain the present ultra-low interest rates. With interest rates at historic low levels and unemployment rising, the Bank of Canada should be able to maintain present interest rates through the rest of 2014 and probably into at least the start of 2015. If US interest rates begin to rise this fall, it may provide even more time for the Bank of Canada to withhold raising rates. This would support investing in Canadian stocks.

Outlook Shows Stay Invested

With employment showing signs of weakness and the Canadian dollar trading around the 93.5 cent US valuation, we can see from the chart below that the high of 2008 has only just now been finally broken. The Price To Earnings ratio back in June 2008 was much higher on average than it is today. Dividends on the TSX 60 are also higher today and corporate revenue in general has dramatically improved, yet only recently has the TSX index managed to recover the 2008 high.

It should be noted that since June 2013 there has been no serious correction on the TSX. In the chart below you can see how the direction up has been almost uninterrupted since June 2013. This has happened in the past but almost always is followed by a correction of at least 7%, but normally 10% to 15%. At the present time then, with unemployment stuck around the 7.1% range, if such a correction were to occur it would be a buying opportunity and not the start of a bear market. Unemployment has to be moving higher for the markets to actually enter a new bear market. In 2009 unemployment was running around 8.3% after hitting a low of 6% in 2007.

TSX from 2005 to 2014

TSX from 2005 to 2014

Summary

Based on the employment numbers, the historic low-interest rates, corporate income growth and the present price to earnings ratio, I believe the outlook is for stocks to continue to be the primary investment choice.

As well US employment numbers have to increase considerably from where they are today to point to a new bear market. Canada will most certainly follow the US into a bear market when it does occur, but employment trends in the US have to reverse course as historically stocks have never entered a bear market with declining unemployment. Instead this advises that should a pullback or correction occur, I should apply my capital to additional trades to take advantage of lower equity prices.

Staying invested in Canadian equities at present continues to make a lot of sense and the poor employment numbers only adds more strength to the case that stocks have less room to fall back versus room to move higher. I plan to stay invested but any move to 15000 or below means I will be buying the HXD ultra short ETF, to take advantage of a short-term move lower in the TSX. Remember though that buying the HXD if it does occur will be for a short period only as at present, the overall underlying trend of the TSX is higher.

There will be signs when the next bear market is occuring but until then, corrections should be looked upon as a natural occurrence within a continuing bear market and taken as opportunities. That is what I will be doing.

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