Canada’s Lack of Stimulus Hurts Consumer Sector

Consumers not encouraged by Canadian weak policy response.

August 1, 2012

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defibrillatorIn our most recent article, we demonstrated the underperformance of consumer discretionary stocks in Canada and Australia. We asserted that the root cause is the lack of monetary stimulus.

To prove this assertion, we felt it would be helpful to show how the consumer discretionary sector responds to monetary stimulus. Below is a chart of the relative performance of the US consumer discretionary sector plotted against overnight interest rates (inverted), which is a useful proxy for monetary stimulus (click on image to enlarge).

JJ_chart 1

Source: S&P, Bloomberg

Note the high correlation between the two series: US consumers respond to monetary stimulus by spending on non-essentials. We can also observe that while there was a lag in the last easing cycle, consumer discretionary stocks in the United States did respond, beginning in mid-2008.

Unfortunately, the same cannot be said of Canada, as the second chart demonstrates. While Canada looked somewhat similar (although in the 1990s it took longer for the sector to respond), our most-recent easing cycle proves the exception (click on image to enlarge):

JJ Chart 2

Source: S&P, Bloomberg

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