Everything rides on the Bank of Canada! So say most pundits, who are convinced Governor Tiff Macklem and crew must speed up rate cuts to avert a 2025 recession. Phooey! Despite incessant chatter around them, central banks aren’t “central” to the economy or markets. Whether the BoC cuts 25 basis points, 50, or zero, this bull market lives on. Let me show you why.
Central bank fixation is a global affliction. Canada is no exception, and so it’s no shock, then, that August’s unemployment uptick to 6.6 per cent spurred calls for the BoC to accelerate the rate cuts it started in June. “Inflation is fine – start slashing – or else” shrieked spooked strategists, claiming a 25-basis-point (bps) cut isn’t enough.
Wrong! First, like America, Canada’s rising unemployment rate isn’t about layoffs. The labour force simply grew faster than hiring, which isn’t some clear sign of weakness. Even so, as I told you in January, 2023, central bankers’ influence is routinely overblown. I detailed why BoC rate hikes wouldn’t trigger recession or a bear market. What’s happened since? Stocks climbed. Canada skirted recession. The U.S. and most of the world did, too.
Hanging on central bankers’ words – like the pundits chirping after Mr. Macklem recently “opened the door” to bigger rate cuts – is doubly daft. Why? Officials frequently issue forecasts and guidance they fail to follow. It isn’t all their fault. The economy is complex. Data vary. Stuff happens. Interpretations change.
So if central bankers don’t know their next moves, you can’t either. Yet Wall Street and Bay Street have entire teams scrutinizing policymakers’ utterances for clues. Or their silence. Don’t bother. Even if you could divine their future actions, it wouldn’t help.
Why? Central bankers don’t possess hidden, deep economic insights. Given near identical training, groupthink infects them. Consider the widely hyped “wage-price spiral” – the notion that rising wages fuel inflation. Nobel laureate Milton Friedman debunked that 60 years ago, showing wages hikes always follow inflation, never lead it.
Recent events have proved him right again. My October, 2023, column revealed this, and it continues now. Canada’s Labour Force Survey shows wage growth running hot at 5 per cent year-over-year through the second quarter. Yet inflation kept sinking, fully down to August’s 2 per cent year-over year rate. If wage growth drove inflation, prices would still be galloping.
Ditto in America, Britain and the euro zone: Wage growth followed inflation rates up … then down. Still, analysts and pundits harp on labour data as if it’s causal. Central bankers globally, blinded by bias, can’t see their error.
Even if you could see into central bankers’ minds, it wouldn’t help you invest. My January, 2023, column told you not to sweat the fallout from rate hikes. That was right. The world economy grew throughout the past two years’ tightening. Some high-interest-rate spots like America grew faster than ultralow-rate countries (like Japan).
And stocks? Central banks simply don’t dictate markets – whether rate cutting or hiking.
Pundits swear stocks need bigger rate cuts to rise. But … why? The TSX hit its 2022 low that July 14 – the day the BoC hiked by 100 basis points. Then stocks climbed through six more hikes, totalling 250 additional bps. From 2022′s July low through this June 5 – the day before cuts started – the TSX rose 28.4 per cent.
It isn’t just Canada. America’s S&P 500 started rising in October, 2022. It kept climbing despite six rate hikes through July, 2023. Market rate-cut expectations swung wildly throughout 2024. Yet the S&P 500 rose 62.4 per cent since 2022′s low and 19.3 per cent in 2024. It is 34.5 per cent above pre-hike levels. Likewise, eurozone stocks are 35.5 per cent above their pre-hike levels. Britain’s FTSE All-Share is up 23.3 per cent since hikes began. If hikes didn’t kill this bull market, what evidence is there to say stocks need cuts now?
Consider Wednesday’s U.S. Fed – bigger than expected – 50-bps rate cut. Note the S&P 500 fell slightly that day. Wasn’t that rate cut supposed to be bullish? The fact is that cuts don’t actually help stocks any more than hikes hurt. It is all relatively random.
See it another way: If interest rates trumped all, then Japan – with forever ultralow or negative rates – should have enjoyed a gangbusters stock market this past decade. But that never happened. While world stocks returned 351 per cent in the 2009–2020 bull market, Japanese stocks returned half that – 171 per cent. And they have lagged since the beginning of 2023, while world stocks soared.
Central banks lack the power to direct stocks because markets are fully global, weighing the next approximately three to 30 months’ profits against expectations. Policy rates, globally and in any one nation, are an input to that but a small, marginal one.
So, ditch that central bank fixation. Let Mr. Macklem and his counterparts elsewhere off the hook. This bull market doesn’t hinge on their talk or actions.
Ken Fisher is the founder, executive chairman and co-chief investment officer of Fisher Investments.
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