Global Markets Insights: Consumer confidence sags, optimism for US small caps, USD vulnerable

October 30, 2020

Consumer confidence in Canada dropped in October in the face of increased COVID-19 cases and renewed physical distancing measures. Retailers, meanwhile, prepare for a very different kind of Christmas this year, with a focus on online sales and smaller gatherings. While still lagging their bigger counterparts, US small cap equities are seeing favourable tailwinds and a possible end to a cycle of underperformance. And the failure of the US government to agree on new financial support measures is putting pressure on the dollar. Our analysts look at the possible impacts of different outcomes from the election.

Scotiabank analysts and economists weigh in on what the pandemic means for retail, equities and foreign exchange.



  • Consumer confidence weakened in October as restrictions tightened in the midst of a second wave of COVID-19. In Canada, the Consumer Confidence Index dropped 9.5 points, the largest monthly decline since April. It seems the new waves of physical distancing measures across a number of regions are weighing on sentiment on future job prospects. Pessimism ratings on future job prospects rose 7 points in October. Consumer sentiment about future finances dropped to the lowest point since April as Canadians worry about the outlook once government support programs wind down. As to purchasing, only 18.5% of respondents believe now is a good time to purchase a big-ticket item, only 60% of where the reading stood in February before the pandemic. Quebec and Alberta declined more than 20 points in October, marking the largest declines since April. Ontario, at 64.8, has the second-lowest consumer confidence reading in the country, and Ontarians were the least confident (13.6%) on big-ticket spending.  Quebec has the largest gap between the current reading and that of February (72.4 points). British Columbia is the only province that logged improved optimism across all four survey questions.

  • We are all aware that the holiday season will be celebrated very differently this year than in years past. Gift shopping will see a significant migration online, and Salesforce.com says their research anticipates there could be some issues with supply chain disruption such that some gifts will not make their way under the tree in time for Dec. 25. They suggest that demand is likely to exceed supply capability by at least 5%, implying that $700M in gifts will be delivered late.

  • There are some very interesting data coming out of the UK this week that point to changes and potential disruption to getting Christmas dinner on the table. An unprecedented level of Christmas food shopping is expected to migrate online in 2020, especially in light of the second wave and tightening of restrictions. John Lewis Partnership have noted that already delivery slots for the important holiday period from Dec. 20 to 24 are filling up. Currently 107k slots are filled and that compares to 44k slots filled for delivery for the 10-day period (Dec. 15-24) leading up to Christmas last year. At Waitrose currently all available delivery slots for the period of Dec. 20-24 are fully booked. Tesco, the UK's leading grocer, is marketing its prime Christmas delivery slots as an incentive for customers to sign up for its Delivery Saver subscription service. Members of the subscription service will have access to the prime slots a week earlier than non-members starting Nov. 13.

  • It will be very interesting to watch how Canadian retailers respond to the changed backdrop for Christmas 2020, especially with respect to a likely move to smaller gatherings this year. The possible advantage for Canadian grocers is that there may have been some good lessons learned from having to adapt in October to a muted celebration of Canadian Thanksgiving.

—  Patricia Baker, Director, Retailing, Global Equity Research


  • Although US small cap equities have been very strong this month, with the Russell 2000 up around 6%, they still lag the S&P 500 by a wide margin this year (-4% vs +5%, respectively). Still, we believe the small caps underperformance cycle has run its course. We see favourable tailwinds next year from a superior macro environment, improving credit conditions, and appealing relative valuations. While COVID-19 and the election could maintain volatility on the high side in the short run, we flag some key points to consider.

  • Historical returns: Back-to-back declines are rare. US small caps rarely suffer two (or more) consecutive years of negative returns. In fact, going back to the 1920s, back-to-back declines only happened five times. Unless the US economy experiences a double-dip recession (not our scenario), small caps appear likely to deliver a positive return next year.

  • Size cycle. If U.S. small caps end 2020 behind large caps, it would mark their fourth consecutive year of underperformance with six of the last seven years seeing underperformance. Historically, a large cap domination cycle tends to last about six years on average. If the current cycle started in 2013 as we believe, its longevity roughly matches the historical average.

  • EPS growth expected to resume. Some investors pointed out recently that the percentage of small caps losing money (negative trailing EPS) is quite high. This is not totally unexpected at the end of a recession. Furthermore, we believe small caps profitability will surge again next year. We find that one of the best leading indicators of profitability is the ISM manufacturing index. It exhibits a solid relationship with S&P 600 trailing earnings growth.

  • Credit conditions matter. With the pandemic, most US banks have tightened their credit conditions, making it harder to get a loan approval. According to the latest Senior loan officer survey run by the Federal Reserve, credit conditions have not been this tight since the financial crisis. It could hardly get worse, in our opinion. Small caps tend to do much better when credit conditions are loosening, which could be the case next year.

  • P/E premium long gone — small now trading at discount. A few years back, small caps’ P/E premium over large cap equities seemed historically high. Now, US small caps are trading at a 5% discount to large cap equities (the S&P 600 fwd P/E ratio stands at 20.8 vs 21.8 for the S&P 500). That is corroborated by the relative P/B ratio, which stands at one of the lowest levels in about 20 years. Hence, from a valuation perspective, small cap equities have not been this attractive in years relative to large caps.

 —  Hugo Ste-Marie, Director Portfolio & Quantitative Strategy; Jean-Michel Gauthier, Associate Director, Portfolio & Quantitative Strategy; and Simone Arel, Research Associate, Global Equity Research

Foreign Exchange

  • FX markets have slipped into neutral, choppy range trading as investors count down the days until the US election.  US lawmakers have failed to land an agreement on fiscal relief for hard-pressed Americans affected by the coronavirus and a deal will now have to wait until after the election, at the very least. Equity markets wilted at the start of the week as fiscal stimulus hopes faded and focus retuned to rising virus cases around the world, lifting the USD. Equity market developments continue to exert a significant influence over short-term currency movements and whether investors are in risk-seeking or risk averse mood is likely to remain a key determinant of day-to-day FX movements ahead of the end of voting in the US next Tuesday. 

  • The CAD retains a strong, positive correlation with US stocks (as measured by daily returns of the spot market and the S&P 500 over a rolling one-month window).  At +67%, the correlation is significant from a statistical point of view and one of the strongest, positive relationships among the G10 currencies.  The means the CAD is likely to move significantly, alongside equity markets, as investors position for — and react to — the results of the election. 

  • Broadly, we feel that the status quo, that is to say President Trump wins the White House while the Senate is held by the Republicans, may be more neutral for risk appetite as hopes of fiscal support may be offset by concerns that the president will reactivate an aggressive negotiating approach with the US' trade  partners. A narrow Biden win, which opens up the possibility of a contested result and protracted litigation, will lift uncertainty and be negative for risk appetite (and the CAD). A Biden win while the Senate remains under the control of the Republicans may also be a modest negative for risk assets in the short term as Republicans may block large-scale fiscal support that markets have already largely priced in. A Democratic sweep, paving the way for significant fiscal measures in Q1 next year may be supportive for risk appetite, and support the CAD in the shorter term. 

  • We remain bearish on the USD in the longer term, however, and expect post-election volatility to settle down into Q1.  We expect the USD to slide gently but persistently through 2021 as relatively weak domestic growth and low domestic yields refocus investors’ attention on USD-negative structural imbalances in the US and drive portfolio re-allocations away from the USD.     

—  Shaun Osborne, Managing Director, Chief FX Strategist, and Juan Manuel Herrera, FX Strategist


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