Despite the TSX being at record levels, there are warning signs that the Canadian economy isn’t doing as well as everyone thought. For the first time in nearly 20 years, the number of corporate insolvencies is on the rise. And this upward trend is expected to reach into 2020. Personal bankruptcies are up too. With the credit bubble close to popping, the number of personal insolvencies are projected to climb over the next few years. The big question is, how will this impact equities and the TSX?
When Was the Last Time Business Insolvencies Increased?
It appears 2019 will be a record year for Canadian businesses. A record that points to volatility in the Canadian economy and stock market. Since 2001, business insolvencies have been declining, but because of Canada’s slowing economy, insolvencies are on the rise.
Over the last 12 months (through the end of September), the number of businesses that have gone under has increased 4.1%.
Most investors might expect that because of falling commodity prices, the mining and oil and gas sector would get hit hard. And they have been; with insolvencies from both sectors rising over 55%.
But the data from the Office of the Superintendent of Bankruptcy suggests business insolvencies are more wide spread. The information and cultural industries saw the number of insolvencies advance 42.1%, while the financial and insurance sector saw sector insolvencies increase 27.6%.
With Canadian economic growth expected to be tepid at best in 2019 and 2020, the rate of corporate insolvencies is expected to continue climbing.
What About Consumer Insolvencies?
Consumer insolvencies are also on the rise. Despite weak projections for the Canadian economy, the Bank of Canada has raised its key lending rate five times since the summer of 2017. Even though the U.S. economy is doing much better than the Canadian economy, the Federal Reserve is lowering its lending rate in an effort to stave off an economic slowdown.
The higher cost of living and record debt levels coupled with higher interest rates is making it more difficult for Canadian borrowers to pay off their debts. Consumer insolvencies soared 8.5% for the 12-month period ending in September. And that number is expected to grow as well over not just the coming months, but years.
How Will Rising Business Insolvencies Impact Canadian Stocks?
Right now, it doesn’t appear as though rising insolvencies and weak economic projections are having any impact on stocks. The TSX hit a fresh high on Wednesday, November 13 and has been enjoying its longest winning streak since January. Stocks are being boosted by investor optimism around weakening trade tensions between the U.S and China. Those celebrations may be a little premature.
The TSX is in record territory but a whopping 80% of equities listed on the S&P/TSX Composite Index have reported earnings growing at the slowest pace since 2015. And it’s not as if the Canadian economy is going to suddenly kick into full-growth mode in 2020. In fact, the Canadian economy is expected to decelerate to just 1.5% in 2019 and 2020.
So what’s behind the stock market gains? The global economy is slowing down and central banks around the world are lowering their rates to zero or close to zero to stimulate growth.
Income starved investors are turning to stocks. And they’re rewarding stocks for not doing as badly as expected. This is sending valuations through the roof. Eventually, fundamentals will come into focus. And when they do, stocks could experience a big correction with some unexpected publicly traded companies filing for insolvency.
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Corporate insolvencies are on the rise for the first time in almost 20 years; because of the slowing Canadian economy, this trend is expected to continue into at least 2020. A slowing economy will hurt some sectors more than others. While this will lead some investors to park their money waiting for better times, the trading professionals at Learn-To-Trade.com can show you how to make money no matter what broader markets are doing.
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