February 3, 2017 / 6:14 PM / 10 months ago

Canadians not feeling 'wealth effect' as stock market nears high

TORONTO (Reuters) - A rising domestic stock market will barely lift the confidence of ordinary Canadians, who are more concerned about job prospects in an economy threatened by a more protectionist United States, economists say.

Passersby watch the performance of stocks on a financial news television screen in the business district of Toronto, Canada, January 30, 2017. REUTERS/Chris Helgren

Canada’s S&P/TSX Composite index was up 34 percent as of Friday afternoon from its January 2016 trough and last week it briefly came within 11 points of its all-time high at 15,685.13.

Stock market gains usually add to financial security and boost people’s spending. But economists expect the “wealth effect” to disappoint as Canadians grapple with a sluggish domestic economy and uncertainty over the implications of Donald Trump’s election as U.S. president.

“People on Bay Street and on Wall Street love to believe in the wealth effect on spending from what the equity market does and it is actually way down near the bottom of the list for what really drives consumer confidence,” said David Rosenberg, chief economist and strategist at Gluskin Sheff & Associates Inc.

“What has a much more powerful impact on confidence is job creation and growth in the paycheck,” Rosenberg added.

Canadian consumer confidence fell in January to its lowest since October, a survey conducted by the Conference Board of Canada showed recently.

Canada did add jobs in 2016, but it was mostly part-time and earnings growth has lagged inflation, data from Statistics Canada shows.

“I think Canadians will be taking more of their cues on how they feel about the economy with the results in the labor market” said Nick Exarhos, economist at CIBC Capital Markets.

He thinks that the quality of jobs available in Canada has deteriorated over the past two years and that the TSX is a poor guide to the strength of the domestic economy due to its heavy concentration of resource stocks.

Economists also doubt that stock market gains will lift business sentiment.

“If Donald Trump has his view that trade deficits with anybody have to be redressed that is a much bigger deal for Canada than the next few points on the TSX,” Rosenberg said.

Canada runs a merchandise trade surplus with the United States, while Trump plans to renegotiate the North American Free Trade Agreement under which Canada sends 75 percent of its exports to the United States.

“If firms were thinking of investing with the idea of shipping to the U.S. ... they may just pause,” said Craig Wright, chief economist at Royal Bank of Canada.

Reporting by Fergal Smith; Editing by Tom Brown

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