Equities, bonds, commodities and the
Canadian dollar – all flashed
green for the first half of 2019.
The first half of 2019 saw equity markets around the world bounce back following a challenging final quarter of 2018. Double-digit gains allowed North American equity markets to regain new highs. Bond yields plummeted, resulting in very healthy returns for fixed-income investors.
Trade tensions dominated the year’s first-half narrative, but a dovish policy shift from various central banks, most notably the U.S. Federal Reserve, provided welcome support for equity markets. With inflation remaining contained, the Fed pivoted toward a rate-cutting bias in an effort to prolong the current economic expansion.
Global growth showed signs of deceleration in the first half of the year, particularly in forward-looking survey data, such as Purchasing Manager Indices. Along with softer economic data, a rapid decline in bond yields flashed a warning to economic momentum. Canadian and U.S. 10-year bond yields fell below 3-month yields resulting in a portion of the yield curve becoming inverted – The inverted yield curve. North American bond yields continue to be weighed down by negative interest rate policies on the part of central banks in Europe and Japan. German 10-year government bond yields fell as low as -0.33% in June and bear a lower negative yield than their Japanese counterparts. The pile of negative-yielding global bonds now stands at a massive US$12.92 trillion.
Trade uncertainty resulted in increased equity market volatility. The trade battle between the U.S. and China ebbed and flowed. Early year optimism over a potential deal initially supported equity market growth. Then tensions ratcheted up after talks broke down in early May, resulting in increased U.S. tariffs on Chinese imports and imposed sanctions against Chinese tech giant, Huawei. The trade battle is being waged on two fronts: trade in goods, excluding technology; and, a separate battle for technology with its attendant national security concerns. Investors weighed the probability of an escalating trade war – and the resulting hit to corporate earnings – versus the possibility that some sort of deal could be struck at any point. Trade developments remain hard to predict; particularly so in an era where a ‘tweet’ can instantly change the narrative.
Oil prices bounced back as U.S. WTI crude prices rallied over 50% from their late-2018 lows, peaking in April at US$66/bbl, then sinking back to the low $50s on fears of slowing demand growth and high inventory levels, before finishing June with another run at $US60/bbl. Gold prices rallied above $1,400 on a more dovish Fed, falling bond yields, and a weaker U.S. dollar.
Canadian equities enjoyed a robust first half of 2019. The S&P/TSX Composite was up double digits, as all eleven GICs sectors finished in the green. Information Technology led gains, helped by spectacular returns from high flying e-commerce firm Shopify (up 108%). The small but growing Health Care sector also saw big price gains, pushed higher by continued flows into cannabis stocks. The heavyweight Financials and Energy sectors were big contributors, benefitting from an improved macro backdrop relative to late 2018. The large Canadian banks reported mixed financial results, but are generally continuing to benefit from a robust Canadian economy and limited signs of credit stress. The Energy sector benefitted from higher oil prices, while falling interest rates also provided a tailwind for the higher-yielding pipeline stocks. Canadian heavy oil differentials narrowed sharply on the back of government mandated production cuts. Other interest-rate sensitive sectors such as Utilities and Real Estate were boosted by the sharp drop in bond yields. The Materials sector lagged for much of the period before a sharp June rally in gold prices brought on strong performance. Base metal prices saw more muted gains due to the trade concerns that weighed on the outlook for global growth and the demand picture from emerging market economies. On a style basis, growth equities outperformed, while Canadian small caps significantly underperformed largely due to weaker energy sector returns – cautious energy investors have gravitated to more defensive, larger market cap energy names.
The S&P 500 rebounded strongly following sharp losses in Q4 2018, hitting a new record high in April and again in June to extend the current record long bull market run. Now into its eleventh year, the S&P 500 is up a cumulative 334.8% or 15.4% CAGR from the March 9, 2009 low of 676 (see GLC Insights – Riding the backside of the U.S. bull market). The policy pivot from the Fed was a key factor in flipping investor sentiment. Investors appeared to largely look through the trade-related noise, hoping and expecting a truce in the trade war. A stellar 13.6% price-only return in Q1 (U.S. dollar terms) marked the best quarterly return for the S&P 500 Index since Q3 2009, while a June rally allowed Q2 to finish in positive territory.
All eleven sectors finished up on a YTD basis, with only Health Care failing to reach double-digit returns. Information technology led gains, helped by strong returns from mega-cap names such as Microsoft, Apple, Mastercard and Visa. Continued strong gains from e-commerce giant Amazon lifted the Consumer Discretionary sector. The stabilized macro environment contributed to robust gains for the U.S. banks within the Financials sector. The Communication Services sector lagged the broader market as headline noise regarding increased regulatory headwinds weighed on select names such as Alphabet. Falling interest rates provided support for interest-rate sensitive sectors, such as Real Estate and Utilities.
IPO activity surged in the U.S. during the first six months of the year, with the market rally providing founders and owners of private companies a window of opportunity to go public. Notable IPOs included ride-sharing giants Uber and Lyft, as well as the popular workplace communications company, Slack. These companies saw share price weakness following their public listings, but one big IPO winner was Beyond Meat, who saw its share price gain over 6x on huge hype around its plant-based protein alternatives.
International equities produced positive gains but trailed their North American peers. European equities moved in tandem with their global peers despite continued political uncertainties. Brexit deadlines were pushed out to the fall as both sides were unable to come to a deal, prompting U.K. Prime Minister Theresa May to resign. Populist pressures remained front and centre in Europe: Italy and the E.U. battled over fiscal targets and street protests continued in France. Japanese and emerging market equities both underperformed, largely due to trade and Chinese growth concerns. Europe and Asia are both severely impacted by whatever moves China makes. The uncertain trade outlook was somewhat offset by Chinese policymakers embarking on a substantial set of economic stimulus policies, spurred on by trade and growth concerns.
The FTSE Canada Universe Bond Index produced strong returns in the first half of 2019, with the 6.5% total return exceeding the full calendar year return in each of the previous four years. North American bond yields fell sharply during the period, continuing a trend that began early in the fourth quarter of 2018. Canadian 10-year bond yields are now more than a full percentage point below their early October 2018 levels (which had marked a four-year high). Long-term bonds outperformed relative to their shorter maturity counterparts. On a sector basis, provincial bonds were the clear winners while high-yield bonds lagged.
The fall in bond yields coincided with a policy shift from various central banks, most notably the U.S. Federal Reserve, which abruptly shifted to a rate-cutting bias after most recently hiking rates a quarter point last December. The Bank of Canada (BoC) left rates unchanged during the period as our bank rate sits 0.75% below that of the U.S. The BoC continues to monitor developments, both domestically and abroad – most notably an unratified USMCA and a reticence to encourage further borrowing amongst already indebted Canadian businesses and households.
We believe the global economy has enough positive momentum to continue with some slowdown within the next two to four quarters. However, at this time we believe equities are pricing in some of the more positive outcomes, despite great uncertainty remaining with the outcome of the U.S. trade agenda and the magnitude and timing of central bank easing interventions. What’s causing us concern are the sharp advances in equities, commodities and bonds. The ‘bull market in everything’ scenario is not one that can last forever.
Our 2019 Mid-Year Outlook calls for single-digit equity price gains between now and the end of the year. Bouts of trade-, political- and geopolitical-related volatility may be severe enough to present buying opportunities for those comfortable with a pro-risk stance. This expected environment lends itself to active portfolio management with its tactical slants and individual security selections that seek out superior growth, quality and/or yield opportunities within markets. We are maintaining our current positions/asset allocation and taking a more neutral stance on risk.
May 1, 2019
In market cycles, we believe acceleration is followed by moderation, before eventually giving way to decline, with moderation being a normal, albeit less desirable stage. Importantly, this means growth has peaked, but that does not immediately give way to economic or corporate earnings decline, rather just lower growth. Today’s debate is around how much global economies and corporate earnings will grow and, importantly, not how much will they shrink.
Shifts in corporate earnings, bond yields and equity valuations are changing the opportunity costs of all asset classes, resulting in narrowed expected outcome differentials between asset classes. On the macro-economic side, all manner of politics, geopolitical risks, trade and inflation are creating unique concerns for various regions and industry sectors around the globe. All these factors combine to increase today’s complex task of finding a path forward.
From a top-down asset class level, we recommend a neutral stance (risk-tolerance aligned); this is neither overweight in bonds or equities. Under the current climate of increased volatility, slowing economic growth and rising interest rates (i.e., the tell-tale signs of progress through the later-stage of a market cycle), we believe a balance between risks and opportunities can best be achieved by fine-tuning portfolio positions within asset classes.
Bottom line: We believe a neutral stance (within one’s personal risk tolerance) with a defensive bias is most appropriate for today’s investors.
Fixed income’s value as a risk-mitigation tool has increased, and continues to increase, the longer we go in the cycle. Bond yields have moved up such that income flowing is now better than it has been for the past two years. We expect further increases in bond yields, which will erode some of the income component, but the yield increases we forecast will leave a small positive total return. Maintain a neutral weighting in fixed income, with a move toward higher credit quality.
Government bonds are attractive for their superior risk-mitigation qualities. Sovereign bond yields have risen enough that they can provide an income component while delivering the highest level of upside in the event of a risk-off scenario.
Investment grade corporate bonds
We see investment-grade corporate bonds as most attractive given their mix of yield pickup and modest safety. We expect investment-grade corporate bonds to outperform governments. Spreads have limited room for further tightening. Their generally shorter duration and higher running yield is a benefit in a rising rate environment.
High-yield corporate bonds
High yield spreads remain low. Given the very narrow spread levels and their lack of risk-mitigation characteristics, we see the risk/reward trade-off in high yield as unattractive.
We believe that the global economy and corporate earnings growth are shifting from acceleration to moderation (not decline), keeping our near-term outlook for equities constructive. Our expected return outcomes between equities and bonds, and amongst regional equity allocations, have narrowed. On a risk-adjusted basis, a neutral stance is most appropriate.
Canada is a favoured market due to its significant expected earnings growth and attractive valuations. These factors have existed for some time, with little appreciation. Canadian equities require a positive shift in sentiment to unlock their value.
We hold a constructive view on U.S. equities based on reasonable valuations and earnings growth potential. Past peak, but a shift to a period of normalized earnings growth and improved valuations will help them post a high single-digit return. The return outlook, lower risk profile and diversification benefits lead us to maintain a slight overweight.
We hold a neutral view toward EAFE equities as the group offers a combination of reasonable earnings growth and valuations. Risks remain, but we see a moderation in many of the key risks through 2019 that allows EAFE equities to narrow the performance gap that has opened up against U.S. equities.
We recommend an underweight to emerging markets, although some of the headwinds from a firmer U.S. dollar, global bond yields trending higher and moderating Chinese growth are set to abate (not disappear). The risk profile of this asset class tempers any enthusiasm at this stage of the market cycle.
2018 Year in Review
After a very calm 2017, where investors made money in most asset class, investors were brought back to reality during 2018.
Corporate earnings and most fundamentals remained strong, but the ongoing monetary policy tightening cycle in the U.S. and increasing trade tensions (most notably between the U.S. and China) pushed up equity risk premiums and placed downward pressure on valuation multiples. Equity market returns were weighed down by commentary around the length of the current economic cycle (the U.S. economy is on track to mark a record in 2019) and the potential of a slowdown in global growth. Severe equity and bond market volatility was particularly notable throughout December; U.S. equity markets retreated sharply to narrow their year-long outperformance gap with non-U.S. equities. The S&P 500 narrowly averted entering ‘bear market’ territory, with a peak-to-trough decline of 19.8%, before recovering by 6.6% into the end of the year. North American bond yields witnessed wide swings; Canadian two-year bond yields ended the year higher on the back of three Bank of Canada rate hikes, while 10-year bond yields ended the year lower. The outcome was a modest positive return for bond investors. Importantly, bonds also provided the necessary offset balanced investors rely on, with a near 3% jump for the FTSE Canada Universe Bond Index coinciding with the fourth quarter swoon for equities.
U.S. equities finished in the red but continued to outperform relative to their developed market peers. Robust corporate earnings, boosted by tax cuts, provided fundamental support for U.S. stocks. Multiple contraction offset much of the earnings growth tailwind, resulting in negative returns – a significant downward shift following the ~20% returns achieved in 2017. Much of the damage came in the fourth quarter, which wiped out decent gains up to that point.
Canadian equities struggled, weighed down by weaker commodity prices and some Canada-centric issues around high household debt, inflated housing prices, low oil prices, resource export bottlenecks, trade frictions and business competitiveness. Across the ocean, political tensions and uncertainty weighed on European equities with the U.K. edging closer to a hard Brexit in 2019 and a new Italian government, whose views on fiscal policy stand at odds with the European Union’s guidelines. The MSCI Emerging Markets (EM) Index entered ‘bear market’ territory in September as it struggled in the face of a stronger U.S. dollar, tightening global liquidity, a slowing Chinese economy, trade uncertainty and a variety of issues (mainly political) in Turkey, Russia and Latin America.
Trade tensions dominated headlines in 2018. The U.S. and China’s tit-for-tat tariff battle weighed heavily as investors feared its impact on an economic cycle that was already “long in the tooth”. President Trump and his trade team were rarely outside the news headlines, setting the tone for capital markets. The U.S., Mexico and Canada finally came to a tentative agreement on a revised NAFTA (now called the USMCA), but the drama weighed heavily on Canadian equities.
Monetary policy divergence remained a prescient theme. The U.S. Federal Reserve continued its quarterly rate hike path with four rate increases, bringing the total to nine since late 2015, while continuing to shrink its balance sheet from its QE-induced largess. Europe and Japan maintained their ultra-easy policy stances. The Bank of Canada hiked rates three times, hesitant to move as aggressively as the U.S. due to ongoing NAFTA negotiations, weak domestic oil prices and highly indebted consumers. A weak loonie provided solace for Canadian investors with foreign investment exposure.
Sentiment toward Canadian equities remained weak. Losses for the S&P/TSX Composite (TSX) were greatest during the two periods of global equity instability in late January and in Q4. NAFTA negotiations were a headwind and provided little relief, even when a tentative agreement was reached in October. Another factor weighing on the TSX was its outsized exposure to underperforming sectors, most notably energy. While the S&P/TSX Composite underperformed the S&P 500, it outperformed European, Japanese and emerging market equities in local currency terms.
U.S. WTI (West Texas Intermediate) oil prices collapsed during the fourth quarter, falling over 40% from their October peak of $76USD. This only tells half the story for the Canadian energy sector however. Pipelines were the theme for 2018. Or, more accurately, a lack of pipelines. A lack of takeaway capacity wreaked havoc for the sector, with widening differentials (Western Canadian Select versus U.S. WTI) slamming already weak sentiment toward Canadian oil producers. Issues came to a head in July when the Federal government stepped in to buy the TransMountain Expansion project from Kinder Morgan Canada, followed later in the year by unprecedented steps from the Alberta government to start buying railcars and locomotives to bolster crude-by-rail capacity, along with instituting industry-wide production curtailments. Canadian oil prices did improve toward the end of the year, but sentiment toward the sector remained depressed.
The heavyweight financials sector also lagged. Concerns over indebted consumers and a slowing domestic housing market outweighed solid financial results for the banks, with the Big Six banks generating a record total of $45.3-billion in earnings for the 2018 fiscal year. The materials sector likewise weighed on index performance: copper prices were weak on the back of slowing global growth concerns and gold companies underperformed relative to bullion prices.
A lack of enthusiasm for Canadian equities was even more evident in the small cap space, with the S&P/TSX Small Cap Index entering ‘bear market’ territory late in the year.
U.S. equities continued to outperform their global peers, but it was far from smooth sailing in 2018. The S&P recovered nicely following an early year sell off, notably marking the longest bull market on record in August (3,453 days at that point), before a fourth quarter correction that narrowly missed entering ‘bear market’ territory erased all the YTD gains. Strong earnings growth from corporate America, boosted higher by tax cuts, were a key reason for U.S. outperformance. Rising interest rates and the ongoing trade dispute between the U.S. and China more than offset this resulting in valuation multiple compression that pushed returns into the red. A weakening loonie helped to positively boost U.S. equity returns slightly for Canadian investors.
Technology stocks (some now reclassified as ‘communication services’) finally paused after a relentless run in recent years. The tech-heavy NASDAQ Index managed to outperform the S&P 500 for the year, but entered ‘bear market’ territory in December. The five FAANG stocks (Facebook, Amazon, Apple, Netflix and Google) experienced drawdowns on average of 36%. Some company-specific issues weighed on the group; most notably, a Facebook personal user data scandal. Fears of a global growth slowdown weighed on cyclically-oriented sectors such as industrials, energy and materials. Signs of slowing growth, a flattening yield curve and political uncertainty hit returns for U.S. financials. Defensive sectors such as health care and utilities were the only gainers – the latter benefitting from the fourth quarter collapse in bond yields.
The situation in Europe remained cloudy as 2018 drew to a close. Europe’s three traditional powerhouses, Germany, France and Britain, all faced political challenges that weighed on European equity
markets. Germany’s Angela Merkel lost key political support while French president Emmanuel Macron was confronted with protests as he struggled to follow through on his reform program. No one had a
harder job than British Prime Minister Theresa May, whose Brexit plans remain in flux with the March 2019 deadline fast approaching. Against this backdrop, along with some softening economic growth
in the region, European equities finished down double digits for the year. The Euro and the British pound also saw sizable declines. Meanwhile, Japanese equities couldn’t escape the global equity
selloff. A sharp fourth quarter drop resulted in a ‘bear market’ that left the Nikkei 225 Stock Index in the red
for the year.
After a stellar 34% return in 2017, emerging markets (EM) struggled in 2018, entering ‘bear market’ territory in September. EM was weighed down by tighter global liquidity (stemming from higher U.S. interest rates and U.S. dollar appreciation) and signs of moderation in global economic growth. The threat of a U.S. and China trade war weighed on sentiment across EM, most notably in Asia, with concerns the current standoff could escalate further and destabilize the global trading order. U.S. dollar strength has adversely affected countries with large U.S. dollar denominated debt, such as Turkey and Argentina, who both faced currency crises in 2018.
The FTSE Canada Universe Bond Index produced a positive total return in 2018; however, bond investors endured a high degree of market volatility. A shifting ‘risk on’ versus ‘risk off’ narrative resulted in significant intra-period moves; the Universe Index was down over 1% on a YTD basis on three separate occasions before subsequently recovering into positive territory each time. U.S. 10-year bond yields rose sharply early in the year and broke above the 3.0% level on a few occasions, a level last seen in 2013 (and only briefly then), before a fourth quarter drop saw it finish the year at 2.68%. The Government of Canada 10-year bond yield rose above 2.5% for the first time since 2014, before a similar fourth-quarter collapse saw them end the year roughly where they started. The U.S. Federal Reserve hiked rates each quarter while the Bank of Canada hiked three times. Inflation in both the U.S. and Canada remained stable, with wage growth remaining contained despite extremely low unemployment rates in both countries.
When all was said and done, short-term bonds shone brighter than longer-term bonds, and government bonds bested their corporate peers. Investment-grade corporate and high-yield bonds both ended the year with wider credit spreads, but posted positive returns due to their higher running yield.
Heading into 2019, the general theme underpinning our outlook is moderation. For market cycles, we believe acceleration is followed by moderation, before eventually giving way to decline, with moderation being a normal, albeit less desirable stage. Importantly, this means growth has peaked, but that does not immediately give way to economic or corporate earnings decline, rather just lower growth. Shifts in corporate earnings, bond yields and equity valuations are changing the opportunity costs of all asset classes. We recommend a neutral stance (risk-tolerance aligned) that is neither overweight in bonds or equities.
June 13, 2018
Global equities were largely in rally mode, led by gains for all the major US indices. In the US, information technology was behind the pack, but still gained enough for the tech heavy NASDAQ to mark a new all-time high. The domestically focused, less trade and US dollar sensitive, Russell 2000 small cap index also posted a fresh all-time high for the fourth week in a row. For the broader S&P 500, the recovery in bond yields (see chart of the week) led the financial sector higher, enough to erase the YTD loss. While in Canada, technology is also a market darling, but its tiny 4% weighting pales to the 26% weighting in the S&P 500 - nearly double any other sector. Canada’s largest sector, the financial sector, benefitted from the higher bond yields. Despite solid earnings growth, robust dividend yields (~3.75% for the banks), and share buybacks, the sector remains underwater YTD - a situation that, to us, spells opportunity.
Emerging markets were a notable laggard despite weakness for the US dollar and some positive developments in the US-China trade ‘discussions’. Emerging markets have failed to meaningfully join any of the post-March equity rallies. This is despite the tech sector being a stand out (the largest sector in the MSCI EM Index) and significant gains for commodity prices, also an EM heavyweight (note the weekly and QTD gains for copper prices – they’re closing in on a four-year high). Our outlook for emerging markets has soured because of: A poor technical backdrop and weakening fundamentals, such as slower growth in Japan and moderating growth in China; along with tighter monetary policy in developed markets forcing tightening in emerging markets to defend their currencies.
Although the volume of trade rhetoric remains high and negative in all of the other US trade disputes, there were positive developments between the US and China. The US cleared the way for Chinese tech company ZTE to restart operations – a positive for the Chinese. On China’s end, it has offered to buy ~$70 billion worth of US energy and agriculture products in an effort to stem the widening trade imbalance. However, $70 billion is much lower than what the US has asked for, and small in comparison to the 12-month trade deficit with China that widened to a record $386 billion. Note that the 12-month trade deficit with Mexico widened to $71.4 billion - also a record, the German trade deficit widened to $71.5 billion, and although the trade deficit with Japan narrowed the past month, it still sits at $69.9 billion. What about Canada? A target of the US President’s negative tweets – Canada’s 12-month rolling trade deficit with the US narrowed to $15.7 billion, by far the most balanced relationship that the US has with its major trading partners.
Chart of the week: Global bond yields recoup much of May’s slide
Global bond yields have quickly arrested their downward swoon, recovering a large part of the May decline, which was sparked by fears around Italy’s government. Italian yields remain elevated having more to do with Italy’s finances than “Italeave”, as the new Italian PM pledged that "leaving the euro has never been considered..." and “Europe is our home”. Eurozone bond yields were further boosted by comments from a senior ECB official that tapering their asset purchase program will be discussed at this week’s meeting. Still, German bond yields remain off their prior-year peak, and European stocks remain down on the year, reflecting the softer eurozone economic data of late. Some of the slowdown can be blamed on large labour strikes, harsh weather and significant flu outbreaks in Q1. The slowdown has brought expectations down markedly, with the eurozone Economic Surprise Index sitting at its lowest level in seven years. Bottoms for these metrics have often augured future rallies for stocks.
The week in review
The week ahead
The markets have been very voliatile since the start of 2018. We have had a relatively smooth past decade of investing with moderate to low volatility. However, in the first 5 months of 2018 it seems the calm is over. Volatility can test our nerves but it also can present opportunities. In times of high volatility, investors tend to be better represented with active investing. Our active money managers are watching for such opportunities in this volatile market.
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February 5, 2018 ... the largest one day drop in the history of the US stock market. Can you say volatility!
In response to this, here are some insights by Eric Lascelles Chief Economist at RBC Global Asset Management.
Global equity markets managed modest gains in August.
A focus on strong corporate earnings and solid economic data offset a number of troubling global events.
Bond markets rallied as yields dropped on weak inflation results and rising geopolitical concerns.
Oil prices dropped as rising US production and ample supply continued to outweigh demand supported by a strong outlook for global growth.
Gold prices rallied, supported by a flight to safety trade as geopolitical concerns rose, particularly in regard to a sharp increase in tensions between North Korea and the US.
CALM AMIDST STORMY CONDITIONS August is typically a period of light trading activity, which lends itself to volatility as fewer market traders can cause bigger market moves. Yet this summer most equity markets managed modest gains without dramatic swings. Globally, corporate earnings were very strong and evidence points to synchronized global economic growth. Once again, a month-end snapshot of capital results hides the stormy waters of politics, international relations and Mother Nature’s life-changing force and fury. The controversy that followed the violent events in Charlottesville, Virginia further revealed signs of political disorder in the Trump administration, while a terrorist attack in Spain and a sharp escalation of threats between the US and North Korea heightened investors’ concerns. Hurricane season has been particularly devastating this year. Hurricane Harvey ripped through Texas, only to be followed in quick succession by Hurricane Irma’s direct hit on the Caribbean and eastern seaboard states. These situations remain fluid and troubling from a human perspective, while the full economic effects are yet to be known.
A SIDEWAYS SUMMER
Over the course of the summer, equity markets saw little change. Gold prices benefited from the safety trade as geopolitical tensions rose, helping the Canadian materials sector post the month’s strongest sector return. In contrast, the energy sector continued to be weak in both Canada and the US as oil prices dropped while most other commodities (e.g. copper, natural gas, silver, gold) rallied on strong economic growth trends, indications of increased demand from China for industrial metals, a weak US dollar, and the aforementioned flight to safety trade that supported precious metal prices. Oil prices have come under pressure as increased US production contributed to the already abundant supply of crude in storage. The price for crude oil and refined oil products (i.e. gasoline) were volatile in August due to Hurricane Harvey’s direct hit on Houston, the center of the US oil and gas industry. Broadly speaking across sectors, both the S&P 500 and S&P/TSX Composite delivered very strong Q2 corporate earnings and sales results, helping to support stock values and keep both indices in positive territory for the month. The bond markets did not reflect the strength equities saw in the global economy. A modest flight to safety trade, weak inflation and geopolitical concerns added to the attraction of bonds in August. Yields fell, boosting bond market returns in both the US and Canada. The Bank of Canada surprised investors by raising rates early in September, becoming the most hawkish of the big global central banks. Meanwhile, the path to normalized rates and monetary policy in the US and Europe remains a topic of great debate in terms of both timing and pace.
SOLID ECONOMIC FOOTING
Economic data continues to reinforce a picture of accelerating global growth. Second quarter US real GDP was revised upward, while Canadian real GDP for Q2 blew past expectations, rising 4.5% versus the consensus expectations of 3.7%. The past four quarters mark the strongest expansion since 2006. Consumer confidence rose to record levels in both Canada and the US. US consumer confidence rose to 122.9 in August, marking the second highest reading since late 2000, and Canadian consumer confidence rose to 121.7, the highest level in nearly a decade. Rounding out the pleasant surprises, US ISM Manufacturing PMI jumped a healthy 2.5 points to 58.8, the highest level in six years. European and Asian markets also continue to report a steady stream of positive economic data, and tentative signs of a return to a healthier rate of inflation.
TURNING A DEAF EAR TO POLITICS
Over the past few months capital markets have managed to turn a deaf ear to Washington. There appears to be a new acceptance of verbal banter amongst politicians, with diminished effect in terms of signaling any meaningful progress toward policy change, such as Wall Street’s dream of tax reform. Instead, the market’s focus has been on economic data and fundamental corporate results, such as profitability and balance sheet health – and we approve. In short, it’s a stock-picker’s market. A disadvantage of passive investment processes and many exchangetraded investment options is their indifference to stock selection. Buy into an index as a whole and you forego the opportunity to differentiate the ‘good’ companies from the better ones, let alone the ‘bad’ companies from the worst. With a focus on stock selection, the goal of active portfolio management is to uncover companies with the most attractive attributes – those who are poised to deliver strong opportunities for capital appreciation within current market conditions. It’s the value of proven, defined investment processes combined with the experience and expertise of portfolio management teams that offer the combination of opportunity and risk management that can navigate today’s market conditions and deliver strong, long-term investment results.
1. Your 20s
· Your top priority is education and the accumulation of the human capital that will generate and maximize future financial capital
· Effective savings habits are formed early by living within your means and repaying loans as quickly as possible
· Striving to eliminate all student debt by age 30 is an excellent goal
2. Your 30s
· Pursue your passions, develop and follow career goals and focus on learning how-to-invest skills
· If you haven’t already, begin a disciplined savings plan of 5%-10% of gross family income and distinguish bad debt (credit card and other high-interest loans) from good debt (mortgage)
· Aim for a financial base worth two to three times your gross family income, not including your residence, by the end of the decade
3. Your 40s
· Serious saving begins in this decade by effectively controlling the use of debt and repaying it wherever possible
· Estimating required retirement capital and forming more specific retirement goals should also happen in your 40s
· If you have been following a do-it-yourself investing model up until this point, you should consider working with a professional given the increasing complexity, and size, of your investment accounts
4. Your 50s
· Your savings rate will peak in this decade, in conjunction with your annual income
· Modeling the required rates of return in your retirement plan will ensure effective asset allocation and improve likelihood of meeting and/or exceeding retirement goals
· Assets should be between six and twelve times your family income
5. Your 60s
· Migrating from the accumulation phase to the income phase, assuming you retire in this decade, will mark the most significant shift of your investing career
· Ensuring your assets are approaching and eventually meet your retirement goal becomes top priority. Reducing risk annually as you approach retirement is also recommended
· Treat your total capital as one single portfolio to effectively determine overall risk. Your nest egg may be 20 times your family income, or higher
6. Your 70s and beyond
· Make a habit of periodically reviewing your capital projections and spending plan
· Protect your capital from inflation and avoid becoming too conservative
· Have the estate planning conversation with loved ones and design a plan sooner rather than later
Every investor is unique and everyone will encounter unexpected challenges throughout their lives that may impact their ability to follow their retirement plan to a “T”. It is the unexpected obstacles that make us really appreciate having implemented a plan early and having had the discipline to follow it. These obstacles are also far easier to overcome when working with a financial advisor who can use their knowledge and experience to adjust your strategy accordingly and get you back on track in short order.
The bottom line market summary for Jan - Feb 2017:
- Global equity markets rallied in January & February.
US Market Update - December 2016
Check out this update from Leih Wang Sr Investment Manager with Empire Life. Video Link: Lieh Wang Sr Investment Manager with Empire Life
On November 30th OPEC reached an agreement to remove 1.2m barrels a day (b/d) from global oil production as long as non-OPEC countries such as Russia cut production by an additional 600,000 b/d.
The agreed upon amount (1.8m b/d total) represents nearly 2% of global production, much more than markets were anticipating
Markets reacted positively to what will be the first cut since 2008 with Brent reaching a 16 month high of $US 55 per barrel
Some speculators feel that this agreement marks the end of a two-year oil glut that has caused deep price cuts and pushed producers like Venezuela to the brink of collapse
If this trend in oil prices persists Saudi Arabia may be able to forget the fact that their plan to push competitors out of the market failed miserably
Success of this new strategy now depends on non-OPEC producers, most notably Russia, to follow through with their end of the bargain
Cuts begin January 1st, 2017 and will last six months. Traders will monitor oil-tanker traffic to ascertain whether fewer are leaving port
Determining whether Russia is also cutting production will be more challenging since most of their production is moved via pipeline
Perhaps the best indication that the deal is being adhered to will be a decline in global oil inventories which is expected to begin at some point next year
Market Update for November 2016
Here is our
market update for November 2016:
2016 Third Quarter Update - October 24, 2016
Please see a comprehensive 3dr quarter update on the markets provided by GLC Asset Management Group => http://www.glc-amgroup.com/pdf/GLC_Market_Matters_October_2016.pdf
October 10, 2016
What affect will the US election have on the markets?
This is the question on our investment clients' minds as we all sit watching the US presidential election heating up. There is no doubt that the run up to the election will likely lead to some market volatility. However, history shows that in US presidential election years, the markets have had consistantly provided positive returns regardless of which party has won. Furthermore, if you have built an investment portfolio that is well diversified in various industries, various investment instruments and well diversified geographically, then it should withstand any election volatility as uncertainty around the US election should be short lived.
Here is more information and commentary on the likely affects of the US election on markets: http://www.cnbc.com/2016/06/23/how-presidential-election-will-affect-your-investment-strategy.html
Market thoughts for the week of September 19th, 2016
Source: National Post April 26, 2016
Source - National Post April 15, 2016
For global stock markets, we are experiencing the worst start to a year in over two decades. In fact, the S&P500 hasn’t seen a start like this since 1929, which turned out to be the beginning of the Great Depression. Unlike in 1929 when the ‘roaring twenties’ led to massive overconfidence and a subsequent crash, the main culprit of this year’s volatile introduction is instability in China. China’s circuit breaker mechanism which was thought to slow “falling knives” has accomplished the exact opposite, resulting in panic and pandemonium both domestically (in China) and globally.
1. Chinese Currency devaluation
* Lowering the Yuan relative to other currencies, especially the US dollar, is meant to bolster Chinese exports. Unfortunately, it may force surrounding nations to take similar actions in order to remain competitive, thereby lessening any positive impacts of China’s heavy-handed market manipulation
* The devaluation and accompanying volatility has also caused a significant exodus of Chinese wealth from the Shanghai and Shenzen stock markets. These assets have consistently landed in more tangible offshore investments, namely the Canadian and U.S real estate markets
* This ineffective Chinese government intervention reaffirms the instability of some emerging markets, particularly those as opaque as China’s
2. Commodities and Canada
* Commodities have suffered as riskier assets have been affected by a ripple effect from China
* Oil reached new lows last week, belabouring the poor performance of the S&P/TSX in 2015
* There is no immediate sign of relief for the price of oil. As such, foreign investors have continued to avoid our market
3. Flight to safety
* With market instability comes the inevitable flight of assets to fixed income securities and gold
* As a result, the price of Gold has risen and yields have fallen as fears of longer term volatility set in
* The U.S federal reserve is in the process of normalizing interest rates. This curtailing of easy credit, combined with the current global volatility, will likely result in a noticeable decline of leveraged investors
Staying diversified by asset class, sector, geography and product type is the best prescription for a market (and/or client) with a weak stomach. While ‘cashing out’ may feel like the right thing to do, and result in avoiding further downside, it often results in avoiding the significant upside that generally follows a correction as well. For more information please contact us at any time.
New-year forecasts should generally be dismissed, largely because they are usually wrong. Forecasts tend to exhibit a recency effect whereby forecasters typically assume that what is occurring now is going to continue to occur. The challenge, beyond not having a crystal ball, is how to communicate market expectations even when we know they could be inaccurate. The first step is to avoid forecasts that make highly specific predictions such as the exact price of oil or the expected annual performance of individual indices. The second is to note that markets are and always will be unpredictable. With those concepts in mind, we look to the year ahead (from a relatively broad perspective) in five key areas of the Canadian economy.
* From a dismal Canadian economy and struggling energy producers, to low interest rates and a potential housing bubble, to increased regulatory pressure and the rise of nimble financial technology companies, bankers won’t exactly be coasting on ideal conditions in 2016
* However, the outlook isn’t all gloomy. Although fintech competition is on the rise, the banks are taking the threat seriously by establishing relationships with outside firms and developing their own in-house technology talent, leading to one of the most remarkable eras for financial innovation
* Additionally, the banks aren’t confined to their home turf. Royal Bank of Canada, TD and Bank of Montreal have substantial operations in the United States, where the economy is considerably stronger. Canadian Imperial Bank of Commerce wants to expand stateside, and Bank of Nova Scotia has a big exposure to Latin America. Add it all up and you can say this: 2016 won’t be all that dull
* Canada’s battered oil patch faces another grim year in 2016 as U.S. and global crude prices hover at severely depressed levels with few signs of recovery on the horizon
* Several forecasters have chopped their outlook for prices, foreshadowing deeper cutbacks in an industry already rife with suspended or reduced dividends, miserly budgets and job losses that number in the tens of thousands. The year ended with the Organization of Petroleum Exporting Countries again refusing to rein in production to accommodate the expected return of Iran to global markets, driving U.S. and international oil prices down to multiyear lows
* Analysts expect the industry’s austerity binge to accelerate as high-cost producers struggle to bring expenses in line with rapidly dwindling cash flows. The Bank of Canada forecasts oil-patch investment levels will plummet another 20 per cent in 2016 after falling by 40 per cent in 2015. To be sure, some analysts believe conditions will steadily improve as demand for cheap crude grows and the boom in U.S. shale output begins to ebb
* The manufacturing sector will begin 2016 much the way it began 2015 – with the expectation that it will be one of the bright spots in the Canadian economy, fuelled by a weak Canadian dollar and a strong U.S. economy that should give a big boost to Canada’s non-energy exports
* “Canadian manufacturers are set up with the pre-conditions for a very good year,” said Peter Hall, chief economist at Export Development Canada. The sector has been suffering the effects of the deep declines in resource prices, taking a particularly big bite out of manufacturers of petroleum and metal products. But even excluding those goods, manufacturing sales were down 1 per cent year to date – a testament to how much of the resource slump is spilling over to other parts of the economy that supply the country’s large resource sector
* “It’s really a tale of two types of supply chains,” said Jayson Myers, chief executive officer of Canadian Manufacturers & Exporters, the sector’s leading trade group. The outlook for exports of non-energy manufactured goods looks strong heading into 2016
4. Real Estate
* The Canadian housing market will likely face its most important test since the global financial crisis in 2016 as low oil prices continue to weigh on Alberta and Saskatchewan while new down payment rules from Ottawa are expected to take some heat out of Ontario and B.C. The slowdown will be even more noticeable because the housing market is coming off one of its best years on record, surprising many analysts who had predicted a soft landing in 2015
* Most housing market forecasters expect growth to slow dramatically in 2016. The Canadian Real Estate Association forecasts that national home prices will increase just 1.4 per cent in 2016, compared with more than 7 per cent in 2015. The market is already showing signs of stress, with average prices outside of Toronto and Vancouver falling by nearly 5 per cent for the year. Much of the pain has come from the oil-dependent Prairies. But new down payment rules from Ottawa, which kick in on Feb. 15, should only add more cold water to the market
* “The Canadian real estate market is already in correction mode,” wrote National Bank of Canada economist Krishen Rangasamy. Mortgage rates are also expected to increase modestly over the next two years. That will mean as many as 750,000 homeowners who are set to renew their mortgages will see their monthly payments increase, according to a study by the Mortgage Professionals of Canada. About half of those borrowers can expect to pay an extra $100 or more a month
* Retailers are bracing for a year of fast-paced change that could hit their bottom lines even as they raise some prices. A weak Canadian dollar will push up some import prices, although consumer resistance may force some merchants to swallow the added currency cost. At the same time, new luxury players will expand in Canada and help shake up that market amid the rise of e-commerce and shrinking physical stores. And 2016 will bring more pain for retailers in oil-squeezed provinces, particularly Alberta
* Merchandising sales are projected to rise 3.6 per cent in 2016, compared with an estimated 2.2 per cent in 2015 and 4.6 per cent in 2014, said retail consultant Ed Strapagiel. The retail slowdown in the second half of 2015 will carry over into the first half of 2016, with some pickup by the end of the year, he predicted. But some of that growth will simply be a result of higher prices of imported goods to make up for heftier purchasing costs in U.S. dollars as supply contracts and currency hedging run out, he said
* There are always winners and losers as changes are rapidly redefining the retail landscape as digital powerhouse Amazon.com Inc. and other e-commerce players step up their efforts while brick-and-mortar stores increasingly scale back. Retailers will need to find ways to marry their physical and digital stores and better serve the ever more important mobile customer
With the holiday season upon us and the ‘joys’ of shopping that come with it, we will highlight an article from tax expert Tim Cestnick that may help you avoid the mayhem at the malls. Whether you have children or grandchildren, this article from the Globe and Mail offers up some sage advice for giving monetary gifts to young people.
1. Age 12 and under
* Contribute to an RESP. With as little as $2500 per year for 18 years plus government grants and an average annual growth rate of 6%, you can build an educational nest egg of roughly $98,000!
* Give them an allowance and tie it to chores so that they learn what a strong work ethic can get them. Encourage them to divide it into 3 buckets: savings, spending, and charity
* Set up a low fee bank account.
1. Ages 13 – 18
* Keep up the allowance and the RESP contributions. If they have started earning some babysitting money or other part-time job income, the allowance will free them up to invest the part-time job money. According to Tim and the CRA, children pay tax on the investment income earned with their money vs. interest and dividend income generated from money you give them being attributable back to you
* Create an in-trust account. Endeavour to grow it with capital gains (cap gains are taxable to the child) and not interest or dividend income (taxable to the parent) and at age 18, the account becomes available to be transferred directly to the child
* Buy life insurance on their lives. Not only does it become a savings vehicle but it turns into ready-made insurance – all transferrable tax free at age 18
1. Over 18
* Consider giving over the insurance and ITF account and discontinue allowance and RESP contributions
* Make a gift of assets – consider passing along inheritance before you die and in a taxation year that is advantageous to you assuming the gift is age appropriate and the recipient is responsible enough to receive it. It will cut down on the tax bill at estate time
* Lastly, educate them on the benefits of the TFSA and investing early as well as the habit of filing a tax return annually
While the ideas listed above may not be gifts that can be ‘opened’, the lessons learned and responsible habits they help to form will ultimately be more valuable than the fuzzy socks or “un-cool” clothes you had planned on giving! For information on any of the products or accounts mentioned above, please contact us at any time.
MONDAY NOVEMBER 16,2015
The incredibly tragic and senseless events in Paris and Beirut last week, like other similar moments in history, provide individuals with an opportunity to stop and evaluate a variety of their own personal circumstances. Ideally, with our sympathy for those directly and indirectly impacted by the events, we develop an even greater appreciation for the safety and freedom we are fortunate to have in our own country.
Inevitably, there are a variety of repercussions that follow such events. This week's comments, and the link provided to the Globe and Mail article it was inspired from, is simply providing information for those investors that may be worried about the economic impact this geopolitical event may have.
1. Equity impact
* While a short-term sell-off is somewhat expected, a prolonged economic impact is not expected given the resiliency of European markets after similar events in the past. All markets remain open
* Some sectors may be negatively affected - specifically trade and tourism as France has the largest number of tourists in the world (representing 7.5% of its GDP)
* Companies directly or indirectly related to defense may see gains given ‘the prospect of more military action in Syria’ says Nicholas Colas, chief market strategist at the ConvergEx Group in New York
2. Economic Impact
* Trade - increased national security slowing down trade may "bode ill for the euro" according to Brian Battle, director of trading at Performance Trust Capital partners in Chicago
* Consumer spending - specifically around luxury goods and tourism may be also impacted
* The initial damage to economic confidence may spur the ECB to continue monetary policy easing keeping pressure on the euro and aiding in exports
3. Treasuries Impact
* “While the attack was in Europe, stocks all around the world will see pressure on Monday. The typical risk off trade is out of global stocks, and into global sovereign debt and the U.S. dollar.” According to Colas
* A meaningful move into US treasuries would counteract the recent trend out of treasuries caused by the belief that the Fed will raise rates next month. However with few expecting fallout from the attack to be big enough to affect Fed decision making, any Monday move will likely be short lived
* One reason for a possible volatile move into Treasuries is because the Fed rate hike anticipation has prompted heavy short positions in the 10-year Treasury. That could exacerbate any move into safe-haven government debt
While most investors will be more focused on the victims of this weekend’s events, some may seek input on how their portfolios will be affected. As with any geopolitical event, effective diversification provides the best defense against market uncertainty – whether the resulting volatility is short-lived or drawn out.
For more information on designing diversified portfolios, please contact us at any time.
Monday, November 2, 2015
Diversification is one of those rare financial planning concepts that most investors understand before their first meeting with an advisor. The phrase “don’t put all of your eggs in one basket” is used so often that one might say it has been downgraded from a piece of helpful advice to overused cliché. But just because the concept is understood by most investors does not mean it is appreciated. Canadian investors continue to demonstrate a clear ‘home bias’, allocating dangerous proportions of their portfolios to Canada and until only recently they’ve been rewarded for their ‘patriotism’. We highlight an article from The Financial Post that discusses the recent outflow of assets from Canada as investors are learning to appreciate the merits of geographical diversification the hard way.
1. Go with the flow
* Money is exiting Canada at the fastest pace in the developed world as the nation’s decade-long oil boom comes to an end
* Canada’s basic balance swung from a surplus of 4.2% of GDP to a deficit of 7.9% in the 12 months ending in June
* More recent data show the outflow extended into the second half of the year. Meanwhile, the Canadian dollar touched an 11-year low against the U.S. dollar in September
1. Oil-based market, water-based dollars
* “The policy in Canada the last 10 years has greatly favoured investments in energy. Now the drop in oil prices made all that investment unprofitable” said Alvise Marino, a foreign-exchange strategist at Credit Suisse Group AG in New York
* The impact of falling oil has been measurable both within the corporate landscape and amongst individual Canadian investors
* Nine of the 10-best performing companies on the S&P/TSX in the past two years have favoured buying growth abroad rather than expanding at home. Domestic mutual-fund investors have pulled money from Canada-focused funds for six straight months, the longest streak in two years
1. The Canadian dollar
* According to Benjamin Reitzes, an economist at BMO, the CAD still has to get cheaper in order to make Canadian businesses more attractive than their foreign peers
* The median forecast among strategists surveyed by Bloomberg has the loonie weakening to $1.34 per U.S. dollar by the first three months of next year (down from roughly $1.31 now)
* The dollar’s decline has led to a pickup in manufacturing and service exports but activity remains below pre-2008 levels. Reitzes believes the currency must stabilize before any meaningful pickup is seen in exports
An optimistic view of the Canadian stock-market’s underperformance this year is one that focuses on lessons learned for those who are overexposed to Canada. It is also an opportunity to remind clients who were already well-diversified that their disciplined approach has boosted returns this year (the S&P 500, Nasdaq, MSCI EAFE and MSCI World are all positive YTD, while the S&P/TSX Composite sits at -7.31%). Lastly, this year’s turbulence should be leveraged going forward as a prime example of just how handcuffed we are to the three sectors that dominate our market. In order to gain exposure to sectors other than energy, financials and materials, looking abroad is an absolute must.
Weekly Commentary – October 26, 2015
Bank of Canada lowers
U.S. housing continues to
Following several years of a general expansion in the price-earnings ratio of equities, we believe returns from this asset class will moderate somewhat and become more closely tied to the rate of growth in company earnings. Also, we anticipate that after an extended period of declining yields in the bond market and therefore increasing bond prices, interest rates will likely rise, which would detract from bond performance. We continue to favour stocks over bonds as they have greater expected growth potential than bonds and are less sensitive to changes in interest rates. Having a professional advisor who can provide a diversified portfolio that takes into consideration your risk tolerance can help protect your investment returns from rising interest rates.
▼ Statistics Canada reported that wholesale sales edged down 0.1% to $55.3 billion in August. Declines in four subsectors, in particular the machinery, equipment and supplies subsector, accounted for the decrease. On a year-over-year basis, overall wholesale sales are now up 3.8%. This report was broadly in line with expectations. Activity at the wholesale level can be an indicator of future consumer trends.
▲ Statistics Canada reported that retail sales rose for the fourth consecutive month, advancing 0.5% to $43.6 billion in August. The increase was led by higher sales at motor vehicle and parts dealers. Excluding this subsector, retail sales were flat. On a year-over-year basis, retail sales are now up 2.8%. This report is considerably stronger than consensus estimates. Since consumer spending accounts for over 60% of Canadian economic activity, it is critical for overall GDP results.
▲ According to the U.S. National Association of Realtors, existing-home sales increased 4.7% to a seasonally adjusted annual rate of 5.55 million units in September from a downwardly revised 5.30 million in August (originally reported as a 5.31 million-unit pace). Sales are now 8.8% above the 5.10 million-unit pace in September 2014. These results are well above consensus expectations. Activity in the housing market has a significant "ripple" effect on the broader economy.
▼ The U.S. Conference Board announced that its Leading Economic Index (LEI) declined 0.2% in September, following no change in August and July. The weakness in stock markets, the manufacturing sector and housing permits was offset by gains in financial indicators. This figure is somewhat weaker than market consensus. The report suggests that the expansion in the U.S economy remains neutral.
▼ Statistics Canada reported that on a seasonally adjusted basis, the CPI decreased 0.2% in September, after posting no change in August. The decline was led by the transportation sub-index, which fell 1.4%. On a year-over-year basis the CPI was up 1.0%. The Bank of Canada's core inflation index rose 2.1% on a year-over-year basis, near the mid-point of its 1% - 3% target band. These figures are broadly in line with expectations, and are consistent with the central bank's forecast for neutral inflation.
Key market and economic performance highlights for the week of October 5th 2015.
Global equities rallied strongly this week after retesting the August lows earlier last week. Although there continues to be numerous issues to worry about, from a technician’s eye, equities have put in a classic bottom. At the price lows last week several positive divergences in market internals began to emerge. More specifically, readings on percentage of stocks below moving averages; new 52 week lows; and on lower volume; just to name a few, failed to confirm the lows on stocks. This is also very consistent with historical corrective patterns where markets make initial lows and retest 6 to 8 weeks later with less conviction. In the chart of the week above we have illustrated one of these divergences where you can see in August both the index and percentage of members below their 150 day moving averages hit new lows. Then last week, with stocks spiking to new lows, breadth held up better. This positive technical action, along with several other factors, leads us to believe that the current rally has some legs. Emerging markets have rebounded post the bigger-than-expected interest rate cut by the Reserve Bank of India. The decline in the US dollar has helped sentiment in the commodity sector. While the emergence of significant M&A activity in the energy sector gives some hope that the worst in the oil patch may be in the rear view mirror. Suncor announced a hostile takeover bid for Canadian Oil Sands Ltd and the Canada Pension Plan Investment Board struck a $900 million deal with Encana on a package of shale assets in Colorado. Finally, the calendar is on your side, as the fourth quarter is historically the best time of year for stocks.
Admittedly the fundamental picture is not as clear. Last week’s disappointing US nonfarm payroll report cast some doubt on the strength of the US economy, and growth is not getting help from inflation. As we enter third quarter earnings season in the US, the strong dollar and weak energy prices are expected to keep a lid on earnings growth. Consensus bottom up projections have S&P 500 third quarter earnings declining 3%. Investors have to look out to 2016 earnings to see more reasonable valuation (note the S&P 500 is trading at 15.5x 2016 consensus earnings). In economic news, the release of the Fed minutes was largely a non event. They confirmed the primary reason for holding steady on rates was concerns about global growth and financial market volatility. The minutes also highlighted the improvement in housing and consumer spending, but inflation is being held low by the strength in the currency. In fact the Fed is prepared to risk higher inflation as opposed to tightening too soon. The negative impact of a strong dollar was evident in the August trade report as the trade deficit was worse than expected. With weak business investment and a trade deficit, US economic growth will rely heavily on the US consumer and fiscal spending. Although the US consumer looks strong, the US government is seemingly headed for another battle over the debt ceiling in early November.
Canadian equities benefitted this week from a rotation into the laggards with energy and materials sectors lifting 11.6% and 10.6%, respectively. While the previous market leaders like health care declined 5%. Canadian earnings season won’t get underway for a few weeks and expectations are quite low as energy continues to depress index-level earnings. Similar to the US, if 2016 consensus earnings hold, valuations become more palatable (note the S&P/TSX Composite is trading at 15.2x 2016 consensus earnings). Economic news in Canada was mixed. At first glance the 12.1k jobs added in September was positive, however it was all part time. Full time employment dropped nearly 62k. Surprisingly, Alberta added 12.3k jobs while Ontario lost 33.8k jobs spread across education, trade, and manufacturing. The unemployment rate ticked up to 7.1%. Not a great report, but nor was it a disaster. The August trade deficit also widened due largely to the drop in energy prices. Finally, the Canadian housing market continues to confound with better than expected starts of 231k. This may be some catch-up to the weak start to the year, but it was strong enough for the Canada Mortgage & Housing Corp to warn companies to manage inventories.
The Federal election is almost upon us and according to data compiled by CIBC World Markets the best outcome for markets would be a minority Conservative, which has on average delivered a 13% CAGR compared to 6% for a minority Liberal government. Interestingly, historically when it’s a majority government Canadian stocks have performed best with Liberal leadership (adding 7.5% on average per year) versus a Conservative majority (where stocks on average have declined 2.8% per year).
Outside of North America, eurozone retail sales increased a better-than-expected 2.3% compared to last year. This is good news for Europe, but unlikely to change the ECB’s commitment to further easing.
In the week ahead, in addition to a pick up in earnings reporting season the US will release September retail sales, CPI, PPI, industrial production, and capacity utilization. The most watched data will likely be out of China where a string of September data will be released, including retail sales, industrial production, fixed asset investment, and inflation.
The past 6 weeks have been a roller coaster in the world markets. Volatility is the 'word of the day!'
Some key points to consider when looking ahead based on the past 6 weeks:
* Concerns over Chinese driven economic growth and the devaluation of the Yuan started a market selloff in August that moved in a wave through Europe and North America
* An impressive rally was staged in the second half of the month with bond yields moving back up, oil gaining 29% from its August lows and North American markets moving up and out of official correction territory for the month
* We remain cautious on Chinese equities as we continue to see extremes in volatility and market speculation
* The US remains the world’s largest economy and as our closest neighbour, we are intricately tied to their economic well-being. Fortunately, the US economy remains significantly healthier today than prior to the 2008/2009 financial crisis. Banks and US households both have much stronger balance sheets than they have had in years
* Active portfolio management and disciplined investment processes were built for market corrections and gyrations like we experienced in August and they can and do find attractive opportunities amidst, and in spite of, market noise and volatility.
Key Take Away:
The old market adage ‘when the US gets a cold, the rest of the world comes down with pneumonia’ needs an update. Perhaps something like "When China catches a cold, the US sneezes, emerging markets run a fever, Europe stays in bed with the chills, and commodities cough up a lung." We recognize that isn’t your everyday market summary, but it sums it up quite nicely for August 2015!