August 9, 2019
Making Cents of the Markets
Be in the Know
What a week! Despite a terrible start on Monday, where the US stock market was down about 3%, if you weren’t paying attention it was almost like nothing happened. The S&P 500 lost 0.5% for the week while the TSX actually gained 0.4% for the week. This was really a continuation from last week’s trade news, with tensions between the US and China not getting better over the weekend. China instructed companies to halt purchases of agricultural goods from the US, which is putting pressure on US farmers who were already struggling. They also let their currency depreciate to above the 7 Yuan per US dollar level, a psychological barrier thought to be the top end. Responding to this breach, the US labelled China as a currency manipulator, which is more symbolic than anything, but has triggered fears that this trade fight may turn into a currency war. Expect more of this over the next few weeks, but remember that even a quick call from President Trump to President Xi has the ability to reverse the negative rhetoric. This is the new normal.
We received Canada’s employment report for July on Friday, and our economy unexpectedly shed jobs, with losses concentrated in the private sector. While the market expected a gain of about 12,500, the reported numbers were a loss of 24,200 jobs, while Canada’s jobless rate increased to 5.7% from 5.5%. The report wasn’t necessarily a disaster, but it does come amid growing pressure for the Bank of Canada to follow worldwide central banks and provide some stimulus. Consensus is still to keep interest rates on hold at their next meeting on September 4, but growing global trade tensions could force their hand before the end of the year to lower them.
Sometimes it pays to take a step back and look at things a little broader. The risks out there are real and we monitor them closely, especially the trade war which could get worse before it gets better. But despite the risk, we have not changed our estimates that are based on economic numbers, corporate earnings, as well as a few major concentrated themes – the Fed, Trump and the low probability of a recession. First, let’s have a look at the Fed. If the trade war starts to really slow economic numbers, the Federal Reserve will likely continue to lower rates. They already dropped interest rates 25bps based on global uncertainty, and are looking more likely to do 25-50bps further in 2019, stimulating the economy and providing support to the stock market.
The second theme is President Trump’s longer term plan. He is running for re-election in 2020, and knows that a weak stock market and weak economy would make winning much more difficult. Why not remove some tariffs or tie up loose ends on a trade deal before the campaign begins so he can provide a boost to both, and dramatically increase his chances of a win? Working Americans and good economy is the key to re-election.
The third theme is the macroeconomic data. It just doesn’t point to a recession at this point. GDP growth in the US is on pace for above 2% growth, and although growth has softened, the US economy continues to grow. Even if you take the worst case estimates of the next round of tariffs, that would not move negative. So although we closely follow the headlines daily, we are patient and have not seen any significant change to our longer term projections. We choose to manage the portfolios looking at the big picture. The markets are actually higher than they were when the trade war was first announced, proving that markets can “climb a wall of worry” and Americans are still working with unemployment at all-time lows. We do recognize that there has been quite a run in the markets since the beginning of the year and have chosen to take some profits on a few names as well as look at “upgrading” some positions. We are also diversified between value and growth stocks and even take it as far as allocating a large portion of the portfolio to companies that have nothing to do with the trade war (ie. BCE, Telus and Inter Pipelines). Due to our active management, along with the diversification mentioned above, we are proud of how well the portfolios have held up during a market correction such as this.
Hard to believe we’re almost done earnings season already. The numbers for companies are still coming in strong, as just over 92% of the S&P 500 has reported 2Q results, and earnings are beating by 5.2% – with 68% of companies exceeding their bottom-line estimates. Despite coming into the earnings season forecasting earnings-per-share (EPS) contraction of about -1%, the beats have pushed that number well into the positive. EPS is now on pace for 3.7%, assuming a typical beat rate for the remainder of the season, according to Credit Suisse. We still have some major companies to get through, as next week we get majors such as Cisco, Wal-Mart, Deere, Applied Materials, and Alibaba.
Chart of the Week
To show how abnormal Monday’s market move was, take a look at every day of the US stock market for the last 10 years:
Beyond the Markets
This weekend, head down to the Abbotsford Airport for the Abbotsford International Airshow! The show will feature performances from the Canadian Forces Snowbirds, U.S. Air Force Thunderbirds, and many more! With everything from food trucks to hot air balloons, this event is sure to amaze and entertain all those who attend.
Click here to purchase your tickets.
Listen to last week’s Making Cents of the Markets on CKNW. We gave listeners an update on the markets, the trade war between the US and China, and managing your portfolio during uncertain times. Listen here.
Click here to read our latest North Shore News article to learn more about the questions you should be asking yourself before retirement. The better the input, the more accurate the results and the easier the transition will be!