February 14, 2020
Making Cents of the Markets
Be In The Know
We hope that everyone enjoys the (holiday) long weekend as North American markets broke out to all-time highs, recording gains over 1% on the week. Investors continue to shrug off any coronavirus fears despite many multi-national businesses being temporarily affected as they shift their focus on the optimistic near-term outlook beyond the virus. Markets were fueled this week by ongoing positive earnings updates and from news that China would provide additional stimulus to their economy to combat the negative effects from the virus. Investors are very aware of past occurrences and that the effects are transitory and disruptive rather than being destructive.
Economic data was light this week in Canada as we saw housing starts in January up over 210,000 that continues to signal a growing and stable housing market. Housing price changes in Canada vary by region but we are starting to see prices increase again after flattening out for the last two years. In the US we saw the inflation rate rise to 2.3% which was relatively in line with expectations. Business optimism, retail sales, and consumer sentiment continue to improve as the US economy remains in a healthy state. Internationally, we saw eurozone GDP only increase 0.2% as growth has continued to sag over the past few years. Employment has improved slightly but this is an area that we continue to monitor closely as a potential opportunity as growth is expected to re-accelerate by the end of this year.
Major commodities such as copper and oil have bounced up off their lows this week, signally growing confidence that China will be able to continue growing at a strong pace after the temporary disruption. Factories have already started to re-open as the economic effects are expected for the next one to two quarters. One would expect more volatility in global equity markets, however, continued global stimulus has lifted stock prices and lowered interest rates globally, including here in North America. As an example, a 10-year US Treasury bond only pays a yield of around 1.6% as interest rates have headed lower this year as investors expect both the Federal Reserve and the Bank of Canada to decrease interest rates this year. This will likely drive lending costs lower which will benefit corporations and individuals alike. Due to this shift, we continue to favor defensive exposures such as utilities, telecommunications, and real estate that benefits from lower interest rates.
Our portfolios are having a fantastic start to the year as they are up approximately 5% so far, despite having less exposure to the market with an allocation still in fixed income and cash. We have seen markets increase in 2020 due to better than expected earnings results, despite earnings growth remaining flat in the fourth quarter of 2019. Additional stimulus and interest rate decreases have lifted prices higher which we expect will be the theme of 2020. We expect markets to hit new highs all the time during a bull market and we must evaluate the broader economy to ensure that the increase is validated. We do hope to see a little weakness as we plan to allocate more exposure to leading sectors in the markets that include technology, financials and consumer discretionary that have already released strong guidance for the 2020 year. We have our target list ready and look forward to updating you on how we continue to allocate capital in a prudent and diligent manner.
Chart of the Week
This week we want to shed more light on how professional investors value the overall market and what today’s high valuations mean for all investors moving forward. The main measure of how one values the market is a P/E ratio or price-to-earnings ratio. This calculates how many dollars investors are paying for each $1 of profits or earnings. The chart below illustrates this ratio since 1954:
Today the P/E ratio sits at 22.42 which means investors on average are paying just over $22 for each dollar of current earnings. We look at the historical range of this ratio to see if markets are “cheap” or “expensive” yet there are many other inputs to consider. Simply put, we are at a relatively high end of the range which normally would be a cause for concern but the key difference to past occurrences is how low global interest rates are. Therefore, we can justify this “expensive” valuation as it alone is not predictive of what will happen in the markets over the next year. We expect that earnings will start to grow again in the upcoming quarters and that this ratio will come down although we won’t be surprised to see “high valuations” in the news as a reason to fear this market.
Beyond the Markets
Both Valentine’s Day and Family Day are taking place this weekend which means there are a plethora of activities to do with your loved ones! For ones looking to do something romantic, Illuminate Yaletown is back for another year of light installations and art shows. The event will take place February 14 and 15 from 5:30pm to 9:00pm, so make sure to experience it while you can! For this who are looking to do something for the whole family, The Shipyards in North Vancouver has opened a new 12,000 square foot skating rink that is free for all! And once you’re done wheeling across the ice, head over to the Caffè Artigiano for a cup of hot chocolate!
Take a look here at our latest article from Business in Vancouver’s Retirement Ready Magazine where we dive deeper into how to manage your emotions when investing.
Listen to our latest Making Cents of the Markets segment on CKNW. We discussed the labour market in Canada and the US as well as the upcoming US election and RRSP season. Listen here.
Take a look here at our latest North Shore News article where we discuss how to take advantage of any tax-efficient decisions!