Market Commentary

Making Cents of the Markets

Be In The Know

The markets are in the midst of their second notable drop of the year, maintaining a trend that has been around for almost four decades. Over the last nine years, we have usually seen at least two pullbacks annually, with one of them generally being a correction of more than 10%. This has occurred in both weak years such as 2011 and 2015 and also stronger years where the markets finished up double digits.

These fast, sharp declines catch your attention and require vigilant investment management but are very common and a normal part of investing in stocks, more than people like to believe. A single day drop over 2% happens, on average, 5.5 times per year. What’s different this time is that markets were not up double digits at the end of September when this change of direction started, so the impact seems to be felt more. In fact, the US is one of the only countries in the world with positive stock markets right now (S&P 500, Dow, Nasdaq), while both Canadian and global indices were already in negative territory prior to this week.

Why did we experience such a quick drop? It really boils down to inflation concerns due to great unemployment data – the best we have seen in 49 years – pushing US 10-year Treasury yields higher. As the US 10-year rate increases, the markets usually see a short-term corresponding drop shorter-term in equity markets – exactly what is unfolding now. We also have been calling for a general pullback leading into midterm elections at which time we believe investors will look to “shop around” for cheaper stocks to take advantage of the likely impending Christmas rally. We are looking forward to another strong earnings quarter which should provide markets with additional information on the strength of the US economy.

Our Strategy

In times like these, it is important to be proactive and properly assess the situation at hand. We will not sell all our positions because the market has a 5% to 10% pullback. We review the news causing a sell off and assess overall economic indicators to understand the severity of the issue. Is this merely a normal correction or is this the beginning of something more? We will always take action when needed as we always have in the past. We did have a stop-loss triggered in Russel Metals, which we sold, but otherwise our positions have not gone through their stops. We came into this sell off with approximately 25% cash in most of our Legacy portfolios, not out of fear but to be strategically be ready to reinvest when we saw markets settle down.

So is the market collapsing finally after a great bull market run? Are we entering a bear market? The answer, in our opinion, is NO. Could markets go lower before they move into another leg higher? Sure, this could happen but we are ready for that and even maybe a little excited because we will be able to pick up some companies that “ran away” from us during the upward momentum we saw in US markets over the previous few months.

We are watching for signs of worse times ahead but just aren’t seeing it in the data at this point. It is important to go back to fundamentals and check out what is going on. America’s tax cuts have helped lift its annualized quarterly growth above 4%. Unemployment is at its lowest level since 1969. Sentiment and breadth are showing bullish signs by being overly, and almost unanimously, negative. We are expecting to see 20%-25% earnings per share growth from companies overall this quarter. There is little chance of an economic recession, what we believe will be the catalyst for a shift in market momentum, on the horizon according to a multiple of metrics analyzed and monitored. Wage growth is growing slowly, which is a concern for inflation, but not unreasonably fast. Small business optimism hit its highest level ever just a month ago. Trade wars are ongoing between the US and China, but overall impact on growth and inflation has been minor. The USMCA was agreed upon for North America and going through US Congress, so uncertainty there has been lifted. There has also been some positivity as Trump will be meeting with Xi at the G20 meeting in November. Market corrections are a healthy part of a secular bull market, and negative news captures attention. The fundamental economic side is ‘all systems go’ in the short-term, with concerns fading out into late 2019 or 2020. For long-term investors, this should be seen more as noise, especially when underlying fundamentals are so strong.

We had been writing of volatility leading into midterms, which are on November 6, and we are now experiencing it and we expect more in the weeks ahead. We are not sure when it will end but as it was anticipated, we had elevated levels of cash. That said, fear surged globally this week, and the market is in strongly oversold positions with pessimism at an extreme – conditions common at market bottoms. We were already overweight cash before this correction, so right now we are looking to shop for discounts with our cash. Remember what the great investor Warren Buffet said: “Be fearful when others are greedy, and be greedy when others are fearful.” CNN’s fear index hit a 5 out of 100 on Thursday’s close, reading extreme fear. This is a good sign that things are nearing a bottom.

Chart Of The Week

Small business optimism surges to highest level ever this week, topping previous record under Reagan:

Beyond the Markets

Retirement may be just around the corner for some, or many might already be enjoying it! After working for so many years, sometimes it can be a bit of a challenge when life changes direction and you’re looking for things to fill your day with. We found an article that covers 20 best things to do after you retire – this will give you fantastic ideas to create the retirement you’ve always dreamed of, you may even realize you have accomplished a lot more than you thought!

We’ve picked out our top five ideas that we think are important to do after you retire:

  1. Travel – being able to see the world is an opportunity everyone should try to take advantage of in retirement!
  2. Get a new hobby or take an existing one to the next level – this could be anything! Like photography, curling, lawn bowling, learning a new language, starting a podcast and so much more.
  3. Start or join a book or film club – this is a great way to expand your knowledge and meet new people.
  4. Reconnect – whether it’s with family, old friends, former co-workers, if there’s more time on your hands now, why not?!
  5. Volunteer – fill your free time with giving back to your community – find volunteering opportunities in your area here!

Listen to Lori on this week’s CKNW of Making Cents of the Markets here. Tune in next Wednesday to hear Part 1 of our Vancouver Real Estate Series and learn about protecting yourself during a housing price correction!

This commentary has been prepared by Pinkowski Wealth Management. It is for informational purposes only. Raymond James Ltd. believes this information to be reliable but does not guarantee its accuracy or completeness and is not responsible for any errors or omissions. Raymond James Ltd, member Canadian Investor Protection Fund. This email may provide links to other Internet sites for the convenience of users. Raymond James Ltd. is not responsible for the availability or content of these external sites, nor does Raymond James Ltd endorse, warrant or guarantee the products, services or information described or offered at these other Internet sites. Users cannot assume that the external sites will abide by the same Privacy Policy which Raymond James Ltd adheres to.