November 16, 2018
Making Cents of the Markets
Be in the Know
When stock markets pullback as quickly as they did in October, it is not unusual for the first rally to be short before falling again to retest the previous lows. It is important to watch the technical patterns which will help in determining when a support level has formed. We are seeing a couple of patterns beginning to form this week but it is still too early to call either of them definitive. We would like to see a stronger rally before putting more cash to work.
On the fundamental side, even though the election is over and that uncertainty is no longer, there are still some overhanging concerns. Global growth concerns due to trade wars, Fed policy mistakes with interest rates, and US dollar strength are all things we’ve written about before that continue to overshadow a very strong US growth profile and strong corporate earnings. Some of these, such as global growth, are being discussed in corporate guidance numbers resulting in some lower expectations for the coming year. Growth is still projected but just at new levels. Should there be positive news resulting from the upcoming Chinese and US trade talks, this would likely reset expectations again, to the upside.
We’re starting to see some clarity on Brexit negotiations, one of the major uncertainties for 2019. An agreement with the EU has been reached on Brexit, with UK Prime Minister May getting approval from her cabinet to proceed but it is far from being a finished deal. Several ministers resigned due to opposition to the agreement, including a few prominent ones, and there are several reports that they are trying to oust PM May as the party leader. The direction of negotiations from here will depend on how the drama unfolds across the pond. If we see further resignations and a leadership challenge, the likelihood of a harder Brexit will increase which would be negative for markets. If PM May stays on and progresses towards the EU summit on 25 November, there could be more stabilization. The prospects of the current deal making through their Parliament remains dim, so more time and changes are needed.
As mentioned, it is typical for market volatility to continue as it finds a bottom. Putting cash to work in stages, averaging into the markets helps manage risk in the absence of a crystal ball. We continuously review and re-evaluate both technical and fundamental measurements to determine the market, sector and geographic exposure we feel is appropriate for each mandate in current conditions. While the rally we believe will come as a result of the strength of the underlying economy may take longer to materialize, the data still supports the thesis. We’re waiting for more stabilization in the markets to make further purchases and still maintain a healthy position in cash.
Our investment committee remarked how this correction has felt in comparison to past corrections. The percentage decline is quite normal in the grand scheme of things, but it was the speed at which it happened, along with the lack of positive days in between, that have made this one feel worse than others. Over the past 7 weeks it has been one step forward, three steps back. We’ve seen corrections like this, especially in 2011, 2015 and even the start of 2016 but sometimes investors forget because this sort of volatility was not present in 2017. Our plan is to be fully invested after the G20 summit should trade talks go positively but the market needs to show more conviction before we will allocate more cash to the markets.
While this correction has seen Apple move almost 20% off its high, several prominent investors put fresh money into the stock during the third quarter, betting on strong growth despite trade tensions. “Mutual fund giant Fidelity added 7 million shares, bringing its total holdings to 110.9 million shares, Janus Henderson added 3.3 million shares for a total of 20.8 million shares, and JP Morgan Chase boosted holdings to 42.7 million shares after adding 1.3 million” according to CNBC. We also had some positive movement in the financial sector after famed value investor Warren Buffett reported a new stake in J.P. Morgan as of the end of September, revealing a $4 billion investment. Financials, one of our overweight sectors, now represent half of Berkshire Hathaway’s top 10 holdings, along with the aforementioned Apple.
To be clear though, as much as the data, indicators and vast majority of analysts and managers are still pointing to continued growth in the markets, should those conditions change and we feel that market momentum is making a longer term shift, our risk management strategy remains in place to actively protect the portfolios.
Chart of the Week
The 5 year returns of major markets, the S&P500 (US), TSX Composite (Canada), and MSCI World ex US. Notice the double dip in the S&P during 2015 & 2016. This year is turning out to be as challenging as 2011 and 2015 but you can see why we have been heavily weighted to the US markets.
Beyond the Markets
If you find yourselves strolling around the downtown Vancouver area this evening, the St. Paul’s Foundation will be launching its seasonal hospital lights display with an event that includes fireworks from the hospital rooftop. Admission is free and there will be food trucks and choirs to add to the festivities. Each year, the Foundation’s Lights of Hope campaign raises millions of dollars for the most immediate patient care and equipment needs. To learn more and support the Foundation, click here.
This display takes six weeks to build by over 150 volunteers using donated materials. To see a time-lapse of what goes into creating the Lights of Hope, visit here and prepare to be amazed by the 100,000 bulbs that help make it so beautiful!
Check out our latest North Shore News article here that provides a closer look into volatility and how it affects investors!
Listen to this week’s CKNW of Making Cents of the Markets here as we discussed oil and what it means for the CAD, the Canadian housing market and year-end tax tips for 2018!