November 30, 2018
Making Cents of the Markets
Be in the Know
November is over! And it appears Federal Reserve chairman Jerome Powell has blinked. That’s what the headlines would have you believe, anyways, as his dovish (more easy going) speech on Wednesday propelled markets higher and we ended the week up 4.8% for the S&P500, for the biggest one-week gain since 2011, now up 3.2% on the year. Canada continues to disappoint, with the TSX ending the week up just 1.3% and still down 6.3% on the year. Oh, Canada. We had a Canadian GDP reading for Q3 on Friday that actually beat expectations with 2% annualized growth, but this is a significant slowing from 2.9% in Q2, and is likely to go lower with the recent collapse in oil prices. The Bank of Canada forecasts Q4 to bounce back with 2.3% growth, but there is clear downside to this number. The Bank will meet next week and decide on interest rates December 5, with expectations are for no move at that meeting. We continue to be cautious on Canadian markets in favour of US markets for the balance of 2018, and likely into next year unless things change. US Crude Oil has just had its weakest month in over 10 years, plunging 22%, which should give consumers a boost right during holiday spending season.
All eyes will be on the G20 meeting this weekend in Buenos Aires, Argentina. World leaders and their partners arrived on Friday for one of the most important meetings in recent years, in relation to the potential effect on stock markets. The big ticket item is the meeting between Mr. Trump and Mr. Xi, the first face-to-face meeting between the two in more than a year, who are scheduled to have dinner on Saturday. This will be the biggest test yet of whether the leaders of the two largest nations will scale up or down their trade war, and big economic impacts are on the line. We saw rhetoric amped up and then backed off in the days leading up to the summit, and the market appears to be moving toward the belief that a handshake agreement will happen this weekend. We agree, but do not expect a major deal to be done this weekend. There are too many sticking points to get figured out by both sides before any deal is made. We expect a deal much like the US did with Europe earlier this year, a pause on tariff escalation while talks continue.
As a side note, on Friday, the new free trade pact between US, Mexico, and Canada was signed by all three country’s leaders. This was just one step in getting the agreement ratified, as now it goes to each country’s government for approval. Mexico and Canada will likely push through without much issue, but there is still a small battle to be had in the US Congress. The Senate, which remains in Republicans control, will have an easy time getting through but opposition Democrats have expressed misgivings with the “USMCA”, and take control of the House in January. The Trump administration has signaled a desire to get this through by mid-2019, before 2020 politics start to enter the arena. We feel this will move forward.
The market showed some good momentum this week, closing near the highs on Wednesday, and we saw a strong reversal off the lows Thursday and Friday. The market is coming up on some larger resistance levels at around 2,760 which would be good to break though and stay above from a technical standpoint. If we get a positive outcome from the meeting with US and China on Saturday, and a rally on Monday morning, we will likely put some more of our cash in our Legacy mandates to work next week. We had record holiday shopping numbers from last weekend showing a strong consumer, clarity from the Federal Reserve putting ease on fiscal tightening worries, and very positive breadth in the market rally this week – an ease on the trade stance may be enough to propel the Santa Claus rally we have been looking for!
Valuations remain attractive at these levels, with the US stock market trading just above 16.7x price-to-earnings, near its long term average of 16.4x, and the lowest in over two years. Trade overhang remains the largest concern, and with the market trading near numerous resistance levels, the outcome of the G20 meeting this weekend will be a major factor of the next directional move. We have our sell list ready should things turn out negatively, and buy list ready should things go positively. Given muted inflation, low interest rates, strong earnings and economic growth, we hope the G20 can confirm our optimism and help stocks overcome a challenging year. We think President Trump is watching as well and wants to see a positive S&P500 in 2018 – as do we!
Chart of the Week
From our Raymond James & Associates research, the long term Price-to-Equity ratio over the last 15 years:
Beyond the Markets
If you are looking for the perfect winter season leisure activity, join in the North Pole themed village “Aurora”. Enjoy the captivating light displays, festive market huts, food courts, amusement rides and live entertainment. From Santa’s Workshop to lacing up your skates on the Frozen River, this breathtaking festival takes place at Vancouver’s Concord Pacific Place and runs until December 30 from 4-10pm.
Check out our latest North Shore News article here that provides a closer look into volatility and how it affects investors!