January 4, 2019
Making Cents of the Markets
Be in the Know
Another holiday shortened week with a full week of news and substantial market movements. Political uncertainty and weak earnings forecasts dominated the early part of this week. The partial government shutdown will continue through the weekend as a meeting between the new congressional leaders and President Trump produced little to no results on Friday, with conflicting opinions on what was discussed. This will be a recurring story through most of 2019.
Apple and Delta Airlines made announcements this week outlining a weaker holiday season than expected, which caused market jitters and big losses on Thursday. The market losses were short lived, with a strong rally Friday dominated by Fed Speak and solid labour market reports from the US and Canada. One current (Jay Powell) and two former (Janet Yellen, Ben Bernanke) Federal Reserve Chairs met at an economic conference today, and they were unequivocally more dovish in tone, saying they will be patient with rate hikes and the balance sheet normalization. Mr. Powell also noted that they can change their thesis quickly, much like Janet Yellen and the Fed did in 2016. This, along with the very strong jobs report in the US and Canada, caused markets to surge, ending the week up 1.9% for the S&P500 in the US, and up 1.4% for the TSX in Canada.
Overall, the market is telling us to be cautious. There are a lot of risks out there, from a technical, macro, trade, Fed, and political point of view. There is also the much anticipated Mueller investigation report to come out in mid-February, which is a big question mark. The Brexit deadline is approaching fast, with no deal on the horizon. We are just eight weeks away from China and the US’s self-imposed hard deadline for a trade deal. But on the positive side, the job market is still very healthy, the softer economic points and weaker stock markets may force the Chinese and US administrations to get a deal done, stock valuations are increasingly attractive vs long term averages, and earnings are expected to be strong despite the bigger headlines this week. With all the news that we are expecting over the coming weeks, we are staying in a “wait-and-see” holding pattern as the market is in the process of forming a bottom. The Feds more “easygoing” talk today is a major hurdle that we needed in order for more investors to again start to build back confidence. Confidence = buying = stock market higher. We have a ways to go to get back to more normalized conditions, but overall this definitely was a step in the right direction. We are in no rush to put cash back to work and are taking a deliberate and measured approach, waiting for more stability.
We met with several external bond and equity managers this week to get their updated insight on current market conditions and for 2019. Summary: portoflio managers are excited about the opportunites the pullback has presented, but they are aware that clients are disappointed with the last few months. Long term return expectations are high, especially from these valuations. Uncertainty and recessions are always a possibility but are not likely to be led by the US macroeconomic picture. For the Legacy portfolios, our equity exposure remains a conservative 49% to 58%, depending on mandate. We have plans in place for both buying equities and raising cash depending on how the markets view the news coming out over the next while, but in the short term, there is too much uncertainty to make significant changes in either direction. We should be getting more clarity over the next few weeks on a number of issues, which could dictate our direction for 2019.
We are looking for more information with regards to four major risk points:
- The Federal Reserve stance on current economic conditions and the rate at which they will increase rates– we learned more about this in the aforementioned meeting today. Their next policy decision meeting is January 29-30. Click here for an overview of the American Association Economic Summit talking points today.
- The direction of trade talks between the US and China, which we should learn more about over the next week as mid-level delegations continue talks in Beijing.
- Corporate earnings through the holiday season, which kick off on January 14. We will be paying particularly close attention to the level of earnings growth and expectations going forward to gauge how much the economy is actually slowing – this will provide much needed insight.
- We need to see more technical conviction from the stock market, maintaining support with increasing market breadth (more stocks advancing than declining – the 70% level is key). We also prefer to see a double bottom, and we want to see high volume for a few consecutive days before we allocate more to equities. Friday was a good day in the market for breadth and volume as over 86% of US stocks were advancing on the day. We need to see more days of conviction like this after technical levels were broken in December. We are not out of the woods yet, but we are looking for the path.
Charts of the Week
Strong labour markets take the headline this week with 312,000 jobs created in December vs expectations of 176,000, with the unemployment rate increasing to 3.9% as more people entered the job market in the US:
U.S. Nonfarm Payrolls
U.S. Unemployment Rate
Beyond the Markets
Vancouver Italian Film Festival kicks off for its sixth year with the North American premiere of “The Man Who Bought the Moon.” This week-long festival presents a mixture of the best new Italian cinematic documentaries and established classics, including work from legends such as Fellini, De Sica, and Bertolucci.
This unique festival is brought to you by VIFF Vancity Theatre and the Italian Cultural Centre with support from the Italian Consul. For more information and tickets online, click here.
January 4th – 12th, Vancity Theatre 1181 Seymour Street, Vancouver V6B 3M7
Check out our latest North Shore News article here for insight into getting your finances in order.