January 11, 2019
Making Cents of the Markets
Be in the Know
The government shutdown continues, with no end in sight, as it is currently tied for the longest government shutdown in US history. We’ve written before that the effect to the economy will be muted as long as the workers receive back pay, given that only 25% of the government is not funded. However, we also noted that the longer it goes on, the more risk it carries. The first part was figured out on Thursday as the Senate passed a Back Pay Bill for furloughed workers, which Trump said he would sign. Economists estimate that the shutdown is likely to shave between about 0.04% and 0.07% of GDP off economic growth per week, so the overall concern is not huge. However, this shutdown has no end in sight at the moment, with Trump and congressional leaders not able to even come to the table for more than a few minutes. This could start affecting consumer and business sentiment if it continues much longer.
Trade talks between the US and China were positive this week, with a two day meeting turning into a three day one, and more talks scheduled for the end of January among upper level trade delegates. The March 1 deadline for tariffs to increase remains a tight deadline, but it is important to remember it is a self-imposed one. If talks continue to show progress, it could be extended (which is not currently on the table from the White House). The talks in late January, which may be delayed if the government shutdown continues, are key.
The Bank of Canada announced Wednesday that they would not raise their benchmark interest rate, as expected, leaving it at 1.75%. Given that oil prices are some ~$20 lower than when they last forecasted rates, and the negative net effect of lower oil prices on our economy, 2019 sets up for a year that may have little to no rate hikes for Canada if things do not improve. That would help out some of the issues with our indebted households and falling home prices, at least some, but it is only January.
We had some positive momentum early in the week with good market breadth, followed by a nice reversal off the lows on Thursday despite some pretty negative headlines from airlines and retail. That was good. But the market has gone from very oversold, to very overbought in about two weeks, so a pullback would not be unexpected here after a pretty impressive bounce off of the lows. We are still cautious of the possibility of a double bottom (a retest of the low or close to it) which we would frankly prefer to see from a technical perspective. Our equity exposure in Legacy remains conservative at 50% to 59% until we break above resistance levels of 2600-2650 on the S&P500, or see the bottoming process firm with good breadth and volume near the lows. No need to rush either way at this point.
We mentioned that we were talking with some of our external fixed income managers, as well as market neutral fund managers, for a place to gain some additional income and returns over the short term while we wait for more clarity. As we finish our due diligence you will likely see us allocate some to these managers over the coming days and weeks. We are awaiting the unofficial kick off of earnings next week, which should give us more guidance on how the corporate world fared throughout the holidays.
Next week will be big for financials, with JP Morgan, Bank of America, Wells Fargo, Citigroup, US Bancorp, American Express, Goldman Sachs, Blackrock, and Bank of New York Mellon all reporting (among others). There are also non-financial names of importance, including UnitedHealth (Legacy), Netflix, Schlumberger, Charles Schwab, CSX corp (Legacy), Kinder Morgan, Delta Air Lines, JB Hunt Transportation (Legacy) and Micron Technology all reporting. It is going to be a telling couple of weeks ahead.
Chart of the Week
Greater Vancouver real estate continues to flash further signs of weakness. According to the Real Estate Board of Greater Vancouver, residential home sales in the region totaled 1,072 in December, 2018 – a 46.8% decrease from December 2017, and a 33.3% decrease from November 2018.
Beyond the Markets
This Saturday at Rogers Arena, experience lacrosse in all of its glory! The Vancouver Warriors are taking on the Saskatchewan Rush in a heated match. This is the first game of a three game home stretch, so if you can’t make it this weekend you can pick up tickets for the January 19 game against the San Diego Seals or the January 26 game against the Colorado Mammoth!
Click here to purchase your tickets.
Listen to this week’s Making Cents of the Markets on CKNW where we discussed last year’s Q4 and gave investment tips for when you’re retired. Listen here.