January 18, 2019
Making Cents of the Markets
Be in the Know
Four weeks in a row that we’ve been in the green, yay! We hope this is not a classic bear market bounce, as PTSD from December remains for all of us. This week was unequivocally positive on a number of fronts. The biggest news that moved markets this week was on trade between the US and China. On Thursday, a report from the Wall Street Journal noted that the US was debating lifting China tariffs to hasten a trade deal and calm the markets. It was not confirmed, nor denied, by the White House. It appears that Treasury Secretary Steven Mnuchin is pushing the lift of tariffs, whereas US Trade Representative Robert Lighthizer is concerned that any concession could be seen as a sign of weakness in negotiations. The late January meetings between the two nations will be sure to move the markets one way or another.
The Brexit drama intensified this week. Solving this crisis will take time, and likely a second referendum, but that is not currently on the table. After two years of negotiating with the EU, Prime Minister Theresa May’s deal was rejected following five days of debate, by 432 votes to 202. Her own Conservative members voted against her by three to one. The following day she survived a leadership challenge from the opposition party, and has until Monday to submit “Plan B”. With hard line “Brexiteers” and “No-Leavers” not accepting compromises, the only way to know what the people really want, is to ask them in a referendum. We also think an extension of Article 50 is likely, which will help avoid a no-deal Brexit on March 29. As mentioned before, a no-deal Brexit is economically irresponsible for both the UK and the EU. “Irresponsible” is the nicest way to say that.
Closer to home, Canadian inflation unexpectedly accelerated in December. Prices excluding gasoline ramped up (aside from Vancouver where gasoline prices continue to be elevated despite a collapse in oil prices…), pushing inflation for 2018 to the highest level in seven years. It’s still well within the normal range and we do not think it is enough to push our Central Bank to raise rates yet, but it’s something to watch.
Let’s go over what major risks we were waiting for more clarity on:
- The Federal Reserve tightening too fast (increasing interest rates) – we got more clarity on their intent to pause at least through the first half of this year, a positive development.
- Trade war with China and the US – as mentioned above, a lot of positivity this week from both nations is leading to better sentiment, which will hopefully culminate in a deal at the end of the month.
- The global economic slowdown – this remains an elevated risk, with weak reports out of Europe, a Brexit drama that continues to have no clarity, and China showing weaker trade numbers recently. The latter may improve with economic stimulus from the Chinese government announced, and if they get a truce on tariffs from the US.
- Stock market technicals were broken on the downside in December – these have definitely improved over the last few weeks, closing above the major resistance level of 2650 with good breadth and volume positive.
In analyzing the risks, and taking the information above, we allocated some cash to equities in our Legacy portfolios this week, bringing allocations to approximately 55-65% equities. We also added about 7% to fixed income in the more conservative mandates. Our goal, if we felt the major risks had abated in the market and earnings continue to be positive (which we are cautious on), would be to get to 70-80% equities but we are not ready to move as of yet. We would still prefer to see a double bottom, as in previous non-recessionary bear markets, this trend has often occurred after the 20+% decline. This, and also that the trade “news” is really rumours at this point, is why we did not get more aggressive this week.
We reviewed analysis on the prior six non-recessionary bear markets going all the way back to 1962, and found that on average the bear market decline is 24% (20% in 2018), with a bounce rally over 24 days on average of 11.4% (25 days and ~13% to today’s close), followed by a retest of the lows 1½ -2 months later. We may not be out of the woods just yet, but a major development on trade and lifting of tariffs would change the equation. We would put more money to work quickly, should we see solid news out of Washington regarding trade.
US markets are closed Monday for Martin Luther King day, while Canadian markets have a normal trading day.
Chart of the Week
Bank of Canada’s housing market concern is apparent, with some major slowing / decline in home prices from the highs. Vancouver and Toronto are especially concerning, and builds the case to pause on rate hikes:
Beyond the Markets
The 9th annual Hot Chocolate Festival is back in Vancouver from January 19 to February 14 and it’s more delicious than ever! There are over two dozen cafes and bakeries whose menus will be offering special cups of gourmet hot chocolate for customers to enjoy. With options such as “Wake Me up Before You Cocoa” and “Nutty & Nice” this festival is sure to indulge your sweet tooth!
Click here for a list of the participating vendors.
Listen to this week’s Making Cents of the Markets on CKNW where we discussed Brexit, Vancouver real estate, and where to invest your money in 2019. Listen here.