January 25, 2019
Making Cents of the Markets
Be in the Know
This week was full of conflicting news reports, some of which pushed the markets higher, and some lower. It ended with the week being relatively flat with the S&P 500 finishing down 0.3% and the TSX returning 0.4% on the week. A market like this is difficult to figure out, as it moves multiple percent based on rumours from news media outlets, which are later refuted. The most pertinent news this week came from a ‘source’ claiming that the US would not invite Chinese delegates to the planned trade meeting next week. That report sent markets quickly lower, with the Dow Jones Industrials losing some 300 points. Later in the day, the White House denied these rumours and the losses were reversed by the following day. We remain cautious, and are waiting for stronger facts to move our allocations one way or another.
An update on the partial government shutdown: on Friday President Trump announced that he would sign a short-term spending bill, ending the longest government shutdown in history. That provides some short-term relief. It will fund the government for 3 weeks before a new deal needs to be signed, meaning that at least 800,000 furloughed workers will return to paid work, at least temporarily. It was estimated that about 0.1 percentage points came off GDP per week, which will likely hurt Q1 2019 readings, but seeing as government workers will receive back pay the overall effect should be limited.
Corporate earnings season is in full swing, and it is hard to remember one as important as this one given the uncertainties overhanging the economy. As of Friday morning, about 26% of the S&P500 has reported for the fourth quarter, and earnings are beating by about 2.4%, with 69% of companies exceeding their bottom-line estimates. Compared to the last 3 years, this is slightly below the average of 4.9% and 70%, respectively. Earnings per share is still on pace for about 16.5% growth year-over-year, if you assume a typical beat rate for the remainder of the season, which is still a very strong number. Guidance for 2019 is shaping up to be more challenging, however, as a drop from double-digit growth back to more normal rates is expected now that tax changes are done.
A couple notable names from this week with earnings beats were Starbucks, Union Pacific, Johnson & Johnson, Proctor & Gamble, Southwest Airlines, CP Rail, and IBM. A couple of misses from Stanley Black & Decker and Intel, along with a weak guide from Halliburton, caused some concern.
Next week will have a flurry of earnings. We get a number of tech giants in Microsoft, Amazon, Apple, Samsung, Facebook, and Alibaba. We also get the likes of ExxonMobil, Shell, Pfizer, Visa, Mastercard, AT&T, and Verizon. Don’t forget Chevron, Merck, Boeing, Unilever, and McDonald’s. We could continue, as the list is much longer. Safe to say we will get a pretty good reading on the underlying economy with these companies next week, as well as some guidance for 2019.
We held steady this week in Legacy, as there were multiple news articles on trade that were either negative or positive. Next week should have major consequences on our allocations, as the Federal Reserve meets on January 30, as well as trade delegations from China meeting with the US (at least, that’s what is fact at the time of writing this). Hopefully, we get more clarity on both in a positive manner, and we can deploy some more cash into the markets with confidence. If, however, trade talks fall apart, we may raise more cash looking for a double-bottom.
From a technical point of view, the markets holding above the 2650 this week is positive, but the short-term market is overbought on a number of metrics. We would expect a pause or pullback in the markets over the next few weeks, all else equal. From an intermediate and longer-term fundamental point of view, the market still looks attractive compared to historical valuations. We had a number of corporate earnings that provided some positivity in the last week, but the global economic weakness continues to contain negativity. We’ll be buyers if we get a substantive trade deal on the table, with the planned escalation of tariffs removed or at least delayed to early March. That, along with the more dovish Fed we have had as of late, would provide us with more conviction.
Chart of the Week
Initial claims for unemployment benefits hit their lowest level since mid-November 1969, as employment in the US shows continued strength:
Beyond the Markets
If you haven’t already heard, Canada’s largest food and drink festival, Dine Out Vancouver is back! Hundreds of restaurants in the area are offering customers multi-course dinners starting at $15.00 (not including beverages, tax, and gratuity). You can also choose from 30 different events and tours to make your Dine Out experience a memorable one. The festival is running from now until February 3, 2019 – so bring your taste buds and enjoy everything Vancouver’s culinary scene has to offer!
Click here to check out the Official 2019 Festival Guide.
Listen to this week’s Making Cents of the Markets on CKNW where we gave an update on earnings as well as talked about mortgage investment entities and the possibility of Canada slipping into a recession without the US. Listen here.
Click here to read our latest North Shore News article for insight into the new provincial taxes and planning for retirement.