February 1, 2019
Making Cents of the Markets
Be in the Know
Lots to talk about this week, so we will try to keep it brief where possible. Earnings, on the whole, were pretty strong this week. There were a couple of misses – AT&T, Microsoft, Caterpillar, Verizon slightly – and a couple of big beats – Boeing, Apple (on reduced guidance), Facebook, UPS. The market was pricing in expectations of severe weakness, as illustrated by the worst December market performance since the Great Depression, so it is not a huge surprise that stronger than expected earnings led to the best January since 1987, and the best monthly gain since October 2015.
Eyes were glued to continued trade negotiations between China and the US, and both teams have said they have made “important progress”. The rhetoric has changed since Trump tweeted he was “a tariff man” on December 4, putting pressure on global stock markets. On Friday, China released a factory survey showing activity had fallen to its lowest level since February 2016, after showing slowest GDP growth since 1990 (Though, at 6.6%, we would take that any day in North America!). They are clearly feeling the pinch of tariffs at a time when their domestic economy was already slowing. The US, in contrast, had a blockbuster jobs report that blew past expectations (chart of the week below).
We now know that President Donald Trump and Chinese Premier Xi Jinping will likely meet multiple times this month ahead of the March 1 deadline. This should hopefully lead to good progress, and indicates that some sort of deal will be done. The Chinese administration looks to be committing to closing the trade gap between the two nations, but much is still to be determined on forced intellectual property transfers, unfair trade practices, and monitoring of the whole deal. Can a comprehensive deal be figured out with less than a month to go? Not likely. Can a face deal be made so that Trump can claim a press conference win, and delay further tariffs, or remove current ones? That seems probable at this point.
Even after the negotiations this week, while positive, there are no assurances that there will be a deal by the end of this month. The Federal Reserve meeting was another positive, with the Chairman Jerome Powell stressing patience on rate hikes while waiting for more economic data. This is wise as global economic numbers have been soft and there were some weak spots in the US last year, namely housing and autos. February will be focused on the final trade deal and the March 2 deadline, budget negotiations in Washington by February 15, and global growth concerns. We are maintaining our reduced allocation of 60% to 65% to equities within our Legacy portfolios, as some of our external managers such as Sentry and Manulife have a higher equity weighting which results in most clients having an overall market exposure of approximately 65-70%. We are comfortable with these weights, given the strength of the rally in January.
Breadth has been very positive in this rally, as has volume. We feel, however, that we are in overbought territory right now after this week’s events and after quite a sharp move off of the low on December 24. For that reason, we remain cautious, as almost all market bottoms are followed by some sort of retracement (which is usually a buying opportunity). We feel it is important to invest based on facts rather than rumours and will be patient when putting to work more of the cash we have on the sidelines – unless we get a quick resolution to the trade deal, which isn’t likely.
Chart of the Week
The US economy notched 100 straight months of increased employment as of the blowout Friday jobs report. 304,000 jobs were added vs expectations of 170,000:
Beyond the Markets
Mark your calendars! This year, Lunar New Year lands on February 5 and the celebration is bound to be spectacular. There will be plenty of events happening throughout the Vancouver area to celebrate the Year of the Pig. Whether you head down to Granville Island to marvel at the lantern installations or take in a traditional lion dance at one of the many locations in Vancouver, you’re sure to have a good time!
Click here to discover the Lunar New Year events happening in Vancouver.
Don’t forget: BC’s annual Family Day has changed dates this year to February 18, 2019! It now takes place on the third Monday of every February to align with the rest of Canada.
Listen to this week’s Making Cents of the Markets on CKNW where we talked about the earnings season, retirement planning in the face of uncertainty, and helping your millennial children get on the right financial path. Listen here.