Market Commentary

Making Cents of the Markets

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Markets started the week with optimism, after there was presumed progress on trade talks between China and the US, with trade delegations set to travel to Asia after the Chinese New Year. And it was all but assured that President Trump would travel to Beijing by the end of the month to get a deal together with President Xi, and possibly meet with him twice. Well, that was short lived, which is why we don’t trade on rumour. By mid-week, a number of reports were starting to leak on how negotiations were not going as fast as originally thought. On Thursday morning, it was rumoured that “Trump and Xi are highly unlikely to meet prior to March 1,” the self-imposed deadline to raise tariffs if no deal is made. Larry Kudlow mentioned that the US and China still have a “pretty sizeable distance” to go on trade. And on Friday, Trump was reportedly expected to ban Chinese telecommunication equipment from US networks. In other words, next week’s meeting are already not starting on the right foot. Despite the headlines, markets were muted this week with the S&P 500 flat and the TSX gaining 0.8%.

Global economics continue to be a concern. Global manufacturing data is reflecting a slowdown in activity, with the January China Manufacturing PMI at 48.3 this week, from a contraction of 49.7 in December (below 50 is contracting, above is expanding). The Eurozone hinted at slight weakness as well, with their manufacturing PMI remaining just above expansion levels at 50.5, and Japan’s at 50.3. That, along with Italy being in a recession, Germany barely avoiding one, Brexit issues, and the EU revising GDP growth forecasts from 1.9% to 1.3% in 2019, there is clearly pressure on the global economy. Whether it will spill over to North America and the US remains to be seen, as the consumer base is enjoying an unprecedented gain in jobs and wage increases, and consumers make up 2/3 of the economy. That’s one positive, anyways.

Another positive has been this earnings season, where companies have been providing more favourable data. Over 62% of S&P500 companies have reported so far, and 73% of them have beat earnings expectations, according to Raymond James US Research. Earnings are by far the best predictor of long-term stock price movements, so this is some encouraging news. One can only wonder where the stock market would be without the increased protectionism from 2018.

Our Strategy

We’ve been talking about the breadth and volume in the markets along with how this recovery off the low has looked much stronger than the ones back in October and November last year. Unfortunately this week, the breadth and volume was negative on Thursday, raising caution, but one day does not change the trend. The market was up against pretty tough resistance levels, bouncing right off of the 200 day moving average, and falling back below 2,700, before closing at 2,710 for the week. If markets fall further, there is weak support at 2,670, then better resistance down at the 50 day moving average at about 2,614. Below that, 2,600, 2,500, ~2,450, and the December low of 2,351. We have been mentioning we are expecting a retest at some point, which a failed trade deal and a hike of tariffs could certainly deliver. Remember a retest does NOT mean we have to go back to the December low, and given the current environment, we do not think that will happen. From a technical perspective, however, the market went from extremely oversold to extremely overbought in just over a month, so a breather here would not be unexpected.

Our equity exposure remains in the 60%-65% range, with the balance in cash or fixed income, depending on mandate. We made some trades on Tuesday this week, as we trimmed some exposure in UnitedHealth as it had grown to a larger percentage than we were comfortable with in one of our mandates. We also sold Boeing in two mandates after a move from $294 to $406 in a month, and we added McDonalds to increase exposure to companies with more predictable earnings and a strong, supported dividend yield. We would prefer to be 70%-80% in equities in our mandates, however caution is needed right now. If a failure in trade talks happen and markets fail to hold key support levels, we will raise additional cash to protect downside. We have to be agile with our plan A if trade talks succeed, and plan B if they deteriorate. More of the latter was rumoured this week, unfortunately.

Chart of the Week

On Friday, the Canadian jobs report blew past expectations for January, adding 66,800 jobs with only 5,000 expected. Our labour market continues to show resilience, a good sign among the increased uncertainty for the Canadian economy:

2018 RRSP Contributions

March 1, 2019 is the last day you can make tax-efficient RRSP contributions for 2018 tax year. RRSP contribution limit for 2018 is 18% of earned income you reported on your tax return in the previous year, up to a maximum of $26,230, plus any “carry-forward” contribution room from previous years. Please check your latest Notice of Assessment from CRA for your individual contribution limits.

Quote of the Day

“Do not save what is left after spending but spend what is left after savings” – Warren Buffet

Beyond the Markets

Valentine’s Day is fast approaching and what better way to celebrate the occasion than with one of the most iconic love stories of all time. Starting on February 14, the Vancouver Opera will be presenting Giacomo Puccini’s La Bohème at the Queen Elizabeth Theatre. Taking place in Paris during the Jazz Age, the opera tells a story of romance and humanity in a way that is sure to touch audiences.

Click here to purchase your tickets!

Listen to this week’s Making Cents of the Markets on CKNW where we talked about fees, year end performance statements, and navigating retirement during times of uncertainty. Listen here.

This commentary has been prepared by Pinkowski Wealth Management. It is for informational purposes only. Raymond James Ltd. believes this information to be reliable but does not guarantee its accuracy or completeness and is not responsible for any errors or omissions. Raymond James Ltd, member Canadian Investor Protection Fund. This email may provide links to other Internet sites for the convenience of users. Raymond James Ltd. is not responsible for the availability or content of these external sites, nor does Raymond James Ltd endorse, warrant or guarantee the products, services or information described or offered at these other Internet sites. Users cannot assume that the external sites will abide by the same Privacy Policy which Raymond James Ltd adheres to.