February 15, 2019
Making Cents of the Markets
Be in the Know
Optimism on trade, and a done budget deal helped markets have their eighth positive week in a row, with the S&P500 gaining 2.5% on the week and the TSX gaining 1.3% on the week. Top officials from the US administration were in China this week, negotiating to get a framework in place before President Trump and President Xi schedule a meeting together. It will likely not be finalized prior to the March 1 deadline for raising tariffs, but it looks like there is more flexibility on that date than would have been eight weeks ago. As long as they continue to make progress, tilting exposures to increased equities looks to be prudent.
There was one big economic data point that caused uncertainty in markets on Thursday, as retail sales from December came in much weaker than expected in the US. One market analyst called it “one of the ugliest of all time”, while others came up with reasons to explain why they were down 1.7% on the month after a strong 1.0% gain in November. It was clearly a bad number, but we think it was explained by a more-than-turbulent stock market, and concern over the impending government shutdown, which caused more people to delay or reconsider purchases. This is something we are monitoring closely as an early indicator of economic weakness.
We are now 63% to 67% equities in Legacy, with the balance in fixed income and money market after continued optimism this week on trade and a budget deal getting finished. We would prefer to be a little higher but given the high equity exposure of our third party managers, most clients are around sitting comfortable at the 65% to 75% in equities overall. This is appropriate given markets are recovering yet there are still a few major risks we see for 2019. We have a positive bias over the next 12 months, as we think a recession in the US is unlikely and the stock market should rally, but we are due for a pullback as markets appear to be overbought.
Most portfolios are back to positive from three months ago, so we are happy to report we are inching closer to getting back to where we were before the market correction started in October. As with any correction, active management helps to reduce the probability of severe losses, and reduces the risk when markets continue to deteriorate. We did take this opportunity to build back and upgrade the portfolio with names we favour, while participating in the recovery as well. Our top sector exposures in industrials and financials have performed best year-to-date, with the industrials sector up 17% and financials up 10.6%. Healthcare, our other overweight sector, has also gained 7% this year.
We would view a pullback as a possible buying opportunity and add allocation to some high quality names in sectors that we want to be in. Our thesis on the trade debacle is that there will be a delay of hiking of tariffs on China on March 1 (for 30 or 60 days, as President Trump has mentioned), while they work out a deal. We just do not think Trump will go into 2020 campaigning by driving the economy into a recession, as that would not be a winning strategy. Or at least, recessions have historically led to changes in administrations. That should provide support but not necessarily large upside from these levels. Building market momentum after a deep correction is a process, and it rarely goes straight from the bottom left to the upper right without pullbacks in between.
Chart of the Week
Some pretty weak year-over-year numbers for Vancouver real estate. Real estate corrections can last a lot longer than stock market corrections as we have recently experienced in the past four months. It is prudent to assess any of your real estate holdings on an ongoing basis just as you do your investment portfolio.
Quote of the Day
“It’s not how much money you make, but how much money you keep, how hard it works for you, and how many generations you keep it for”
– Robert Kiyosaki
Beyond the Markets
This coming Monday, February 18 is Family Day across some provinces and is an extra day off to spend with your loved ones. Take a family trip to the Vancouver Art Gallery where there are a number of workshops to choose from, and it is free admission for children under the age of 12.
With all this fresh snow, take a drive up to Whistler and enjoy one of the many winter time activities with special discounts on Family Day, including ice skating at Whistler Olympic Plaza or Nordic skiing and snowshoeing at the Lost Lake trails.
Listen to this week’s Making Cents of the Markets on CKNW where we gave listeners an update on the Canadian economy, talked about the pros and cons to RRSPS as well as how to decide how much money you’ll need in retirement. Listen here.