Market Commentary

Making Cents of the Markets

Be in the Know

After a sharp consolidation in May, where markets were down 6.7% on the S&P500, 3.3% on the TSX, and the tech heavy NASDAQ composite down almost 8%, we have seen an impressive counter rally in June. In fact, the Dow Jones Industrials Average is on pace for its best June return since 1938, and the S&P 500 is on pace for the best June since 1955! One more week to go, but the returns are very strong. For the month, the S&P500 is up 7.2%, while the TSX is up 3%. When markets swing positive and negative like they have the last three months, it’s important to also consider the year-to-date and longer term returns. Seeing a one month decline after a strong month or quarter prior, is quite normal.

Remember the quiet week last week? That didn’t last long. This week’s rally of over 2.2% on the S&P500 and about 1.4% on the TSX was driven by a couple of larger macro important events. The first was improvement on trade, as US President Trump and Chinese President Xi agreed and both confirmed to extended talks at the G20 meeting in Japan next week. This was welcome news, as it is seen as an opportunity to de-escalate trade tensions. The second was the much anticipated Federal Reserve (Fed) meeting Wednesday, where they held rates steady as was widely expected. What gave the market a lift, though, was the fact they removed “patience” from their text. That was inferred by the market that a rate cut could be coming as soon as their next meeting at the end of July. In addition to the Fed being more dovish, this week we also had the European Central Bank (ECB) head Mario Draghi pledge to stimulate the eurozone economy if conditions don’t improve. This was much to the chagrin of President Trump who accused him of currency manipulation. Still, another positive for markets. As for dovish central banks around the world, we now have the Fed, the ECB, the Bank of Japan, and the Reserve Bank of Australia stating that they will use or are using monetary policy to support their economies. We think the Bank of Canada won’t be far behind, with their next meeting on July 10.

Worth noting, there was also elevated tension in the Middle East, with the latest being Iran shooting down an unmanned UAV that belonged to the United States on Thursday. President Trump said he had aborted a military strike in response, as it would have caused a disproportionate loss of life. This caused oil prices to spike this week, rallying more than 9%. We’ve noted US-Iran tensions as a potential headwind down the road to equity markets, but hopefully better communication will happen over the weekend. As for an economic effect, we don’t have this as too large an impact for now but obviously it must be monitored.

Our Strategy

Markets have officially entered some of the more extreme overbought technical levels we have seen in some time. Clearly, “don’t fight the Fed” was in play this week as markets rallied and risk-on sentiment was abundant. In addition, the US 10-year Treasury yield dropped below 2% for the first time since 2016, which means that the safe bond alternatives aren’t giving you a lot of bang for your buck right now, as dividend yields can be found much higher. Market leaders this week were the cyclical energy, technology, and industrials sectors, where the defensive industries of utilities, real estate, and consumer staples lagged, despite the lower rates. We would like to see the S&P500 hold the new highs in the coming days, and we would also like to see breadth improve if the advance continues. The equal-weighted S&P500 (as opposed to the market-cap weighted one quoted more often), as well as the small-cap stocks, have not been able to gain the relative strength in the recovery. It would be more comforting if those two indices performed better with new highs. However, the Fed signal and the break to new highs are good intermediate-term signs for stocks.

A small note on the Canadian dollar this week. With oil prices rising significantly amid US-Iran tension, US longer-term yields dropping, and the Federal Reserve signaling rate cuts in short order, the Canadian dollar (CAD) had its best week in some time gaining about 1.5% on the US dollar (USD). That brings a year-to-date gain of about 3.3%, with the CAD moving from 73.2 cents to start the year to 75.7 cents as of writing. What does that mean for your portfolios? Unfortunately, any US dollar holdings in Canadian accounts lose Canadian dollar value on the exchange rate. At the beginning of the year we had thought the CAD will be in a range of 73-78 cents throughout the year, and we remain in the middle of that range. It does not affect our investment strategy that is biased toward US stocks at this time, as diversification benefits and stronger companies outweigh the potential negative effects of a stronger CAD.

Chart of the Week

From the Raymond James & Associates (USA) team, the July Fed cut odds are basically 100% which is pushing down the US 10-year Treasury yield:

Beyond the Markets

My, my, look at all the butterflies! From now until September immerse yourself in the world of butterflies with a trip to the Vancouver Aquarium. As part of a conservation initiative, the insects are shipped from Costa Rica to the Aquarium as chrysalides and then hung in an emergent chamber so they can safely emerge into the free-flight gallery. The aquarium invites you to “watch in awe” as they flutter alongside parrots, sloths and other new friends!

Click here to learn more.

Listen to this week’s Making Cents of the Markets on CKNW. We discussed the Fed meeting, the G20, and the Trans Mountain pipeline expansion. Listen here.

Click here to read our latest North Shore News article to learn more about the questions you should be asking yourself before retirement. The better the input, the more accurate the results and the easier the transition will be!

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.