June 28, 2019
Making Cents of the Markets
Be in the Know
Unsurprisingly, markets were a little timid this week in North America ahead of the G20 meeting in Osaka that started on Friday, as the TSX fell 0.9% whereas the S&P 500 fell 0.3%. All eyes remain on Japan, where Presidents Trump and Xi are set to meet at 7:30 PM PST tonight (Saturday 11:30 am local time). A quick refresher on what’s at stake, 25% tariffs are currently in place on $250 billion worth of imports from China, with the remaining $300 billion of imports threatened. There is a lot of optimism heading into the weekend, though, and there is growing consensus that a truce will be made which will delay the next tranche of tariffs. We will be on watch for a press conference tonight, as any escalation of trade tensions or no delay in tariffs would likely lead to a consolidation in stock markets.
The Canadian economy grew more than expected in April, helped by the oil and gas sector after a surge in prices. Statistics Canada pegged real gross domestic product (GDP) at 0.3% for April versus expectations of 0.1% growth, following a 0.5% increase in March. The Bank of Canada is likely to highlight this at their next meeting on July 10, but realistically, we need more clarity on trade before calling the all-clear on the Canadian economy. Of course, lower interest rates are helping keep the housing market afloat despite elevated levels of debt. Vancouver and Toronto remain the key risk areas and has seen the average house price fall significantly since the peak in 2017. With the recent growth, the Canadian dollar has strengthened all the way to 76.25 cents this week from 73.30 to start the year.
In lowering our cash levels this week slightly, we elected to pick up some fixed income and a couple of companies at favourable valuations with strong dividend yields. We still have 10% to 18% of cash to deploy in our Legacy mandates, something we may look at reducing further next week should the meeting between Trump and Xi go well. The Federal Reserve (Fed) is also monitoring trade, and is ready to support the economic outlook as needed as a backstop to a bad outcome. This puts an effective floor in equity markets, we think. Next week, we will get the June ISM manufacturing data and also the jobs report, which should give investors a clearer picture of what to expect from the Fed in late July. As of now, the market is pricing 100% odds of a rate cut at their next meeting (76% chance of 0.25% cut, and 24% chance of a 0.50% cut – we think the latter unlikely).
In the short-term, there will always be some sort of detrimental or positive news going on week to week. What we really want to concentrate on is the picture 6 to 12 months from now, if not longer. What do we see in that time frame? The economic picture remains strong enough in the US to support slowing, but positive, growth. The Fed is at our back. Oil prices have climbed a significant amount this year, but we are still well off of highs and they are not a concern at this point. Inflation is in check which allows for more monetary policy easing if needed. With lower bond yields, high dividend stocks become more attractive as the tradeoff is not as appealing to buy bonds. We still think we are headed for new highs in the stock markets this year at some point given the backdrop. If things go worse than expected this weekend and we have to change some assumptions, we have a plan in place to raise some cash and protect client portfolios. We put that as a low, but non-zero possibility.
Chart of the Week
Let’s highlight the US consumer for the charts this week, with some help from Raymond James & Associates (USA). The top chart is showing that consumer confidence has dropped from highs, but are still at high levels compared to historically. The bottom chart supports this claim, as the job market remains strong with multi-decade lows in unemployment, and the 4-week average of initial jobs claims still trending at low levels despite a small tick higher in the last 2 weeks:
Beyond the Markets
Happy birthday Canada!
Another year older and the celebrations just keep getting better and better! There are a number of events taking place across the Lower Mainland this Canada Day that are sure to be fun for everyone. One of the major celebrations will be occurring on Granville Island which will feature a parade, live music, dragon boat rides, and tons of food. If you have little ones, don’t forget to bring a blanket and relax while the kids play at the Granville Island Water Park or Kid’s Market.
In addition, Western Canada’s largest Canada Day event will be returning to Surrey’s Bill Reid Millennium Amphitheatre this year from 10:00am to 11:00pm. The celebration will feature amusement rides, food trucks, fireworks, as well as performances from The Wild Moccasin Dancers, The Piano Men, and many more! Click here to learn more.
Listen to this week’s Making Cents of the Markets on CKNW. We discussed Vancouver home prices as well as creating inheritance plans and what to do after the death of a spouse. 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!