July 5, 2019
Making Cents of the Markets
Be in the Know
This week ended quietly with Independence Day having an effect on trading volumes for the past three days. The markets had a solid start after the annual two day G20 in Japan where all eyes were on the 80 minute meeting between China’s President Xi and President Trump. Heading into last weekend, there was hope that the two countries would be able to start to cooperate and that’s the news that we received.
With Canadian markets closed, Monday started the second quarter with US markets gapping up on a three day run to all-time highs based on renewed optimism of a trade deal. It started last Saturday when the US President tweeted that his meeting with President Xi went “far better than expected.” As a result of the meeting, President Trump agreed not to go forward with the additional rounds of tariffs during the negotiation period while China agreed to begin purchasing “large amounts” of agriculture product from the U.S. In addition, Huawei is now allowed, once again, to have business dealings with U.S. tech companies which came at the request of both President Xi and the U.S. corporations it previously had dealings with.
This time around, it seems that China blinked first as Xi said they were willing to make concessions on tariffs, barriers and intellectual property protections which is exactly what the US wanted to hear. He said it was their contribution to achieving a win-win outcome. They have both acknowledged that dialogue and cooperation is better than confrontation and friction. While the agreement doesn’t end the trade dispute, at least there are no new tariffs. The trouble is, we’re getting a bit of a déjà vu feeling as the same sort of positive sentiment came from the last G20 meeting in November and 4 months after they had a similar agreement to hold off on tariffs, Trump said the Chinese had failed to deliver and raised tariffs. It’s not improbable that we could see a similar situation here. We’re already seeing some products now getting rerouted through countries like Vietnam to avoid the tariffs so work-arounds are being implemented in the meantime. The US also threatened tariffs on Europe accusing them of unfairly subsidizing Airbus, a competitor to American company Boeing. Whether this negotiation tactic works is to be seen.
With the markets pricing in a trade deal, more focus (and market sensitivity) is on interest rates. Leading up to Friday morning, economists had essentially all expected a drop in interest rates when the Fed meets at the end of July due to the softening economic data. This morning’s employment numbers threw a bit of cold water on those expectations after a strong jobs report – 224k reported vs 165k expected – means the US may not need to boost the economy just yet. Economic data is a little mixed but we see no recession alarms yet and the growth continues. The Fed needs to act early to have a better chance of delaying a contraction and they know it. But “how early?” is the question. Eventually the US will join the rest of the world also considering or already making rate cuts. Lower interest rates puts more money in consumers’ pockets, letting them continue to spend which in turn drives economic growth.
Currency and foreign exchange rates are becoming a political talking point again with the global interest rate moves. Dropping rates generally causes a currency to fall relative to others, making their exports more competitive. The USD is at a yearly low just based on expectations of lower rates but demand for US treasuries will prop it up as well. With US yields still low, it shows that demand for safety is still there.
Q2 earnings season starts soon and, while expectations are low, the first quarter also had anticipated a contraction which turned out to be premature. The S&P500 has broken out to new highs, a bullish sign, but we want to see it stay there with good volume to confirm support. We feel it’s important to take advantage of this momentum but at the same time need to manage risk. The US markets have been strong but consider the risk levels to achieve this. There have been six significant corrections in the last 18 months, including a 20% drawdown that bottomed in December and getting defensive has protected against large declines.
2019 returns are back on track and we’re seeing excellent growth even with reduced stock market exposure. We continue to make small shifts to the portfolio, looking to take some profits off the table as the rally continues and replace them with a few new positions with great potential even as the economy slows.
Chart of the Week
US nonfarm payrolls are still strong.
Beyond the Markets
Vancouver’s biggest two-day Latin American festival returns July 6 and 7 for a weekend of great music, food, and sports! Carnaval Del Sol is sure to put a mark on your summer with over 450 artists from various Latin American countries performing on 6 stages. But the excitement doesn’t stop there because the festival will also feature over 30 different food vendors, fashion shows, beer plaza, and soccer tournament. Tickets start at just $2.00 and are available for purchase here.
Listen to this week’s Making Cents of the Markets on CKNW with Financial Advisor, John McLean. We discussed results of the G20 Summit, unique financial planning needs of high net worth investors, and common biases and how to correct them. 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!