August 23, 2019
Making Cents of the Markets
Be in the Know
On Friday morning it was looking like we were going to have a good week, and then a tweet storm on trade pushed things lower. The markets ended the week down 0.7% on the TSX and 1.4% on the S&P500, despite a supportive Federal Reserve and some strong retail earnings. The retail sector went off this week, highlighted by a great earnings report from Target. The stock surged over 20% (!!) after blowout earnings, having its best day ever, which is something incredible for a company so large (now $54 billion market cap) and having been around as long as it has. They were the big winner this week, but Lowe’s, BJ’s, Dick’s, and Nordstrom all beat expectations as the general population continues to buy consumer goods at a strong clip. This was all overshadowed on Friday, when President Xi announced retaliatory tariffs to go in place right after the new US tariffs are to go in place. That wasn’t really what shook the markets, though, as several tweets from President Trump pushed them lower. The most bombastic was when he told US companies to look for “alternatives to China,” something that may be more hyperbolic than possible. Light August trading is not helping the market swings, but this is just another reminder that trade policy is in flux at the moment.
The consumer remains the workhorse in the economy, as we saw in some of the numbers this week from earnings and also economic data points. Retail sales have risen well above estimates in the past two months, which is supported by strong employment, lower interest rates, lower oil prices, and low inflation. When we look to forecast whether that is going to get weaker or stronger, one of the weekly data points we look at is initial jobless claims, for which we get updates every Thursday. The 4-week average of that statistic is near its lowest levels of all-time, even below a year ago when the narrative was a global coordinated economic expansion. This will likely have the effect of being able to prolong this expansion, longer than the headlines would have you think. Yes, there is some global weakness, but the Federal Reserve is clearly ready to provide stimulus if the economy starts to falter.
The US market has fluctuated between its 50 day moving average (DMA) and 200 DMA for a while now, as it looks to steady itself after the August swoon that started the month. Investors are trying to digest the balance between negative trade rhetoric, and a positive bias from central bankers. On Friday, Federal Reserve Chairman Jay Powell pledged to ‘act as appropriate’ to sustain the economy, without saying he would or wouldn’t cut rates much further – this was seen as positive from the markets, albeit briefly. The tone of the message we took as supportive, and that is a good sign for equity markets longer term. Risk management and stock picking will continue to be paramount over the next year while not overreacting to any positive or negative headlines on trade. While the daily swings can cause some uneasiness, remember that the US stock market is still only 5.9% from the market highs made earlier this year.
Q2 earnings are winding down, and in general the results were better than expected. Earnings growth of 1.1% versus the -2% estimate when earnings season began is great, although the guidance going forward was a little soft, admittedly. We had some very good retail earnings results, along with some tech companies continuing to improve on their margins over the season. Energy continues to be a tough space to be in, and while Health Care reported some pretty strong results over the quarter, they continue to be under political pressure ahead of the 2020 election. Both Republicans and Democrats will use the sector as a punching bag, as we have already seen. The third quarter looks to be steady, but earnings estimates have moved 2% lower as tariffs continue to impact the bottom-line.
Chart of the Week
From Raymond James and Associates (USA), a look at 4-week average initial jobless claims vs the S&P500 since 1989 – shaded areas are recessions:
Beyond the Markets
For those who are trying to soak up what seem to be the last days of summer, there are a plethora of events taking place across the Lower Mainland that are sure to make the season of sunshine memorable. You can take a trip down to the Abbotsford Sunflower Festival which is back at Mann Farms until September 1! The festival features beautiful fields where you can snap photos, pick your own flowers, and enjoy a delicious wine tasting.
If you’re the type that enjoys deep-fried foods and roller-coasters, head to The Fair at The PNE from now until September 2 for all that and more! The Fair is currently hosting Summer Night Concerts that include big names such as The Beach Boys and TLC, however, you can also check out the amazing SuperDogs or take a stroll through the PNE Prize Home.
Listen to last week’s Making Cents of the Markets on CKNW. We talked about the housing market in Vancouver, the Bank of Canada, and the benefits of having the right executor. Listen here.
Click here to read our latest North Shore News article where we touch on financial planning after losing a loved one. The article dives deeper into how to lessen your burden and the appropriate steps to take after such a life-changing event.