Market Commentary

Making Cents of the Markets

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After a month of rolling markets, with eleven days of 1% or more daily swings, we finally ended on a high note. For the week the S&P 500 gained 2.8% and the TSX was up 2.5% due to the news that China and the US are getting back to the table, with China using a more moderate, measured approach to trade. China’s foreign ministry said on Friday that negotiators “are maintaining effective communication” as the two countries try to strike a deal. This follows a positive news week where China hinted that they will not escalate the trade war for now, while President Trump also touted progress. In the past, just when things are starting to improve is exactly when things break down, but we hope to see more improvement over the weekend.

The Bank of Canada meets on Wednesday, and we will see how they interpret the strong GDP report from Friday. Canada posted an annualized growth rate of 3.7% (annualized) in Q2, beating expectations. Though the details were less encouraging, with business investment declining and household spending growth being soft, there was solid growth in the ‘non-commodity’ industries. There was also a huge 5.4% growth from net trade, reversing the drag from Q1. From the Bank of Canada’s perspective, Q2 shouldn’t do anything to alleviate the concerns of the external growth backdrop, which will slow the Canadian economy going forward. We expect the central bank to follow global peers with a rate cut, probably not next week, but we wouldn’t be surprised to see one by their meeting in December. They have limited ammunition so we believe they will wait a little longer before pulling the trigger.

Our Strategy

As August came to a close, US stock markets were barely lower than where they started. Given the volatility over the month, you would have guessed the US market was worse than -1.8% for the month, but here we are. The Canadian market ended up flat for the month (0.2% gain). Trade dominated the headlines throughout, but there was a decent close to earnings season as well, and some strong economic fundamentals, so it makes sense that stocks are volatile given the conflicting headlines. There is a well-defined range on the S&P of about 2822 to 2945 right now, which sets up a break out one way or another. We are near the top of that range now, almost breaking through on Friday. Pushing through would be positive for stocks on a momentum basis. If we do get a break-out, there will be further resistance near the old highs of 3027 unless we get some good news regarding trade.

We do think short-term upside is limited here, as there is a low probability of a trade deal anytime soon and new tariffs are slated to kick in next week. There is a chance that those tariffs could be delayed over the weekend, but we see that as unlikely for a couple of reasons – President Trump is emboldened right now as China was seen as backing down from further tariff escalations, and President Xi has the 70 year anniversary of the People’s Republic of China celebration on October 1 coming up. There has also been some slowing earnings trends, slowing global macro data, and last week was the last week of holidays for summer.  August through October is also seasonally weak for stocks. That said, it is not all bad. We still think in the intermediate term there is reasonable upside, with a “Fed Put” and “Trump Put” to help with downside protection on the economy and markets. The Fed cut rates in July, is almost guaranteed to cut rates in September thanks to the trade dispute, and is intent on supporting the economy. Trump’s behavior on trade remains erratic, but he has an election coming up fast. He wants a good economy and a strong stock market to tout on his campaign trail.

Chart of the Week

From Raymond James & Associates (USA), a look at historical S&P 500 dividend yield versus the US 10 year treasury yield. “74% of dividend-paying S&P 500 companies currently have a higher yield than the US 10 year Treasury yield. Although it is an incentive to buy stocks over bonds, we believe it reflects the unusual activity in the bond market as opposed to giving a glaring sign to buy equities.” Interesting times, indeed.

Beyond the Markets

Spend your Labour Day weekend enjoying the best of live theatre at this year’s Bard on the Beach Shakespeare Festival! Weekend performances will begin at 2:00pm and 7:30pm, showcasing titles such as the beloved Shakespeare in Love and Coriolanus. So grab your tickets and head down to Vanier Park because with performances this magnificent, it is not a question of ‘to go or not to go?’

Click here to purchase your tickets.

Listen to last week’s Making Cents of the Markets on CKNW. We talked all about what Canadian banks are saying about the economy, politics and trade, as well as the gold market. 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.

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.