October 28, 2019
Making Cents of the Markets
Be in the Know
The big Canadian news this week was obviously the election, though it certainly wasn’t an influence on markets and we don’t make investment decisions based on political parties. We’ve had Liberal and Conservative governments, Republican and Democratic parties in the white house, and yet corporate profits have risen and fallen under all colours. What we will watch for is a change in any tax laws or budget/fiscal moves that would impact the profitability of the companies we own. But these changes typically don’t happen overnight – though the Halloween income trust debacle of 2006 took the markets by surprise, so it can happen. Ultimately, the 50-day Canadian election campaign didn’t even move the needle for investors. The never-ending US campaigns are a different story.
Across the pond, Brexit talks are still volatile and an extension has been decided with no date provided but North American investors are pretty desensitized to that now. Europe is experiencing a manufacturing slowdown with PMI numbers coming in at 45.7 (below 50 is contracting). Germany’s 41.9 level increases the concerns of a possible recession in the region but governments still have tools to delay when that could happen. This week, the European Central Bank had their scheduled policy meeting and made no changes to the monetary policy but mentioned that the central bank could provide further stimulus in the form of bond buying if needed.
The global markets have shown their resiliency in these late stages of the economic cycle and indices are holding near their highs, as are investment portfolios (although the softer USD is causing overall account values to hold back a little) driven by a strong start to earnings season. We just finished what was one of the busiest weeks of the season and now that almost 40% of the S&P500 have reported, the vast majority of them, 78%, have beat analyst expectations continuing the trend of previous quarters.
The US Fed meets next week with another interest rate decision on the table. With global economic conditions slowing and the IMF downgrading global growth forecasts to 3.0% for this year and 3.4% next year, they may want to give the economy a little shot in the arm but also consider that they don’t want to do too much too soon. It is noted that the slowdown is due to lower manufacturing globally and uncertainty on tariffs, which are things that could be improved with a trade deal instead.
Week two of earnings season carried the markets higher, as we expected. Our opinion hasn’t changed from last week when we expressed our confidence and favourable outlook for the markets this quarter. Phase one of the trade deal could be completed soon and earnings momentum is solid.
We like this excerpt from our friends at Bespoke: “When looking through an updated version of the list taking into account companies that have reported earnings since Wednesday’s close, there were four stocks that stood out – Tesla (17.7%), Winnebago (15.2%), Polaris (10.9%), and Harley Davidson (7.98%). All four of these companies are similar in that they produce vehicles that everyone wants, but no one needs.
The fact that each one reacted so well to their earnings reports obviously implies that what the market was expecting and what the companies delivered were far apart from each other. In other words, the market was either underestimating the health of the consumer or overstating the weakness of the economy. That’s something to keep in mind for the remainder of the earnings season when it comes to consumer-related stocks.”
Chart of the Week
The S&P 500’s cumulative A/D line had moved to new all-time highs, which is a relatively bullish sign for the broader market. For just about two years now, following each significant pullback for equities, breadth led prices to new highs. With this week’s gains in the S&P 500, its cumulative A/D line has made new highs, which should help to support prices going forward.
Beyond the Markets
This weekend is India’s biggest holiday of the year! Celebrated every year during the autumn season, Diwali (also known as the Festival of Lights), symbolizes the spiritual victory of light over darkness! There are many ways to celebrate across the Lower Mainland including the special Diwali Night Canucks Game as well as the Diwali Downtown Vancouver event at the Roundhouse Community Centre. Click here to learn more.
Listen to this week’s Making Cents of the Markets on CKNW. We talked all about politics and investing as well as the dangers of having a 100% mutual fund portfolio. Listen here.
Take a look here at our latest North Shore News article where we discuss how the recent federal election could impact investors.