Market Commentary

Making Cents of the Markets

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Headlines were fairly muted this week, at least when judged by the market reaction with the S&P breaking into new highs. The most watched announcement was the October double interest rate decision and there were no surprises from central banks in either Canada or the US as both acted expected. The Bank of Canada kept interest rates as is, keeping them at the same level they have been for over a year now, and the US Federal Reserve, acting independent of the White House as they must, dropped their rates by 0.25% as an “insurance precaution” or booster shot to their economy for the third and likely last time of 2019.

The momentum was solidly positive with four out of five “green” days and even today’s soft manufacturing PMI numbers didn’t faze investors as the markets trekked higher throughout the day, closing strong. The good payroll numbers certainly contributed to the rally today but some improvement on the US-China trade front early in the week also lifted investor sentiment. While there is some doubt on how quickly phase one will be signed and whether a long-term overall deal can be reached because China isn’t budging on some contentious issues, both US and Chinese officials have repeatedly said they are still close to finalizing some parts of a trade agreement. Stock market futures dipped pre-market on the news but recovered later.

The month of October was good one for markets but it was the largest stocks within the overall index (S&P500) that outperformed and the scattered underlying sector results show that the more conservative/defensive areas such as staples and utilities generally under-performed the more aggressive ones like healthcare and technology. The energy sector weakness continued this month as well and as per our active management strategy, we like to avoid those weaker sectors.

With October’s move higher, we couldn’t ask for a better setup into the last eight weeks of the year. Seasonally, November and December are two of the best performing months, however you wouldn’t have known it last year. The differences from a year ago are stark though with the biggest change coming in the form of government attitude and action towards economic support. Less than a year ago, the US Fed was raising interest rates and talking about further increases in 2019 which the markets view negatively, and we now have them taking the exact opposite approach and “boosting” the economy.

Our Strategy

Within the investment portfolios, we held steady this week as markets climbed. Interest rate moves alone don’t cause us to make sweeping changes to the portfolios but we do factor them into our overall analysis of the markets and global economy. As we held the same belief as most analysts that Canada would hold steady and the US would cut, there are no surprises there. Corporate earnings are still strong which are easing economic slowdown fears. In fact, the “R” word is no longer the topic du jour, though we wonder how long that will last. We note that US GDP grew a little stronger than expected in Q3 (1.9% vs 1.6% expected) but slower than the 2% realized in Q2. Canadian GDP grew slowly and was a touch lower than markets expected but the underlying details were undoubtedly stronger. In both cases, the economy is not at risk of going in reverse for the immediate future. Combine this with accommodative conditions from central banks, cooperation on the trade front with both sides looking for a resolution and corporations continuing to make good money as consumers continue to spend and we think recession fears could be on the back-burner for the rest of 2019 and this breakout to new record highs on the S&P500 is a positive technical move.

Next year will bring similar questions on economic strength and interest rate cuts so we expect some volatility.  An argument could be made for Canada to start cutting rates for the same reason that almost every other country in the world has started – insurance against a slowdown. The BoC governor said that Canada’s economy is resilient but is increasingly tested by global trade conflict and uncertainty. It’s more likely Canada makes the first move in early 2020 as current conditions don’t warrant lower rates yet and we have limited ammunition. Consider that on average, the Canadian government has cut interest rates by around 4% during periods of recession. Well, our prime rate is 3.95% (vs the American prime of 4.75%, after three cuts) and our key overnight rate is only 1.75%. We literally do not have the wiggle room to make those same cuts this time so they will likely wait a little longer to start whereas the US had higher rates to begin with and could get a head start.

The Canadian government is also careful to not encourage higher borrowing by dropping rates unnecessarily. They want the opposite actually – they want less debt for Canadian households which currently sits near record highs. But if the troubled global economy gets worse, it may mean one comes sooner than later. And if you want some predictions on what the Canadian banks are thinking on rates, our mortgage rates do tell a story. Most banks and credit unions are now willing to take a locked in 2.69% over a variable paying them 3.15%. Why would they be willing to lock in 0.50% less now? Only because they are assuming rates will drop by at least 0.50-1.00% over the next few years and eventually, that five year fixed at 2.69% will be more profitable to them than a variable rate mortgage. That said, 2.69% is a fantastic rate to lock in at and the stability and certainty that such a low rate can provide homeowners is something to consider.

Chart of the Week

Canada’s prime interest rate (1990 – 2019). How many remember double digit mortgage rates?

Beyond the Markets

This weekend, experience lights galore during the Lumière festival, located at various sites across Vancouver! Head down to English Bay, Jim Deva Plaza, Lot 19, or the Vancouver Art Gallery to behold a series of interactive art installations that are sure to wow. The event will also feature live performances from Ember Arts Fire and many more! Click here to learn more.

Listen to this week’s Making Cents of the Markets on CKNW. We discussed interest rate changes, separating advice from a product, as well as dementia and financial planning. Listen here.

Take a look here at our latest North Shore News article where we discuss how the recent federal election could impact investors.

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.