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Making Cents of the Markets

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The S&P 500 is higher on the week +0.9% while the TSX is up 1.7%. Since the beginning of autumn, the U.S. stock market has hit the gas pedal. We are in the last few weeks of the major earnings releases for the quarter before they start to trail off into December. The results have been very positive which is one of the reasons the markets have been rallying. That rally broke through to new highs and then got a major boost late in the week from a positive development in the trade negotiations with the S&P 500, Dow Jones Industrial Average, and NASDAQ reaching new all-time highs.

Prior to this earnings season, the outlook was that corporate profits may have peaked and this quarter was going to show that they had started shrinking. This isn’t to say earnings were expected to go negative but that they were going to make less money than they did a year earlier. In reality, Q3 earnings are still growing 3% above consensus in fact, and the majority of companies are still beating analysts’ expectations, though we know that the bar was lowered so the hurdle wasn’t as hard to clear. It’s still very positive and the market has liked what they’ve heard from many companies including Disney who reported this week and traded up 5% after beating earnings estimates on the top and bottom lines. They also announced they had reached a deal with Amazon to put Disney+ on Amazon Fire TV devices, and on Samsung and LG televisions all positive news for the stock.

The statistics of this seasons results were better than feared for Q3 earnings reports, compared to historical averages. The 65% of companies that have surpassed estimates on the bottom line is better than last quarter and also the long term average for the quarter. Looking ahead to Q4, guidance has been lowered for a few companies already. Often when this happens, even if the same business happens to beat on both top and bottom lines today, you can see the price fall just because of lower expectations for the next three months. The mixed signals we’re getting for the last quarter of 2019 mean we are seeing a few bigger swings from certain stocks. But overall, companies are showing a lot of resilience against the tariffs and wage inflation. Margins are down from the highs a year ago but have seen a steady rise back up over the last two quarters. For example, industrials which should have the biggest pressure from tariffs and inflation, are actually on track to return to peak margin levels from early 2018 – one of the reasons that sector is doing so well this year.

China’s economic growth has weakened this year to the lowest level in nearly three decades. This is primarily due to the result of a gradual shift to a new economy and a damaging trade war with the U.S. However, China’s mainland stock market, made up of largely domestic-facing companies, is having a great year being the best performing major stock index in the world with more than 37% total return for investors this year, based on the FTSE A share 200 index. This is a reflection in the growth from the country’s deregulation and market liberalization initiatives, the Chinese government’s stimulus measures and particularly from increased weighting in MSCI’s emerging markets index. China has the second-largest stock market in the world and is growing fast.

The recent de-escalation of the trade war, when combined with the strong earnings has resulted in US markets hitting record highs. Thursday the announcement from both China and the US was that they had agreed to cancel the December 15th tariffs, however, today Trump announced that there are “no agreements on rolling back tariffs” yet but that China wants to make a trade deal. He did say that the US/China deal will be signed in the US which is still movement in the right direction. The tariff news was particularly positive because the December 15th tariffs were the ones targeting items that would have had the biggest direct impact on household budgets of any other round of tariffs already in place. Items including clothing, shoes, cell phones, laptops and toys were all on the newest list. It’s unlikely that phase two will be completed before the election but finalizing phase one is an important step and we see that happening soon.

Our Strategy

Momentum is solidly positive right now and the breakout to new highs seems to be holding. The 10yr Treasury yield is climbing which is a positive for markets as money flows from bonds to stocks and our portfolio positioning has been excellent to benefit from this rally. The defensive sectors have slowed down as the cyclical ones have resumed their leadership. We’ve been monitoring valuations and taking profits where we see opportunity to cash in. We then look to redeploy that cash into positions that show better value and upside opportunities. This process of high grading the portfolios will continue as the markets climb. At the same time, we’re also ensuring we have some fixed income to temper the volatility of the investment portfolios. With longer term annualized returns back on track to historic norms, we are still cautiously optimistic that this rally has some legs. There will be a period where it eventually pulls back, and we’re ready for that, but right now, we are taking advantage of the upward swing. With more stable global economic data, including in China and Europe, and solid U.S. consumer and employment data, we think this bull market run has further to go over the next year but requires some patience.

Chart of the Week

Manufacturing industries in the U.S. and China seem to be moving in opposite directions. In October, a private company survey of China’s factory activity shows it expanded for a third consecutive month, while U.S. manufacturing contracted for the third month in a row. October was the largest deficit the U.S. manufacturing industry has had with China’s in the nearly eight year history.

Data: Caixin, Institute for Supply Management; Chart: Andrew Witherspoon/Axios

Beyond the Markets

It is that time of year when we come together to remember those who lost their lives in the First World War in 1918. Make your way to Victory Square or another location in your area to join in observing the parades and taking part in the moment of silence. Click here to find a Remembrance Day event taking place in your city.

“But the freedom that they fought for, and the country grand they wrought for, is their monument today, and for aye.”
—Thomas Dunn English

Listen to this week’s Making Cents of the Markets on CKNW. We gave listeners an update on earnings and the trade dispute, discussed currency fluctuations, and dove into planning considerations for aging parents and their adult children. 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.