Market Commentary

Making Cents of the Markets

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It was a shortened holiday week in the US, with markets closed on Thanksgiving Thursday and a half trading day on Friday. Consumers are getting discounts this weekend during the “Black Friday” deals, and early indications are that they are spending more than ever, especially online. Online sales are expected to hit $7.5 billion on Black Friday with already $4.2 billion worth of purchases online and Cyber Monday is expected to pull in $9.4 billion this year, a $1.5 billion increase from last year’s online sales and a record high according to Adobe Analytics data. The average American incurred over $1,200 in holiday debt in 2018, according to Magnify Money and Black Friday spending was likely responsible for a big chunk of it! Shop with caution. Stores look bare, but it is simply a sign of a fundamental shift happening in the retail space of more retail purchases moving online, with nearly half the revenue on Thanksgiving Day coming from smartphones. It seems the strong economy, employment data along with low interest rates is having an effect, setting up for a strong holiday season.

With lighter volumes though the markets, we still managed to see solid increases. The TSX rose 0.5% while the S&P gained 1.0% on the week, finishing with one of the strongest months up 3.4% for both the TSX and S&P 500 on the month.  It’s been five weeks since the S&P 500 first closed at a new record high and since then, it’s been hitting new record highs at a pace of more than once every other day. Would you believe that there are still industry groups trading below their 50-day moving averages? The current reading stands at 91.7% which is a strong number in itself though over the last five years there have been numerous periods where a higher percentage (and even 100%) of industry groups traded above their 50-DMAs, and the most recent was back in July.

Hitting new highs and then breaking that multiple times is not a bad thing. In fact, it’s a good sign and quite normal when growth is driven by good fundamentals.  We mentioned it last week as well but driving this market rally is a combination of continued positive Q3 earnings, optimism on trade, good economic data trends, a supportive Federal Reserve and now, we’re into a good seasonal period.

We had a pause in the streak last week but with China signaling that it’s willing to crack down on intellectual property theft, the higher momentum resumed. It took another breather today based on China’s disappointment with the US signing new Hong Kong bills. Otherwise, there isn’t a lot of concrete trade news – keeping in mind that not every headline has to be trade related. There’s still the regular weekly and monthly economic data to analyze, global sentiment surveys, and of course, corporate profits.

Consumer confidence, a monthly data plot, is still strong compare to historic readings but for November had fallen for the fourth straight month. The magnitude of the decline hasn’t been particularly large, though the trend is now tied for the longest monthly losing streak of the entire expansion. We saw this same four month slide from March through June 2012 so it’s something we aren’t basing big decisions on but we do notice that the reading both declined and also came in weaker than expected. While the holiday shopping season may reverse this short term downward trend, it’s something to note.

Even with a holiday and a shortened session today leaving no US releases in the past 48 hours, it was a very busy week for economic data with 36 releases in the first 3 days. Most of this data came in stronger than expected or above the prior reading where there were no forecasts. While the bulk of the week’s data was strong, manufacturing data, namely from the regional Fed indices, was mixed. Chicago and Richmond were worse than expected but Dallas showed better than anticipated improvement. On the bright side, other manufacturing hard data like durable goods came in much stronger than both the previous month and consensus forecasts.  Housing data was also solid this week with better than anticipated home price growth shown in two of the three indicators: the quarterly Home Price Purchase Index, FHFA, and Case-Shiller (only the Case-Shiller index was weaker than expected, albeit up from the prior month). The second release of third-quarter GDP was the most notable indicator of the week with a much stronger than expected reading which showed the economy grew by 2.1% QoQ versus estimates of a 1.9% growth rate.

This illustrates that the US economy is expanding. It’s still moving forward at a healthy pace. Inflation is sitting at 1.9% which is right where they want it so there’s no immediate pressure to move interest rates in either direction.

Our Strategy

As good as conditions have been, we are a little cautious on when the next pullback will come because we know it can’t go straight up. The fact that the markets have shrugged off almost all of the softer or weaker news is also something we are paying attention to. That’s not to say some stocks aren’t feeling the pinch when results don’t meet expectations. We’ve seen some companies see their shares take a double digit hit based on weaker profits or lower guidance for Q4. Notable names include Under Armour which dropped -14% after missing and having their accounting practices reviewed, Kohl’s, the department store,  fell 11% after missing on profits and lowering guidance and TripAdvisor has fallen -28% over last month since missing on both top and bottom line. This shows that you still have to do your homework and due diligence before picking stocks. But when you get the right ones, you can benefit when they beat expectations. For instance, Target, a company we own, that was up 12% after beating on earnings and up 44% since we bought it just 4 months ago. Disney, another name of ours, has risen +16% over last month and popped after beating on top and bottom lines. And CVS Health, which is one in our portfolios, is also +15% since reporting a beat on revenue and earnings

In the coming weeks, trade will still be in focus with the December 15th tariffs an important aspect to resolve. We keep hearing that phase one is almost complete and once official, will probably be a bit of a boost – though a lot of it is already priced in. Earnings season is essentially over with just a small handful of names over the next couple weeks and it’s been a good one. 75% beat expectations on bottom line which is higher than the 65% long-term average while top line beats are just a hair lower than long-term average of 60%. If you exclude the energy sector, earnings are 2% higher than a year ago on average. The next season, Q4 which starts in January, is expected to be about the same growth rate year over year, excluding energy.

We mentioned this last week but it’s worth repeating. It’s important not to chase gains. Don’t be greedy or complacent as markets hit these record highs. We’re optimistic ourselves for 2020 but cautious because should the trade deal fail and tariffs escalate, a quick correction is very probable.

Risk management requires you to think logically about the situation. Even if the trade deal gets delayed and tariffs do kick in, not everything will drop. Just like back in May when the trade deal fell apart back then as well, some stocks rose. You need to worry about companies that are most affected by trade and tariffs such as Apple, Caterpillar, and Deere.  We decided to get off the trade roller coaster with some of those names to reinvest in areas that don’t see these types of swings when trade news announced. Diversification is good as there is strength in a number of sectors that aren’t as sensitive to the trade news.

Chart of the Week

Black Friday actual sales and predictions of online revenue over the past four years.

Source: Adobe Analytics

Beyond the Markets

Ho, ho, ho! This weekend marks the beginning of December and the unofficial beginning of the holiday season. While there are many events taking place throughout the Lower Mainland, one of the most notable is happening this Sunday, December 1st. The 16th annual Vancouver Santa Claus Parade will be marching through the streets of Vancouver, spreading joy to all those in the area. This event will feature music, costumes, food, and tons of fun – you might even catch a glimpse of old Saint Nick! Click here to find the best viewing spots.

Listen to this week’s Making Cents of the Markets on CKNW. We gave listeners an update on the markets and dove into year-end tax planning strategies for 2019. 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.