January 10, 2020
Making Cents of the Markets
Be In The Know
The first full trading week of the year is over and the market continues to show its strength, climbing roughly 1% in both Canada and the US, as the positive trade tone and seasonality have supported sustained momentum. The S&P has now been up in 11 of the last 13 weeks and remains in a very strong uptrend. In a market like we are in now, it is important to get broad based support from many different areas and we are seeing just that. 10 of 11 S&P sectors are above their 50dma and 6 of 11 sectors are above their 200dma. While the market has proven resilient in the past week with several intraday reversals after trading lower overnight, and overall breadth looks good, there are a few developments to keep an eye on.
Even though the technical backdrop remains healthy, we believe the general market is stretched to the upside (10% above the 200-day moving average) and likely in need of consolidation. We would not be surprised to see a pause or light pullback and view initial support at 3212, followed by 3191 and the 50 DMA at 3150. A move to this level (~3.3% lower) should be viewed as healthy, and we would use it as a buying opportunity.
We believe earnings growth will need to be the major contribution to market returns this year and expect solid earnings growth in 2020 of 5.5%. Q4 2019 earnings season begins next Tuesday, so corporate results could reintroduce some volatility back into the markets at least at the company level. The US and China are also expected to sign phase one of their trade agreement next Wednesday the 15th. Q4 earnings estimates have remained very stable over the past two months, albeit still reflecting a -1.1% earnings contraction, if actual results follow a similar “beat pattern” as the first three quarters of 2019, final results are likely to finish closer to 2% growth. The average S&P 500 company is expecting Q4 earnings growth of 3.5% currently.
Tensions in the U.S. and Iran seem to be easing following President Trump’s remarks saying he wanted peace in the region and called for a new nuclear deal. He also said that Iran “appears to be standing down” and that “we must all work together toward making a deal with Iran that makes the world a safer and more peaceful place.” These comments, along with the subdued retaliation from Iran, helped investors continue their “risk-on” appetite. The backdrop of a partial trade deal with China and Fed Chairman Richard Clarida saying the U.S. economy remains in a “good place” is adding to the bullish sentiment.
The China-US trade deal was overshadowed by the Iranian tensions this week but China officially confirmed that Vice Premier Liu He will visit Washington from Jan. 13-15 to sign the Phase One trade deal. The agreement reached last month is expected to cut tariffs and boost Chinese purchases of US farm, energy and manufactured goods while addressing some disputes over intellectual property. However, no version of the text has been made public, and Chinese officials have yet to publicly commit to key points such as increasing imports of US goods and services by $200 billion over two years.
We continue to benefit from the market’s climb as we have maintained our equity allocations. The spike in gold prices following the Iranian conflict lead us to sell half our position in the bullion and take some profits as we believe the yellow metal could pull back and we wanted to keep some of those returns. We may look to bring it back up to the full weight again if it settles back down and we see an attractive entry point. While gold hit 52-week highs this past Monday and has also seen a strong uptrend over the last year, the performance has still lagged equities and it’s unknown how long short term moves in commodities like gold and oil will last.
We’re also monitoring our exposure to geographic areas, like Europe, or to sectors that may see some fundamental weakness in the future and adjust accordingly. We believe markets will continue to move higher this year, not without some volatility, but leading up to the election there are tailwinds helping push forward through these headwinds we get from time to time. The threat of war has come up a few times over the last year or two. Not that long ago, the big fear was over the US reaction to a nuclear North Korea. Then there was Syria. Now Iran. Also keep in mind that when we reviewed market reactions during the major wars over the last 100 years, it showed that the impact of war on US stocks was, perhaps strangely, largely positive, rather than negative.
Focusing on the health of the US and Global economies as we should, signs still look good and momentum is on our side. We stand ready to get defensive if conditions change and we have to adjust our outlook but at this time, we’re happy with our positions and the returns they are bringing.
Chart of the Week
From our friends at Bespoke: “It’s pretty remarkable to see that there has only been one day since 10/23 where the S&P 500 didn’t close at overbought levels (>1 standard deviation above 50-DMA). Talk about a relentless rally!”
Source: Bespoke Investment Group
Beyond the Markets
Some have been looking forward to it, others have been dreading it. However, no matter your feelings toward it, snow has officially arrived in Metro Vancouver! While there are many winter activities to do around the city, it is also the perfect time to stay indoors rather than attempting to venture outside. There is arguably no activity which depicts this weather as well as curling up with a good book so take advantage and peruse through The New York Times 100 Notable Books of 2019 to find your pick. The list features works from Ann Patchett, Stephen King, and Christopher Benfey and is sure to impress even the choosiest of readers!
Listen to our latest Making Cents of the Markets segment on CKNW. We talked about Iran and the risk of war on investments, the outlook for 2020, and finding an advisor that is right for you! Listen here.
Take a look here at our latest North Shore News article where we discuss how this is the time to ensure you take advantage of any tax-efficient decisions that need to be made before 2020!