January 17, 2020
Making Cents of the Markets
Be in the Know
January continues to be a strong start to the year as markets head higher globally, with Canada and the US both up over 1% on the week. There were many events attributing to this strength including earnings season, positive trade news and economic data.
As we have previously stated, earnings growth will need to be a major contributor to market returns this year in order to justify the market’s latest advance. This week, the US financial sector earnings were headlined with the majority of companies beating analyst estimates and heading higher. The start of earnings season for the transportation sector saw relatively weaker earnings and guidance updates. There’s still another four weeks to go in this Q4 season so there are many more to watch.
President Trump signed an initial trade deal with China on Wednesday with the expected level of pomp and pageantry, bringing the first chapter of an extended and economically-damaging fight with one of the world’s largest economies to a close. The pact is intended to open Chinese markets to more American companies, increase farm and energy exports, and provide greater protection for American technology and trade secrets. Furthermore, China has committed to buying an additional $200 billion worth of American goods and services by 2021 and is expected to ease some Chinese tariffs previously placed on American products. US tariffs remain in place for “phase two” of the trade deal that is not expected to be resolved until after the 2020 US election.
American economic data continues to improve as US housing starts jumped to 1.6 million in December on an annualized basis, which is the highest since 2006. We also saw a rise in retail sales and a drop in initial jobless claims within the Philly Business Outlook that clearly points to an economy doing just fine. While the 6.1% GDP growth reported by China was the lowest in 29 years, it was in-line with expectations which actually helped abate any fears of further growth slowing down due to the toll of the trade war. The signing of “phase one” of the trade deal should provide some stability that may be already starting to show in the data.
The markets continue to show resiliency and head higher. The S&P is now up 12 of the last 14 weeks and remains in a strong uptrend. Currently, the S&P 500 is trading at 18.5 times forward annual earnings which is a 24% premium to its 10-year historical average which means market participants are expecting a lot of good news to come. If it does not come as expected, then we will likely see the market pullback as it continues to remain stretched in the near-term. We remain bullish over the intermediate term and continue to monitor all news events closely.
Our portfolios continue to follow the markets higher and we’ve continued to take some profits on positions that seem to be extended in valuation. We remain diversified with growth and value exposures which has helped the mandates benefit from the latest advance. We are confident with our current exposures, the profit taking we’ve been taking and the momentum that we have behind us.
Despite recent strength, we remain disciplined with our cash balances as we do not want to chase companies that have outperformed and are more extended than the overall market. We prefer to remain balanced and comfortable with our exposures as we wait for market weakness before re-allocating. Areas that we are watching closely are the technology and semi-conductor sectors that have been leading the market over the past few months.
The backdrop for positive returns this year remains intact and expectations for a mid-single digit year is wide-spread. There will inevitably be surprises and pullbacks along the way, however, as always, we will actively manage our exposure to the markets, our cash levels, our risk levels and the portfolio positions.
Chart of the Week
One of the most notable pieces of economic news this week was US housing starts breaking out to a 13-year high of 1.6 million annualized housing starts. The data suggests that the US housing market recovery is back on track and could support the longest economic expansion on record.
Source: Federal Reserve Economic Research
This is an important economic indicator that clearly shows that the US economy is on a solid footing for the near-term as the previous decline in housing starts preceded the last recession in 2008. Builders said they “continue to grapple with a shortage of lots and labor while buyers are frustrated by a lack of inventory, particularly among starter homes”. Clearly this is not a sign that we are close to a recession but rather supports the current trend of the economy and market.
Beyond the Markets
It seems like just yesterday most Metro Vancouver was stuck indoors as a result of the massive amounts of snow we received this week! But now that there are signs of slowing, it appears that there will be a good opportunity to venture outside. And what a time to do so as January 18th marks the beginning of the Vancouver Hot Chocolate Festival. Over 40 cafés will be participating this year, so head down and check out one of their special hot chocolate creations for a limited time. With flavors such as “Mum’s Apple Pie” and “Deep Chocolate Dreams” there is sure to be something for everyone!
Listen to our latest Making Cents of the Markets segment on CKNW. We gave listeners an update on the US/China trade deal, gold and oil, as well as retirement planning for business owners! 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!