January 24, 2020
Making Cents of the Markets
Be In The Know
Markets continue to be resilient in the face of any global fears as they moved only slightly lower this past week in the face of escalating conditions out of China with the coronavirus. The focus of markets was rather on companies reporting earnings as many large US multinational companies released positive results this week, which has supported the market’s latest advance.
Notable companies that reported this week include Intel, American Express, and IBM that all topped consensus estimates and abated fears of slowing growth through strong guidance for the 2020 year. Earnings for the S&P are expected to grow in the single digit range for 2020 thus it is good to see companies relaying positive guidance to their investors for the upcoming year, thereby affirming these expectations. Earnings growth drives higher valuations and prices for the market, so it is important to monitor these updates and their effects on the market closely.
As for economic events, the Bank of Canada maintained the overnight rate at 1.75% given tight labour conditions, a pickup in household spending, and inflation trending towards its 2% target. The Canadian dollar weakened as expectations remain for rates to stay steady in 2020 with a potential cut in 2021 or earlier if conditions weaken. Canada remains one of the only economies globally to hold their interest rates steady in 2019, as most of the world lowered their rates to provide financial support to their economies.
One aspect that could weaken the Canadian economy is the recent fall in oil prices as the commodity has declined almost 15% from the high on January 6 to its current price of $54 a barrel. This fall was a result of the diminished conflict between the US and Iran, lower demand due to the coronavirus, and greater supply coming out of the US. Though very difficult to forecast, oil prices are expected to range between $55 to $60 throughout the 2020 year. Given the volatility of this sector and current environment, we have no exposure to oil and gas producers and plan to avoid this sector until we see some significant improvements in the supply and demand picture.
While most global markets were flat on the week, Chinese and other emerging markets pulled back due to fears around the spreading of the coronavirus. This virus has spread mostly in China and has reportedly caused 26 deaths and sparked more than 800 confirmed cases. This will likely have some adverse implications for US companies doing business in China which we have limited exposure to. We have our thoughts and prayers with those affected as Lunar New Year celebrations begin. We wish all happiness, good health, and prosperity in the new year!
Our portfolios have done well thus far in 2020 given our balanced and diversified exposures. This diversification is much broader when compared to the overall Canadian market which has provided us with strong returns with less volatility. Our approach also allows us to take advantage of better opportunities as most of our investments are in US companies, many with global businesses. The US market is over 10 times as large thus we continue to look for new opportunities in both the US and Canada.
This week we had many of our portfolio companies reporting earnings, of which most beat estimates for earnings and revenues in the fourth quarter. More importantly, these companies re-affirmed their guidance for a strong 2020 year which provides us with the confidence to maintain these investments going forward. As results continue to come in, we closely analyze our investments and make changes when necessary. Lately, we have maintained our exposures but have trimmed certain positions that have done well and are trading at higher valuations. We have raised cash slightly as one form of defense so that we have capital to put back to work when markets weaken.
Speaking of defense, we hold exposures in defensive sectors such as telecommunications, utilities, and consumer staples. These have benefited us over the last year as they tend to do well when interest rates head lower. They also tend to hold up better than most sectors when the market weakens as their businesses are staples in our every day lives. These will be important exposures for our portfolios going forward and will change based upon the economic environment. If we start to see growth pick up, then we will likely decrease these exposures in favour of growth however if we see growth softening again then we will maintain and potentially increase them. This is just one of the ways on how we plan to play defense in 2020.
Chart of the Week
Despite the strong performance in stocks over the last 12-months, investors have been buying bonds as of late. Unlike in past market rallies when cash flooded into traditionally risky assets, money continues to move towards traditionally safer alternatives. One can see the strong inflows throughout the whole 2019 year in the chart below that shows total bond inflows and outflows since 2008:
Source: Yardeni Research Inc.
This theme has continued into the 2020 year as we saw a recent spike which was the highest amount of bond buying for any two week period on record. Strategists claim that investment grade or higher quality bonds are in favour as investors remain worried about a major stock downturn, but still want to chase yield and strong returns which these bonds delivered in 2019.
The recent spike was likely due to investors moving out of equities given the relatively high valuation of the market today. The reality is that the we are in an environment where global data has not yet pointed to a solid rebound or deterioration thus these investors may be getting ahead of themselves. We remain patient as markets can continue heading higher despite various investor fears.
Beyond the Markets
Happy Lunar New Year! Saturday marks the beginning of the Spring Festival and there are a plethora of events taking place across the Lower Mainland where you can join in the celebrations. One of the most notable events is the Vancouver Chinatown Spring Festival Parade. This signature event feature lion dances, marching bands, and much more. The parade begins at 11:00am but make sure to come early to find a good spot!
Listen to our latest Making Cents of the Markets segment on CKNW. We discussed the Canadian interest rate decision, oil, and active vs. passive investing! Listen here.
Take a look here at our latest North Shore News article where we discuss how to take advantage of any tax-efficient decisions!