February 7, 2020
Making Cents of the Markets
Be In The Know
Well that market pullback was short-lived, as markets bounced back this past week and wiped away the previous week’s losses with the Canadian and US markets up 2% and 3% respectively. North American markets broke out to all-time highs as there were numerous reasons to be bullish with positive economic data, strong earnings updates, and an effort by China to reduce tariffs on $75 billion worth of American-made goods. This is an encouraging step that signals China’s intention to hold up its end of a trade truce to stimulate trade for both economies in the face of negative near-term effects from the coronavirus.
This week we had numerous economic updates that focused on manufacturing and employment in the US and Canada. Manufacturing indicators showed that we are starting to see a pick up in manufacturing activity in North America which has been part of a larger positive acceleration, globally. Employment gains were robust in both Canada and US as both economies beat expectations with 35,000 and 225,000 jobs being added respectively in the month of January. Unemployment rates remained near multi-year lows at 5.5% for Canada and 3.6% for the US. All of this data confirms that our local economies remain healthy and that the probability of a recession this year remains low.
More than 60% of the companies in the US have reported earnings with 71% of them beating analyst expectations. The overall earnings growth rate has been low but is far better than the 4% contraction initially expected by analysts. The ongoing concern for many international companies is the potential impacts from the coronavirus as many of these international companies have lowered guidance for the upcoming quarters. The companies affected are those with operations or products in China as people are not going out or shopping due to fears of transmission. Due to previous trade tariff concerns, we have limited our exposures to these companies while we continue to monitor recent developments.
Lastly, President Trump was officially acquitted on charges that he abused power and obstructed Congress when he allegedly sought to pressure Ukraine to investigate his rivals. The votes fell far short of the two-thirds majority required to convict and remove the president from office. Trump remains favored to win the 2020 US Presidential election as his odds have risen in the last 6 months while the Democratic candidates continue to debate with each other to become the primary Democratic candidate. We will have more clarity on who will likely be the Democratic Party leader after “Super Tuesday” on March 3rd when 14 states and territories cast their ballots for who they think should become the nominee. Bernie Sanders and Joe Biden remain the favorites to face off against Trump in the 2020 Presidential Election. This will be very important for markets as they have typically done better when the current party stays in power.
After only 5 weeks of 2020, we have seen a very strong start to the year as markets continue higher dismissing fears around the trade tariffs, the coronavirus, and potential impeachment. This is because the focus has shifted on company earnings that have beat analyst expectations and now are expected to increase nicely in 2020. Most of our portfolio companies have reported as well, with approximately 70% of them beating earnings and revenue estimates which is in line with the market rate. We have been pleased with these results and have made minor shifts to high grade the quality of our portfolios.
These shifts include selling off laggards that are no longer outperforming the market due to slowing growth or weakening fundamentals and adding market leaders that have exhibited stronger qualities than their peers. Despite these shifts, we have largely maintained our exposures with a bias towards large high quality companies that the market has favored over the last year. We always follow the actions of institutions or “smart money” which has avoided smaller companies or commodity based exposures like energy that we remain bearish on.
We understand that volatility is normal within markets but still have not seen any real weakness in US markets since September of 2019, when they only pulled back 4%. By studying historical data, markets typically pull back greater than 6% one to two times per year which are typically great buying opportunities. This understanding allows us to be patient with our remaining cash exposures so that we can add to or buy our favorite companies at lower prices. No one can forecast the reasons or timing of these periods of market weakness, thus it is simply best to have a plan and to be prepared to act. With that said, we have our target list ready and look forward to the months ahead!
Chart of the Week
We realize that we have mentioned the coronavirus numerous times over the past week but recognize how important this information is to all of us given the fears and potential impacts. North American markets have clearly shaken off these fears and continued higher but are they correct to? This week’s chart of the week highlights past instances of disease outbreaks and their near-term effects on the market:
As one can see, the initial outbreak creates fear that typically weighs on markets for the first month but then markets continue higher as these fears dissipate due to global efforts to stop the disease in its tracks. In comparison, the coronavirus was first reported on December 31st 2019 and the MSCI World Index weakened 3% in the first month but has already wiped away this loss in the first week of February.
So where are we today with the status of the virus? Infections continue to rise above 31,000 people globally with over 600 deaths reported in China. The positive news is that the rate of infection continues to slow and China has begun testing an antiviral drug in coronavirus patients. Global efforts to contain and reduce the effects of the virus continue to strengthen as we (and markets) expect this situation to dissipate over the coming 6 months.
Beyond the Markets
This weekend will be double the fun at Rogers Arena! The excitement is set to begin tonight as the Vancouver Warriors take the floor against the Buffalo Bandits for what is sure to be an exhilarating lacrosse game. Keep in mind that it is throwback night at the Arena so dress up in your 1990s jeans and jam out to some classic hits! The fun continues on Saturday as the Vancouver Canucks face off against the Calgary Flames. Despite their three game losing streak, the ’Nucks are ready for battle as recent news suggests that Elias Pettersson will be lacing up following a lower-body injury.
Listen to our latest Making Cents of the Markets segment on CKNW. We gave listeners an update on the Canadian economy, earnings season, year-end fee and performance statements. 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!