Market Commentary

Making Cents of the Markets

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Be in the Know

After a strong rally over the past month, global markets took a breather and pulled back 4% to 5% due to concerns around a second wave of COVID infections in the US and a disappointing growth forecast from the US Federal Reserve. Over the last few days, we have observed a rising trend of cases and hospitalizations in southwestern states as people return to work and lower their guard when attending public places. US Treasury Secretary Steven Mnuchin was adamant that the US will not be shut down again which is our belief as the goal of many states and provinces is not to have zero cases (an unrealistic ideal) but rather to ensure safe practices and limit hospitalizations.

On Wednesday, the US Federal Reserve voted to keep benchmark interest rates near zero and indicated that they expect rates to stay low for years to come until the economy returns to full employment. Global markets sold off Thursday as they were dissatisfied with the Fed’s forecast for US GDP to decrease by 6.5% in 2020 before bouncing back 5% in 2021. The Fed also expects unemployment to remain high at 9.3% by the end of 2020 before falling back down to 6.5% in the following year. Most of this information was known before this announcement, so perhaps investors simply took these news updates as reasons to take profits after a strong rally off of the lows.

Pullbacks are normal throughout any bull market as they typically occur multiple times per year within healthy uptrends. We have been relatively defensively positioned and welcome this recent weakness as we continue to be active and re-allocate equity exposures into leading growth-related sectors. Markets continue to hold up in a bullish manner so we remain confident in the economic recovery and open minded that there will likely be bumps along the way.

Our Strategy

This week we decided to trim certain equity positions with strong profits to raise cash in case the current pullback continues in the coming weeks. A further pullback would create the double bottom we have referenced previously, though it wouldn’t be expected to be as deep as March and wouldn’t be overly concerned with this possibility recognizing that markets were extended in the short-term and could use any reason to weaken further. A lot of good outcomes including a smooth economic recovery have been priced into the recent rally so we must remain disciplined and execute based upon our experience and not what the latest hot trend is.

One recent trend has been an influx of retail investors into risky, struggling companies like car rental companies, big box retailers, and airlines. Many of these stocks rose exponentially as investors chased recent returns only to see most of those gains fizzle out by the end of the week. We believe that this is speculative behavior and prefer to focus our efforts on quality companies that have strong balance sheets and future growth prospects. We will leave the speculation to the day-traders and continue to focus on successful long-term investing.

Chart of the Week

We again shift our attention towards the relationship of the US vs. Canadian dollar. Throughout the past 2 years, holding US dollars has proved to be a strong hedge as it has appreciated against the Canadian dollar, especially when markets have come under pressure. This can be seen by the 3 blue arrows in the 3-year chart below which highlight periods of strength in the US currency:

Source – Stockcharts.com

We have been focused on the US equity market for many years mainly due to the fact that it has been one of the world’s strongest and largest markets with many more quality companies than in Canada. Yet in recent weeks, many investors have become concerned about the declining US dollar as oil rebounded off of the lows. We remain confident in our positioning in US companies and overall currency as the long-term uptrend remains intact and due to the natural hedge it provides during periods of market weakness.

Beyond the Markets

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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 provides 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.