May 17, 2019
Making Cents of the Markets
Be in the Know
Trade was in the spotlight this week, with tweets and headlines dominating. Despite the gyrating market, we ended the week only slightly lower in the US, down 0.8%, and in Canada we actually ended slightly higher, up 0.7%. This comes after a massive decline on Monday that saw the Dow Jones Industrial Average close the day off some 600+ points, so it was positive to see the market gain most of that back during the week. Part of this was due to the sigh of relief the markets had as the US chose to delay any decision on auto tariffs against the EU and Japan for six months (something we will revisit at that time). This news came alongside progress on the removal of the steel and aluminum tariffs in North America, although the final result is yet to be revealed as of writing, they are said to be lifted as soon as today.
As for economic readings this week, we received some disappointing retail sales and manufacturing numbers out of the US and China on Wednesday, but concerns were alleviated by Friday. Another strong labour market reading with jobless claims coming in less than expected, with strong housing data also released in the US this week. US consumer sentiment hit 102.4 vs 97.5, a 15 year high, and leading indicators grew 0.2%. Our recessionary signals aren’t flashing warning signs within the next 12 months with the unemployment rate at multi decade lows, leading indicators expansionary, sentiment levels elevated, and the housing market rebounding. Yes, there was some weakness out of manufacturing this week, but that represents less than 12% of GDP growth in the US. Retail sales are something to keep an eye on, but one month does not make a trend, and March retail sales were growing at the fastest pace since 2017.
Vancouver was mentioned during the Bank of Canada’s (BoC) annual financial system review on Thursday. They noted contentment with the national housing market, as the new mortgage stress test rules and positive fundamentals were evident, but that there was softness in our local market. Governor Poloz went so far as to say that a 20% market correction was “conceivable” but there would be stabilization once the “froth” comes out of the market. We tend to agree with the comments, as the affordability issues in Vancouver alongside the drop off of selling activity set up for a flat to negative housing market for the foreseeable future.
We continue to wait for rumours to turn into facts, but so far that has yet to happen with trade news between the US and China. Thus, we have held steady in our portfolios this week while we wait for more certainty. Trump and Xi should be ready to make a deal as there is too much at stake for both nations, which is why we are ready to pull the trigger. As a reminder, we are still only about 3% off of the high in the US stock market. The economic fundamentals are stronger than late last year, and corporate earnings have been coming in well above expectations, so we think new all-time highs are more likely in the medium to longer term. According to Credit Suisse, 94% of the S&P 500’s market cap has now reported, and expectations have moved to earnings per share (EPS) growth of 2.5% to 2.9% for the quarter. In January, this was forecasted as the weakest quarter of the year with consensus EPS contraction, not growth.
When you look at the last major pullback in Q4 2018, there are a few significant differences. Remember last year, stocks were hit by a ‘quadruple whammy,’ which featured negative trade headlines, interest rates spiking, China tightening monetary policy, and the Federal Reserve (Fed) tightening monetary policy. Well, we still have negative trade headlines today between the US and China, but the other three are no longer a headwind. The 10-year Treasury hit 3.25% in November 2018, whereas it is just under 2.4% today. China has been deploying massive monetary stimulus in their local economy. And finally, the Fed is firmly in hold mode on interest rates, with market participants looking for a rate cut if anything. That, along with the stronger economics and corporate earnings, keeps us from pulling the plug on stocks anytime soon, and should allow for a run throughout the rest of the year. Our thoughts are that President Trump knows what kicking the economy into a recession during an election year will do to his chances of a 2020 presidential bid, so he should be ready to deal if things show weakness.
Chart of the Week
US Consumer sentiment hit a 15-year high on Friday of 102.4 versus expectations of 97.5, the highest level since 2004! Consumers are clearly viewing prospects for the overall economy much more favourably, but we do expect some retreat in subsequent months with trade uncertainties increased:
Beyond the Markets
From now until July 14, experience Roald Dahl’s classic story, Matilda, live at the Stanley Industrial Alliance Stage in Vancouver. Adapted by award-winning writer, Dennis Kelly, Matilda the Musical tells the story of a remarkable and intelligent girl who overcomes obstacles with the help of her unique gift of telekinesis. The performance is sure to bring out the child in everyone, so pick up a ticket and immerse yourself in the world of Matilda Wormwood.
Click here to purchase tickets to Matilda the Musical.
Listen to last week’s Making Cents of the Markets on CKNW. We gave listeners insight into the trade wars between the US and China, financial advising across generations, and the “sell in May and go away” theory. Listen here.
Click here to read our latest North Shore News article for insight into the housing market and what it means for buyer choice and affordability.