May 24, 2019
Making Cents of the Markets
Be in the Know
It was almost amusing watching the market move back and forth this week, with every day punctuated by a trade headline to the positive or the negative. On Monday, for example, stocks were lower as the US enforced sanctions on Chinese telecom giant, Huawei, causing several large US companies to suspend business activity. Tuesday, President Xi Jinping said China is embarking on a “new Long March” referencing China’s civil war in the 1930s, causing market jitters. However, markets rebounded as temporary licenses were granted to companies for 90 days to continue business with Huawei (quite the one day turnaround on sanctions). Then on Wednesday, China stated that the trade war is pushing them “to rethink economic ties with the US”, and on Thursday China said talks can’t continue unless the “US addresses its ‘wrong actions’”. Markets pushed lower, only to rebound late in the day as Trump announced that the recent Huawei sanctions could be part of a deal on trade. The ping-pong of headlines can be dizzying at times, but at the end of the day, this is likely posturing by both nations. We will be watching for tug-of-war updates this weekend.
Speaking of geopolitical mishaps, it has been a while, but we must talk about some Brexit related news. On Friday, Prime Minister Theresa May announced she will be stepping down, after a grueling battle trying to get her withdrawal agreement through parliament. The writing has been on the wall for a while, after several missteps and gambles taken in her tenure that all failed miserably. The European Union (EU) has signaled that her successor will not get another chance to renegotiate a new deal, which means that the UK has three possible directions going forward after a new prime minister is elected. The first is to revoke Article 50 and cancel Brexit, the second is to crash out of the EU without a deal, and the third is to pass the withdrawal agreement through. Of course, the EU could be bluffing about renegotiations, but it would be foolish to test that bluff by chancing a “no-deal” Brexit. We still think the final outcome will be decided by another referendum down the road, but there will likely be more twists and turns along the way.
With every overnight headline on trade moving the markets, we made no changes this week. It is prudent to wait for more developments before trading in this type of market. Our base case scenario still assumes that cooler heads will prevail, and something will get done. We are not sure how solid any deal will be. With the increased tariffs, the effects on the overall economy could be getting larger, especially on consumers and their sentiment. This is something that we are watching that will likely show in the numbers next month. All eyes are on what happens with the G20 meeting on June 28-29, where hopefully Trump and Xi will meet to get talks back on track.
Remember a few key things, every time the market has had a significant drop, the Trump administration has come in to calm the market nerves and save the day. The 2020 election is only 1.5 years away, and we would be surprised if the current administration will allow a lot of weakness before an election year. Even this morning, after a large move to the downside in the markets on Thursday, President Trump predicted a “quick resolution to the trade war” (without providing evidence to confirm). The increased tariffs have yet to take effect, as it was only on goods shipped after May 8, which have yet to make it to America. June 1 is when the retaliatory tariffs go into place from China. For these reasons, we have not become more conservative despite the uncertainty.
Chart of the Week
From our friends at Raymond James & Associates (USA) in their Portfolio Strategy, the S&P 500 price to earnings ratio (trailing 12 months) remains at 17.2x, in line with the last three months. This will likely be where it stays until trade gets resolved one way or another:
Beyond the Markets
Head down to the Hastings Racecourse this weekend to experience the first round of the family-friendly Dog Days of Summer, where the cutest of pups playfully compete for top spot. This weekend, the ever-popular bulldogs will be racing! However, the racecourse will also be hosting corgi races in June and wiener dog races in July. In between races, make sure to check out the food trucks, craft beer, and live music taking place track-side!
Click here to learn more.
Listen to this week’s Making Cents of the Markets on CKNW. We briefed listeners on trade, leverage and DSC, as well as how to find an advisor who looks out for you. 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.