May 31, 2019
Making Cents of the Markets
Be in the Know
Trade battles were the major headlines again this week, clearly impacting the markets with the S&P500 down 2.6% and the TSX down 1.2%. Talks with China appear to be breaking down and there is much less optimism a deal will get done in the short-term. China has now threated to restrict the flow of rare earth metals, of which they own a significant market share (they produced 70% of total rare earth metals in 2018). The dollar amount is small, however, the affect is larger as these metals are used for manufacturing products from smartphones to electric vehicles and wind turbines. In addition, China has started to make a list of corporations and people they deem “unreliable entities” in response to the business restrictions on Huawei in the US. Expect more jockeying and tit-for-tat responses before the G20 meeting on June 28-29.
The biggest news of the week came in the form of an unexpected tweet on Friday. President Trump threatened to launch a round of tariffs against all Mexican imports unless they address illegal immigration. The tariffs would start at 5% on June 10, and escalate by 5% each month until hitting 25%. The cost of this impact? Another tax on the American consumer. Using the 2018 trade figures as a baseline, CNBC estimates that the tariffs would tax US consumers $18.6 billion at 5%, and escalating to nearly $93 billion when they hit 25%. Of course, those figures do not take into account all of the impact. The integrated supply chain for the auto industry causes parts to crisscross borders multiple times, which would be disrupted by such tariffs. Production processes would have to be changed in substantial ways to reduce the impact. As of writing, there has been no response from Mexico, but retaliatory measures are surely going to be announced at some point. It is also possible there is a legal challenge to these tariffs from the Chamber of Commerce, so we will see what happens over the weekend. Hopefully cooler heads prevail with an agreement on immigration so that these tariffs do not go into place. However, we are back to waiting for the “Tariff Man” to tweet and have had those hopes before.
While there has been some growing concern about economic signals, we think it premature to be throwing in the towel. Growth is slowing, but overall, the US macro picture is not showing significant cracks. Next week we will get some major updates, with the May ISM manufacturing data, the ISM non-manufacturing data, and the jobs report on Friday. We are watching these and other economic indicators intently over the next few weeks to see if any roll over with the newly heightened trade tensions. However, the odds of a recession are still low over the next 12 months. We are still comfortable with our current Legacy positions and do not think it’s prudent to sell when any headline could flip the script to the positive. Often, when things seem as bad as they can be is right when things rebound. Despite the S&P500 being off only about 6.5% from their highs, we are starting to see very oversold conditions that are ripe for a relief rally.
Another thing that’s different today in comparison to last fall, when the markets sold off heavily, is the positioning of the Federal Reserve. We have mentioned this before but it is worth re-emphasizing. They are firmly on hold with rates, and the market is now pricing in at least one rate cut this year, with the odds of two cuts rising (the September and December meetings are the most likely dates for any cut). While we can’t say we want a rate cut, as that means that the economy is weaker than expected and needs a little push of the gas pedal, historically rate cuts have provided significant boosts to equities. That positioning is likely holding up equity markets right now, as it was the opposite last year in December when they said they were intent on hiking two to four times in 2019 and were “a long way from neutral” rates. In addition, we’ve talked about how next year is an election year, and Trump moreso than other presidents sees the stock market as a gauge for how well he is doing. That should help keep markets from going too far to the downside, one would think.
Chart of the Week
Pullbacks are normal! From Raymond James & Associates (USA), it is important to keep perspective, even during the course of bull markets. Since 1980, there has been an average sell-off of 15.1% each year, despite very positive markets during that time period. The average pullback during bull market years is between 8-12% annually, and we are just over 6.5% off the highs now:
Beyond the Markets
This Saturday June 1, Hats Off Day returns to the streets of North Burnaby. Running along Hastings Street from Boundary Road to Gamma Avenue, this fun-filled event showcases some of the best local talent and merchants. The parade begins at 10:00am. Then at 11:30am the festival begins, with food, music, classic cars, and activities for people of all ages to enjoy! Click here to learn more.
Or if you prefer to take part in a Sunday-Fun-Day, make sure to check out the Greater Vancouver Food Truck Festival on June 2 at Town Centre Park in Coquitlam. The festival features over 28 different food trucks so you are sure to find something delicious! Click here to learn more.
Listen to this week’s Making Cents of the Markets on CKNW. We talked all about the Canadian housing market and the financial struggles of millennials. 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.