It was a relatively quiet week with few surprises but there was still plenty of market moving news and developments to keep traders busy. In the U.S., economic data continued to be positive led by October orders for durable goods which rose 4.8%. That nearly doubled expectations and points to growing stabilization in the factory sector. Meantime, consumer confidence has surged since the presidential election as the University of Michigan sentiment survey rose to 98.3 from a preliminary November read of 91.6 and a final October reading of 87.2. Also in the U.S., Fed minutes from their meeting held three weeks ago were released Wednesday. The minutes largely confirmed expectations that a rate rise could be coming at the bank’s December 13-14 meeting. In Europe, business activity expanded the most in nearly a year in November according to a composite purchasing managers’ index released Wednesday. The index jumped to 54.1 from 53.3 in October which puts it at its highest level all year; any read above 50 signals economic expansion. In commodities news, the likelihood of a global oil production cut rose and fell this week in advance of key meetings starting Monday among OPEC and other major producers. Russia, Iran and Iraq said they were willing to debate cuts earlier in the week but were having second thoughts by Thursday. Turning to Canada, retail sales rose 0.6% in September in an early sign the Liberal’s fiscal stimulus plan is lifting domestic demand. It was July when the Trudeau government started sending cheques to families with young children and an uptick in sales data had been expected. Looking ahead, Statscan releases Canadian GDP data for September and the third quarter next week.
Major U.S. stock indexes closed in record territory (Dow, S&P 500 and Nasdaq) Wednesday in advance of Thanksgiving Day celebrations Thursday and an abbreviated trading day Friday. The TSX hit multi-year highs this week as well. For the four days covered in this report, the Dow rose 216 pts. to close at 19, 083, the S&P 500 jumped 23 pts. to finish at 2,204 and the Nasdaq ended 79 pts. higher at 5,380. In Canada, the TSX ended up 211 points. to settle at 15,075.
With the calendar year‐end fast approaching, this is an opportune time for investors to identify positions currently trading at a loss that may be sold for tax purposes. The task is made more challenging this year by the positive performance of equity markets in, among other regions, Canada and the U.S. – though we are the first to acknowledge positive returns, potential tax consequences notwithstanding, are more favourable than the alternative! At this juncture our investment strategy of remaining overweight equities / underweight fixed income with a bias toward cyclical sectors remains valid. However, it implies a more cautious approach is warranted in respect of defensive sectors, and we also note our enthusiasm for international and emerging market assets has waned in light of protectionist trade risks in the year ahead. Tax loss selling may provide an opportunity to re-position portfolios consistent with our outlook and investors’ long-term investment goals.
The world is stunned by the defeat of heavily favoured Hillary Clinton in last night’s presidential election, ending eight years of Democratic rule and sending the United States on a new, uncertain path. It is this uncertainty that will create higher volatility in the investment markets. Trump’s policies have been vague and limited in detail in the days prior to the election.
As the market adapts to the new Trump government, there will be higher volatility. The key point is not to overreact. A short time ago, BREXIT shock hit the markets and cooled quickly. The Euro markets have performed quite well compared to expectations.
A few weeks ago, we had raised our cash holdings in our managed portfolios in order to help prepare for the opportunities that this volatility will bring. During conversations with our mutual fund suppliers, they had done the same, holding cash in the range of 5 to 10%. In addition to holding cash, bonds yields have declined (that means the prices have increased, which is good). Both cash and bonds help provide stability during higher volatile equity markets.
While uncertainty also brings anxiety and perhaps catastrophic thinking, it is important to keep focused on the benefits of a well-diversified portfolio. We are maintaining equity holdings with sustainable dividends and stronger balance sheets (less debt and better earnings). I believe a big buying opportunity will occur soon. If Trump can act in any rational fashion around fiscal policy, the markets will take notice.
Just because you can check your investments on a minute-by-minute basis, doesn’t mean that you should. It has been demonstrated that investors who check their portfolio more frequently are likely to trade more and have lower returns. What’s the best way to avoid losses? Don’t look at your portfolio. Knee jerk reactions can lead to investment errors. The key to risk reduction is having a well-balanced and diversified portfolio holding cash, fixed income and equities in proportions based on your long-term goals and objectives. This asset allocation or recipe should not be changed based on short term markets, as its composition helps provide stability to ride out the bumps.
CNBC, Bloomberg TV, BNN, financial news channels: switch them off. It is my opinion the people working there are not in the business of providing good advice. They’re in the business of selling airtime and providing a captive audience to advertisers. The best way to attract attention is to appeal to the emotions and instincts of the viewers. The “experts” who want to be regulars on these shows must entertain. It is much easier to accomplish that by stoking people’s fears of a doomsday outlook or to get in early on the next superstar investment. These television channels are full of “breaking news” or “news alerts” with predictions of imminent doom or eternal bliss – often at the same time.
Opportunities will arise and we will measure the potential against our client’s best interests.
Currency: We expect the US dollar to maintain its value within a few cents however the Canadian dollar could sink to low 70’s
Energy: OPEC is set to meet on November 30th. Their opinion is that global demand for oil would rise in 2019. The price of oil will also affect the Canadian dollar.
Fed stands pat
Market attention moved from U.S. corporate profits to central bankers this week with the U.S. Federal Reserve the leading player. The Fed’s two-day policy meeting concluded Wednesday with no changes to monetary policy. Bank officials did, however, send signals that they intend to raise rates in December at their final scheduled meeting of the year. Turning to U.S. corporate profits, Q3 earnings season is on pace to snap a multi-quarter decline according to FactSet which forecasts a 1.6% blended earnings growth rate for the S&P 500. In the U.K., the Bank of England said Thursday it would shelve plans to lower interest rates as it forecast stronger growth and higher inflation for 2017. Meantime, a British court ruled that the U.K. can’t implement an exit strategy from the EU without a vote from Parliament. Turning to Japan, its central bank opted to leave monetary policy unchanged Tuesday. Short-term rates on some commercial loans remain at minus 0.1% and 10-year government bonds at 0.0%. Perhaps most notably, the BoJ extended its target date to reach 2% inflation to fiscal 2018 from 2017. In the euro zone Tuesday, GDP rose in the currency union by 1.6% yoy in Q3 matching the rise in the previous quarter. Canada also reported GDP data Tuesday that showed real gross domestic product rising 0.2% in August following a 0.4% rise in July. The dip in monthly growth reinforces expectations that the BoC will maintain a cautious stance when it comes to future monetary policy decisions. Looking ahead, two potentially market-moving events are ahead of us. The first is the U.S. jobs report due today (Canada also reports) and the second is Tuesday’s presidential election.
Stocks fell out of the gate to start November with most major equity benchmarks falling the first trading days of the month. In the U.S., the Dow shed 231 pts. to end at 17,930, the S&P 500 dropped 38 pts. to close at 2,088 and the Nasdaq gave back 132 pts. to settle at 5,058. In Canada, the TSX fell 202 pts. to finish at 14,583.
Volatility has arrived
We see equities continuing to outperform government bonds over the coming year given that the unemployment rate is likely to remain low in coming months as the economic expansion continues. We prefer a cyclical bias in our strategy across equities (resources/international) and fixed income (credit). Investors should use occasional bouts of weakness to deploy large cash holdings in our preferred segments. Certainly there are a plethora of geo-political pressures and risks that could trigger spikes in volatility in coming months including U.S. elections (which is resulting in elevated volatility as we speak) , Brexit & Eurozone break-up risks, terrorism, etc.
TSX Market Close November 4, 2016: Second last column is year to date price gain percentage, last column is 52 week price gain percentage.