April was another strong month as the market continued its recovery from the lows of December. This continues to been driven by the topics we have covered in the previous market reviews of the year. This rise feels very similar to 2017 when the US equity markets faced very little opposition and continued to run higher and higher without a real pause or correction. While issues did present themselves, nothing materialized and then we had a bit of a move upwards to new highs. It is also worthy to point out the US Federal Reserve raised rates three times that year.
We were very fortunate in 2017 that nothing came along to cause a large market sell-off. That event came quickly in February 2018, about one month after the US passed their highly anticipated US tax cut bill and began their tariff war. Similarly this year, we are waiting for a US/China trade agreement and moving up in anticipation. It is unlikely that this year we will be so lucky to receive a constant grind up without some sort of a market correction. That being said, the economies around the world appear to be in a mode of slow growth which is positive for investments and it does appear that there is more potential in the intermediate-term.
The US Federal Reserve spoke again on the state of the economy and gave the impression that they were very unlikely to cut rates, but kept strong on the stance that they were reluctant to raise rates. While the US Fed used to come out and speak every 3 months, recently they felt it would be better to communicate officially every month. This appears to come with positives and negatives. The good part is that you get more insight each month to where the Federal Reserve’s thoughts are heading, but on the bad side, there is a constant overthinking going into every word that comes out of Jerome Powell’s mouth. Fundamentally, nothing has changed since December, but his monthly speeches have created more volatility in the market every time he gets in front of the microphone and gives the world a piece of his mind. For now, it appears everything remains unchanged.
In Canada, we have once again decided to leave rates unchanged (as expected), but have taken a more dovish (less aggressive) stance towards rates. It does not appear the Bank of Canada will be increasing rates in the near future, something that was foreshadowed earlier in the month with the major Canadian Banks cutting mortgage rates prior to the federal rate decision. The biggest reason for this less aggressive stance would be the Bank of Canada has decreased its 2019 growth expectation from 1.7% to 1.2%, a pretty significant decrease but nothing surprising, as most analysts did this much earlier in the year. This is something that is in line with our expectations as the government has done very little to spur economic growth in this country. Some small measures have been put in place (i.e. oil transportation help on the west coast and decreasing small business taxes), but these will take time to turn into economic growth which is a historical measurement not a forward-looking one. As stated before, we do see the possibility of commodity growth and market appreciation towards the end of 2019, but the economic data would trail behind that. To add a little spice and uncertainty, this year in October, Canada will have their federal election. Looking at the polls, the Conservatives do hold a lead over the Liberal Party which may give investors hope of a more stimulated economy for 2020.
The US/China trade talk has been quiet as of late, which is nice and troubling at the same time. It’s calming because we do not have brash movements from the President of the United States creating a volatile market but at the same time a little worrisome because it is difficult to predict how these negotiations are going or how far apart or close together they actually are. We would imagine there would be more news around this going into the summer as the US Federal Election is in 2020 and there will be pressure on President Trump from the Democratic candidates going forward.
Brexit now has a new extended date: October 31st, 2019. After much deliberation and two years of very little progress, Britain has received its extension. While this is a lengthy-time period, it is hard to imagine them putting something significant together in 6 months that they could not do in the 2 years prior. More and more, the talk of another vote to remain part of the EU might be coming up in the future. So much so, that the British government has already prepared to launch a nationwide poll within 10 days if needed. With all of this, Trump Tariffs, and a slowdown in the Chinese economy, the EU is looking to keep rates low for some time as their growth crawls around 1.5%.
Move over cryptocurrency and marijuana, there is a new exciting investment on the block. The always flashy IPO! This year, there is a larger than normal amount of IPO’s coming to market and with some very recognizable brands. IPO is short for initial public offering, which means a private company will begin trading on the public markets. Usually, this entails the private company to offer new public shares to the public market at a predetermined price. The company sells those shares in exchange for cash, this is a great way for companies to raise a lot of money to expand the business. The first big one of the year was Lyft, the ride-sharing software company. After being private since 2012, the company decided to go public about 7 years later looking to raise $2 billion in new money from investors. The IPO price was set at $72 and quickly jumped to $88 on the first day only to decline over the coming week to $54. The next notable one is Pinterest, which quickly jumped from $25 to $35 in less than two weeks at the end of April. We always recommend being wary of these flashy IPOs as they come out, as they tend to generate a lot of hype and that hype leads to investors overextending themselves to get a part of the action. There will be a lot of volatility in their stock prices and you most likely will be able to pick them up cheaper in the near future. There are many big names coming up for 2019, Uber, AirBnB, Beyond Meats, Impossible Meats, Slack, and WeWork.
Our investment thesis remains the same with a balanced approach especially with markets performing well. We believe in a mix of Equities, Alternatives and Fixed Income. At this point, we believe to not reach for returns in the public or private markets as recent returns have been slightly above averages. We still believe there are a lot of great opportunities even at these levels in equities, but investors will need to be much more selective going forward. For more information, please do not hesitate to contact us.
Konrad, Justin, and Merriel
More articles and information is available at www.lkwealth.ca .
Content Sources: Bloomberg, Trading Economics, Yahoo Finance, Reuters
Disclaimer: This newsletter is solely the work of Konrad Kopacz and Justin Lim for the private information of their clients. Although the author is a registered Investment Advisor with Echelon Wealth Partners Inc. (“Echelon”) this is not an official publication of Echelon, and the author is not an Echelon research analyst. The views (including any recommendations) expressed in this newsletter are those of the author alone, and they have not been approved by, and are not necessarily those of, Echelon.
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