Konrad Kopacz No Comments
It was a great start to the year, after a tremendous 2019. Investors have continued to buy the big names and we now have 4 companies (Alphabet, Amazon, Apple, and Microsoft) with market caps over $1 trillion dollars.
Coronavirus! With the amount of coverage, this was getting you would have thought we were heading into a zombie apocalypse. As fear rang through the streets and SARS fresh in everyone’s minds, people around the world canceled flights, vacations, and stores sold out of face masks overnight. While it’s better to be safe than sorry, this is most likely overblown. If anyone bothered to spend 10 minutes doing a couple of google searches they would have

  determined the following. ‘Novel Coronavirus’ is a type of virus very similar to the flu. Its cousin SARS was a more fatal mutation of coronavirus; the death rate of the current coronavirus is approximately 2% (in China), the death rate of SARS was around 10%. However, the death rate of the Canadian seasonal flu virus is around 1%, and the death rate of coronavirus outside of China is less than 0.5%. There were articles of people with coronavirus comparing it to a really bad cold. In the United States last year there were 80,000 deaths from the flu. Worldwide, there are 35,000 cases of coronavirus and 725 deaths (at the time of writing this article) with only 323 cases outside of China with only 1 death outside of China (Philippines). Of the death cases, 80% were over the age of 60, and 75% of the deaths had preexisting conditions (such as cardiovascular disease and diabetes). The seasonal flu is far more deadly than the current coronavirus and yet, no canceled flights, vacations, or plant shutdowns because of it. While the coronavirus has mostly been overblown, the economic ramifications of this are real. Airlines have canceled flights, business in mainland China has slowed, plants are shut down, etc. these actions have an effect on company earnings, operations, and reports. Let’s move on to bigger and more impactful things…

Source: Yahoo Finance

With all of this virus talk, we have all forgotten the assassination of the Iranian Major General Qasem Soleimani who was the leader of the Qud Force, a listed terrorist organization by the United States, Canada, Saudia Arabia, and Bahrain. This is actually not the first time he was targeted, in 2007 President Bush designated him a terrorist target but well into the Iraq war, the US officials felt it was a bad time to attack an Iranian terrorist. Then in 2011, he was targeted again by the Obama administration after a series of terrorist events and planned attacks on Americans. While the retaliation of this was mild (the Iranian government launched a missile attack on an Iraqi airbase), the repercussions could have been far worse but this potentially could be problematic in the future. As of right now, neither side appears to want to risk any escalation. The market and investors quickly shrugged off the attack and carried on with business as usual.

As expected President Trump was acquitted of the charges and will not be impeached. While this did make some headlines it really was a foregone conclusion, it would have required Republicans to vote against him in the Senate hearing which was very unlikely. Now he can use this as ammunition in the upcoming election claiming the Democrats went on a witch hunt after him and when all the evidence was presented he was “innocent the whole time”. We are still early in the race but it appears Joe Biden and Bernie Sanders are emerging as leaders to represent the Democrats. It will be interesting to see if late-comer Michael Bloomberg can make a push after recent reports have him spending $300 million on his relatively ‘short’ lived campaign. He seems to be more central than the rest and potentially could win more of the swing votes than the further left Biden and Sanders. Who the president of the United States is and their policy plays a vital role in the shape of the US economy and in turn the structure of the global economy.

In the US, inflation has begun to tick up. This is a vital metric for the US federal reserve as they (and most of the world) have an inflation controlled economy; they do their best to not allow inflation to run rampant and will curtail it by increasing interest rates. Through the end of 2018 and most of 2019, their inflation was sub 2% and now has hit above 2% for two consecutive months. The US will most likely not allow inflation to rise above 3% before increasing interest rates again. At that point, it becomes a more difficult balancing act as 2018 taught us when the US Federal Reserve raised rates too quickly and we had a significant sell-off at the end of 2018. Job growth remains good and wage growth remains stable, which means at this point they could absorb rate increases but how many rate increases would the economy be able to handle? There are still many Americans sitting on the sidelines without jobs, so there is still room for employment levels to continue to grow. Overall, the US economy is moving along well, and with a reduction in tariffs and better international trade they could actually be operating better in the future than they currently are.

In Canada, Justin Trudeau grew a beard. He also grew the national debt per person (factoring out inflation) at the highest rate ever for a Prime Minister, barring a world war. That is pretty impressive because historically there have only been two “growers” in this category and both were governing in the 1800s. Now he faces a very difficult decision of whether or not to approve a Teck Resources Ltd oil sands project in Alberta that would generate $70 billion in taxes and royalties, 7,500 jobs, and really help a struggling Alberta economy. However, this project would come with 4.1 million tonnes of CO2 per year. To put it in perspective that is like adding 1% more CO2 to Canada’s current total of approximately 540 million tonnes. As Canada strives to be carbon neutral this could have a material impact as each 1% (54 million tonnes) counts. Glad we aren’t the ones that have to make this decision.

Inflation has also picked up to slightly over 2%, if this continues it will be a little tougher for the Bank of Canada to lower rates this year but it still looks unlikely that they would raise rates. Our employment rate has remained stable, after a decline in December, which helps the case to leave rates where they are. Real estate prices also grew Canada wide in 2019 with the new forecasts expecting them to increase again in 2020 as supply remains a major concern. While this is great for homeowners, this most likely means debt will also continue to rise, creating further risk in Canada. As a services-based economy, jobs and job growth are extremely important. Of that services industry, a large piece is in the real estate sector which is why it is important to pay attention to the forecast of Canadian real estate. In the immediate term, this is great for our economy and we should see investments continue to rise if these trends prevail.

Coronavirus, assassinations, impeachment, high debt, etc. there seems to be some gloom out there but the indexes continue to rally, yay. The reason for this is because the economic environment still suggests it. Employment remains strong globally; the US, Canada, Europe, Asia all have had consistently decreasing unemployment. Even problem areas like Brazil and Venezuela added jobs last year. On top of this, central banks have been very lenient keeping rates low and providing economic stimulus. The world has been growing and the markets have been reacting as such, so enjoy it.

The BAD news is this will not last forever, the GOOD news is we are strong enough that one event will not throw it all off in one shot; we are behaving like a regular cyclical economy. Employment will stabilize, inflation will rise, interest rates will increase, all regular signs of a maturing economy. The environment still suggests room to grow from here, even if we have some short term fluctuations. We should expect some fluctuations throughout the year, but those are natural and characteristic of where we sit in the economic cycle.  

Our investment thesis remains the same with a balanced approach (Public vs. Private Investments). We believe every investor should hold a diversified mix of Equities, Alternatives, and Fixed Income just like the pension funds and endowment funds do. At the time of writing this, there are still a lot of great opportunities, even at these levels in the equity markets, but investors should be much more selective going forward. For more information, please do not hesitate to contact us.

Sincerely,

Justin, Konrad, 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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These estimates and expectations will prove to have been correct, and actual outcomes and results may differ materially from what is expressed, implied or projected in such forward-looking statements.