Konrad Kopacz No Comments

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.

Source: Yahoo Finance

With renewed tensions on the trade front after a couple of months of positive news, investors have become more skeptical of a trade deal being completed. This is in the wake of the US increasing tariffs on Chinese imports from 10% to 25%. This increase in tariffs during trade negotiations isn’t a good sign; it could mean that talks are not going as well as first thought, but talks have not ceased which is positive. While we feel the effects of the trade war in the stock market, we have yet to feel it in inflation, with those numbers just recently touching 2%. As these tariffs just took effect, it will be interesting to watch inflation in the coming months. From China’s side, while this also has not hit their economic numbers, there have been many companies that are beginning to diversify and source from other countries to reduce trade risk. This may have an effect on China in the longer term as companies may move out to avoid the exports tariffs to the US. This already has had an effect on the Vietnamese economy, jumping 8% as companies look for a cheap labour environment to place their factories. Both sides of this trade war are being hurt in this skirmish and it’s up for debate who can withstand the pain longer, but it is clear that both sides are better with a solution than without one.

If that wasn’t enough, President Trump announced a new set of tariffs on Mexico if they would not stop the flow of illegal immigrants into the United States. These would begin at 5% and increase every month until it reaches 25%. This is quite the gamble for the US, as a 25% tariff from Chinese goods and a 25% tariff on Mexican goods would be a lot for the US consumer to handle. The double tariffs on about $900 billion worth of goods could not be absorbed by US companies and would need to be passed onto the consumer, which would be a drastic drag on the economy. This policy has been opposed by many in the White House and therefore there is hope that this will get resolved quickly. This would directly affect many of the car companies that produce in Mexico and ship their product over the border. As an example, in 2018 about $93 billion worth of cars were shipped over the border.

With trade wars weighing on the economy, the US Federal Reserve has been forced to play defense, stating that they would cut rates if needed, in light of the heightened trade war. Last year’s rate increases are now looking pretty good and give them the ability to stimulate the economy through a rate cut (very few developed economies can say the same). This stance has given investors some relief that in the tornado of President Trump’s trade wars, the US Federal Reserve can provide some protection against a falling economy. The market has already begun to adjust to the potential rate cuts with the high yielding securities getting a boost.
On that front, with the expectation that the US will cut rates, it is expected that Canada will follow suit. A slowdown in the US economy is a slowdown in the Canadian economy and with the recent plunge in oil prices, Canada may need to get on the offensive. This could help stimulate both economies going into the end of 2019, and be in line with our initial 2019 thesis that the end of 2019 would be stronger for Canada.

On the other side of the Atlantic, Theresa May has had enough and officially declared she will be stepping down as the Prime Minister of Britain. She will remain as Prime Minister until her successor has been chosen, but in her time has failed to bring both sides to a conclusion on the BREXIT issue, which ultimately led to her timely end. This outcome was most likely inevitable as the task was extremely difficult and both sides were far apart on many issues. Depending on the new leader and how the rhetoric sways, we could see a second BREXIT vote to determine what the future will hold.

With so much negativity, where is the positive news? Surprisingly, with all this, there has been some positive momentum in the market. Companies with very little exposure to the trade war have actually been safe havens for people’s money and have excelled. Companies like WalMart, Starbucks, McDonald’s, etc. while international, operate within the countries boundaries and therefore are unaffected by trade over the border. Also, companies like Dollar General and Metro have held strong, as they are companies that source from other places rather than China and operate primarily in North America. On top of that, utilities, telecommunications, REITs have held on well. Generally, these industries perform well when the expectation is that interest rates will decrease in the future. While there has been a lot of headline news of markets decreasing, we are not getting the same broad market sell-off that we received at the tail end of last year but rather a rotation from riskier assets to ones that are more conservative equities.

Topics for the remainder of the year:
– While the last 8 months have been exciting, the rest of the year will continue to provide excitement or in financial terms, volatility. We will have ongoing trade wars that will continue to provide ups and downs in the market. Interest rates will be an issue going forward as the Federal Reserve will assess the damage the trade wars have or will cause to the economy.
– These have been staples that we have been able to count on but let’s look at the newer ones.
– Politics, while this headline always changes, there is more coming. First, the Canadian federal election will be at the end of 2019 and we could get a change in leadership which would signal a change in policy. Starting in June and concluding in early 2020, the Democratic debates will begin in order to find a new leader of the Democratic party in the United States. These debates will be pivotal in deciding who will face off against President Trump in next year’s Presidential election.
– The role of ECB President will be up at the end of 2019 as this role has been held by Mario Draghi, who has been especially dovish on economic policy and constant stimulus into the European Union. It might be difficult to find another President as forgiving as “Super Mario”. Always under consideration is that with the level of rising debt in the world, and with a decrease in interest rates, there will be room to issue more cheap debt and this will most likely be something that companies and individuals will take advantage of. This is a slow-developing story and not an immediate concern, but something to watch for the future.

In summary, do expect continued volatility for the remainder of the year, especially over the summer months as trade wars heat up and elections also begin to ramp. This does help create opportunities for us and we have been rebalancing portfolios to take advantage of the recent downturn as there are many areas that got hit harder than they should have been.

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. 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.

Sincerely,

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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