The main driver pushing the market higher in the cooperation from the US Federal Reserve. They have cut twice this year and have given the tone that they will continue to monitor the economic data and will continue to cut if need be. This is much different than the rhetoric last year when they had a steady rate increase plan for the foreseeable future.
Source: Yahoo Finance
This tone has given the market hope that even if the economic data were to worsen the US Federal Reserve would bail them out, giving investors confidence to put more money into the market. This does limit the downside knowing you have potential interest rate cuts in the future, this has allowed investors to be more optimistic regarding the other issues.
The biggest story is the US/China trade war, the headlines would suggest there has been a lot of progress back and forth but yet here we are waiting to see if something comes out the other end. A couple of updates are that China has stated they will enforce stricter penalties to IP theft within the country which was a major point of interest for the US as many US technology companies are having their intellectual property copied in China, they have also made some ground on US agricultural purchases which once again the US would love to see return. The US president has been standing firm and has hinted that a 2019 trade deal might be too soon for him and feels the US could wait until next year to put something into writing. This comes with some skepticism as this seems more of a political play than what’s best for the country, but this is nothing out of character. As they sort it out the December 15th date remains in the balance with the market wondering if they will go through with another increase in tariffs on Chinese imports. This along with the impeachment story seem to be very negative headlines, however, the market continues higher as they now have the US Federal Reserve in their corner. Eventually, something will need to get done though as interest rate cuts only go so far.
In Canada, a few blows have been delivered to our economy. The first being a terrible employment number that appears to be overlooked by the market, as Canada lost 71,000 jobs in November. This is the largest job loss in a decade. Another overlooked area is the CN rail strike. While this seems extremely minimal from a national level, this strike showed how vulnerable Canada is to the smallest disruption. We are a very large country and the most efficient way to ship from province to province is through rail. This strike is expected to have a significant impact on our GDP and if prolonged could lead to a bad supply issue in Canada. If these trends continue, Canada will most likely have to follow the US in cutting rates to bolster its economy.
Now nearing the end of the year we can review one thing that has gotten some headlines recently, Do trickle-down economics work? Trump ran on this economic platform so let’s see how it has worked so far. Almost two years after the US tax cut we should be seeing the effects of this new legislation. This tax bill essentially saved many companies billions in taxes, with some companies bringing their federal tax rate down to 0% or even negative in some cases. These adjustments have allowed companies to use the 2018 tax bill to adjust their spending to favor tax credit eligible expenses to reduce their federal rate to nothing. This theoretically leaves more excess capital for the company to invest in their employees and capital expenditures (company spend on assets with a longer than 1-year time horizon, i.e. buildings, and equipment). In 2018, CAPEX spending was up only 2% and in 2019 it is up about 3% so far. The giant saving by companies has not resulted in a boom of spending but has only increased a little. The argument on the other side of this is that the trade war may have actually reduced companies’ reluctance to spend. Company balance sheets are stronger than ever with many companies sitting on record levels of cash and the unemployment rate continues to fall. So, the answer to the question is yes and no. The massive flow of savings to companies has not resulted in a massive flow to employees but there is potential to do so. The next year or two will show whether they will begin to pay employees more and start investing in long projects that will push the economy further or will they continue to hoard cash to protect the company itself.
Brexit news, Boris Johnson is holding a general election on December 12, 2019, in hopes to gain more support for a withdrawal from the EU plan purposed for January 2020. Yes, once again another vote for support within the UK. This plan has the UK leaving the EU 11 months after January, which would bring it to the end of 2020. This would most likely the fastest resolution to Brexit which would bring the Brexit process to approximately 4.5 years from the start.
Gold taking a breather with the market doing well. Often seen as a safe haven when there is a lot of global uncertainty, gold has fallen below $1,500 and continues to hover around the mid to higher $1,4000s. This is on the back of renewed trade war progress which is giving investors more confidence as the days wind down for the year. It is still well up from about a year ago but many of those fears are lessening giving gold a smaller runway in the future. With the progress on the trade war, it pushes the late-cycle gold rally further out into the future. This puts gold up about 13% YTD.
Oil has been gained a little strength in the last couple months and looks like it will finish the year up as Saudia Arabia decided to once again cut their oil production, this is most likely to help their IPO of Saudi ARAMCO, which is expected to be the largest IPO in history raising around $25-$30 Billion USD. This puts oil up about 28% YTD.
While the commodity market has been growing it has not had the giant blow-out year we were expecting, this is actually positive in the sense of less chance of a recession in the short-term. We expect there to be continued commodity growth in 2020 as should rise and interest rates should remain low.
The marijuana stocks hit record lows this past month, causing fear across the industry. This came from companies showing a lot lower than expected revenue growth and lower than expected revenue guidance for the future. On top of this, the recalls on the organic products were much higher than expected and Canada is showing a real supply problem with a lot fewer people buying. Even further, the delay in the Ontario store licenses is really restricting the selling ability of these companies to Canada’s largest market. Fear is at an all-time and this might be an excellent entry point for anyone not invested. The US just passed its legalization bill through the House (Democratic dominant) and now goes to the Senate (republican dominant), if it were to make it through the Senate that could create an entryway into the US which could spark a rally for these companies.
With all that said, 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 equity markets, but investors should be much more selective going forward. For more information, please do not hesitate to contact us.
Konrad, Justin, and Merriel
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