Fall is upon us, trees are shedding their green vibrant leaves and preparing for a cold winter. The market has taken a similar approach with a charismatic Barak Obama stepping out of the oval office as investors prepare for a change in leadership. While it does feel as if the world is being put on hold, there actually are things going on around the globe. The United States put on a scary Halloween mask (Donald Trump’s face), but under the costume, it continues to add jobs and push wage growth. This is leading to an increase in home sales and inflation. The market has not reacted favourably as investors continue to get defensive regarding a possible Trump win. After oil was the largest driver last month, it has cooled off quite a bit as production continues to grow. This is expected to be addressed as OPEC is looking to put in a production cap at the end of November. But until something gets implemented it will continue to take its toll on Canada’s economy as it is also not seeing any job growth and its GDP has slowed as a result. The numbers coming from the US continue to be strong, governments continue to create favourable investment environments and there is room for economic expansion. Hopefully, after the US election, the fear in the market will be reduced and the market can move upwards along with the US economy.
The most notable developments this month have been the following
This month oil fell more than expected as the OPEC deal does not seem as strong as once thought. This has had an effect on jobs within Canada and on exports both of which continue to be low. A weaker dollar should help exports, especially if the US consumer begins to purchase our wonderful Canadian goods and services. With their added purchasing power this could add some relief as the loonie continues to be cheap relative the US dollar.
– Recent well performing sectors are Basic Materials, Energy, Industrials and Utilities
– The TSX was up slightly in October by 0.4%
– The Canadian Dollar closed down this month against the US greenback at $0.742
– Inflation is up 1.3% – this is slower than our projections as there is continued weakness
– Jobless rate remains steady (7%) – we would like to see this improve
– Bank rate remains at 0.75% – expected to remain here for quite a while until the economy can improve
– Exports slightly improve as the loonie decreases (up 0.6%)
Election talk has paused the market this month and the uncertainty has created volatility in the short term. With all this political uncertainty, the underlying numbers are good, the US consumer is the strongest GDP driver and if they continue to earn more money, they will be more likely to spend more money. We can expect volatility right up until the election and most likely a market drop if Trump were to get elected; unlike Clinton, where she would bring a certain level of certainty of relief to the market.
– Recent well performing sectors are Utilities, Energy, Basic Materials and Technology
– Unlike our domestic Canadian market, the S&P 500 closed down 1.94% for October
– Election remains neck and neck and it will go to the wire on Election Day, November 8th
– Gold recently broke out of its slump amid fears of post-Brexit effects, potential US rate hikes and US elections looming.
– US Personal Spending on the Rise (Up 0.5%) – This is in line with our projections as employment and wage growth continues
– US GDP Growth Rate highest in 2 years (annualized 2.9%) as consumer spending increases
– New Homes Sales Rise 3.1% – higher than expected
– Inflation at 2 year high 1.5% Year-over-Year – as expected and in line with government projections for a December rate hike
ECB continues QE until March 2017, as Europe continues to struggle. Europe is weathering the storm pretty well all things considered. Large cap companies are beginning to take advantage of the weakness in their currency as the majority of their business comes from outside of the EU. While there will be volatility going forward, they are currently going through a correction and may go into a recession, therefore there will most likely be future buying opportunities once the EU sort themselves out.
– GDP growth rate steady (0.3%) – it is very low but at least it’s not dropping
– Inflation increasing (0.5% Year-over-Year) – a slight increase from last month, but it was expected as their currency moves down
– A 0% interest rate will continue as the ECB leaves the rate unchanged
Japanese jobs and inflation continues to fall, but it will take time to see if their new fiscal strategies will be successful. China is still growing at a strong pace relative to the rest of the globe as GDP matches expectations (1.8% Growth for the Quarter) and inflation continues to hover around 2%. Although it is a decrease from previous years, lower manufacturing demand continues to drag the numbers lower. South Korea dominates the headlines as the protests ramp up calling for the President’s resignation on cult ties.
Eye on the month ahead
– Elections, Trump vs. Clinton.
– If Trump wins, expect volatility and the attention to shift to the Democratic and Republican government split. The more certainty and continuation the better for markets.
– If Clinton wins, expect a short-term rebound and slow growth going forward.
– OPEC meeting is being held at the end of the month, what production levels will be decided on?
We continue to believe that a globally balanced portfolio is the best approach. Equities favored over fixed income as bonds enter into a difficult long term environment. We favor the US over Canada unless there is an event to derail their slow growth, this could be the “Trump” factor.
Finance 101 – Education
What is Fiscal Policy?
Governments can stimulate an economy through multiple methods. What we have seen in the most recent history has been monetary policy or supply of money stimulus. This usually involves decreasing interest rates or flooding the market with money to increase the money supply for business and investors. This potentially would create more capital and allow for more expenditures. With interest rates at record lows this has been used by almost every government around the world.
Going forward the US is looking to now use changes in fiscal policy to stimulate the economy. This is the adjustment of government spending and tax levels to influence the economic market. Both candidates have plans to jolt the US economy through their fiscal plans. Clinton, looks to increase government spending on infrastructure to create more jobs for the low and middle class workers while taxing the higher income earners more. Trump, looks to reduce taxes to put more money in the hands of business owners to spend on salaries and new ventures.
Fiscal Policy is the next step to let the economy continue to grow. The verdict is out on which plan works better in the long term but in either case it could create another driver for the US economy.
Konrad, Justin and Merriel
Disclaimer: Echelon Wealth Partners Inc. is a member of IIROC and CIPF. This document has been prepared as a monthly market update and does not contain any recommendations for any particular investment. It is not an offer to buy or sell or a solicitation of an offer to buy or sell any security or instrument or to participate in any particular investing strategy. Any investment decision should be based on your own risk tolerance and investment objectives and reviewed with an investment advisor. Any opinions or recommendations expressed herein do not necessarily reflect those of Echelon Wealth Partners Inc. The data used in this document is from various sources and is believed but in no way warranted to be reliable, accurate, complete and appropriate.