Summer has now ended and we can now get back to business as usual. Once again, President Trump is on the hot seat to get impeached over a phone call with Ukrainian President Wolodymyr Zelensky. It seems like only yesterday from the last impeachment process, how quickly time flies! This time, the accusation on President Trump is of withholding foreign aid in order to gain information about Joe Biden for the upcoming election. After reading the brief, it does not appear to have too much teeth, but the testimony the following day does show a little bending of the rules from the White House, which may show some foul play of others around the President.
With just the current information, there does not seem to be enough to impeach as they would need about 20 Republican representatives to cross the line and vote for the impeachment. Unless there is more news on the horizon this does not seem likely. Definitely another shot at his credibility, but was that really that high, to begin with? The one glaring piece of information to take from this that can be used when investing, is that President Trump cares a lot about the upcoming election.
After this, Trump did offer some tweets to try and smooth things over about progress in the US/China trade war. Claiming that “it could happen sooner than you think” and then also stating the talks will open once again in October. There have also been talks of getting a trade deal in pieces rather than a full deal with certain easier areas being done first then moving onto the areas where they are further apart. Once again, he does appear to be trying to set up at least something going into the 2020 election campaign. This bodes well for stocks as Trump may need a trade deal in order to lock in some votes, where a trade deal in the farming sector could really swing the election in his favor.
The US Federal Reserve decided to cut rates (as expected), but indicated a wait and see approach whether there will be another rate cut before the end of the year. Even with this candor, it does appear analysts are predicting another rate cut. This is definitely needed, as US interest rates are among the highest in the developed world which is actually quite shocking, as lower risk should not warrant a higher rate. Many developed countries have zero or negative rates and actually represent a higher risk profile than the US, this has caused a massive purchase of US dollars and US treasuries. Large institutions from around the world have been loading up on US dollars through US Treasuries, pushing the demand through the roof and pushing the rates of bonds lower than ever. This is a large reason for the yield curve inversion in the summer and is beginning to actually cause a shortage in US dollars within the United States. If the rates remain high without further cuts we could see quantitative easing come back to help balance the high demand for US dollars. This is important investment information as we could be entering a time again where interest rates become extremely low and could also have US dollars being pumped back into the system. This type of economic environment could cause a multiple rise in stocks with lower interest rates and run in commodity prices, similar to 2009-2012 when we last were in this type of environment. During that time gold, copper, and wheat prices all rallied with an influx of cheap dollars into the system.
It seems as if the biggest hindrance on the US would the effects from the rest of the world. The US economy is actually doing quite well, they are mostly driven by the US consumer which makes up about 70% of their GDP. Looking at the US consumer, personal income continues to grow, the rate at which they are savings also continues to grow, and most importantly consumer spending continues to grow. On top of this, gasoline prices are the cheapest they have been since 2009. While the US consumer is not thriving as they once have, they are moving along quite nicely and continue to drive the US economy even though the rest of the world cannot say the same. In Canada, we continue to spend more than we save as our consumer debt to income ratio continues to climb. Our retail sales have begun to decrease and our housing prices nationwide have come down over the last year. The Canadian consumer seems fine for now, but our debt continues to climb both at the government and the consumer level, as we spend more than we save.
BREXIT continues to roll on, at this point, we feel we will still be talking about this for eternity as no real progress has been made and they still aren’t even sure if or how this will happen. Recently, Boris Johnson lost multiple votes to accomplish a hard BREXIT (leaving the EU without a trade deal) which he promised by October 31st. Upcoming, there will be an EU Summit meeting in October where all the leaders will discuss a multitude of topics but this will be one of them. At that point, there might be a little more clarity on the topic, but it is unlikely. It seems the most likely outcome is further extensions of BREXIT and we will be talking about this for the foreseeable future.
Elections, elections, elections. The US elections get a lot of our headlines in Canada as our economy is so tied to the US economy, thus their performance dictates our performance and the rest of the worlds as well. But for the time being, we can set aside the US election talk and focus on our own federal race. On the 21st of October, we will be voting on who will be running our country for the next 4 years. This along with every Canadian election appears to be a giant smear campaign against the individuals rather than the actual platforms they are running on. We urge to avoid the noise and take some time to look at what each candidate would like to do with our country over the next 4 years and vote based on that rather than the stories that grab the headlines. We have included a couple of links for your viewing pleasure.
In conclusion, looking at the general markets, things continue to slow on a global level. Many countries are seeing declining growth and are doing what they can to spur more growth. This is resulting in a decrease in interest around the world. This slowdown is partly due to global trade tensions US/China, US/Canada/Mexico, UK/EU, sanctions around the world, Canada/China trade tensions, etc… It would be nice to have some relief in trade going forward, to a point where global growth can stabilize. Until then, central banks appear to be content to lower rates which are great for equities (stocks) but is causing a consistent build in global debt which is cheaper than ever before. This environment should bode well for stocks and commodities (including real estate), as long as the asset isn’t getting hit too hard from global trade issues. Bonds should also perform well in the short-term, but do not offer attractive yields vs. history and comparing to the equity markets.
We continue to believe in equities primarily, as it is still difficult to believe in other asset classes at this point in time. While the decrease in rates helps bond prices in the short-term, it is difficult to choose a 2% bond over a 4% dividend at this given time. We expect there will continue to be volatility this year, with continued fears of a slowing global economy and upcoming elections. As we have previously stated, commodities look more attractive to close out the year and into 2020 as a result.
With all that said, our investment thesis remains the same with a balanced approach. 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.
Lastly, we want to thank everyone that donated, volunteered and/or attended the charity soccer tournament that we hosted to help raise funds and awareness for ALS. We had a great time and we raised just over $12,000 at this year’s event. Please see the video below to learn more about the event.
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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