We decided to combine February and March in this issue as there weren’t as many headlines in February to discuss. March was a less impressive month compared to a fantastic February. In February the global economy rebounded with China leading the way. In March, we received mixed results from major economies with the exception of Germany and Hong Kong realizing strong economic results.
There are however major uncertainties that we need to pay attention to that can derail global growth such as Trump’s global trade plan, high debt levels and political instability in Europe and US if Trump does something crazy. We already had a failed vote when it comes to his healthcare (Obama care) reform bill; with so many Republicans disliking the existing plan that it should have been a slam dunk to go through. Luckily, the senate is its own independent body and won’t just pass a bill that its own party members push forward, this is a positive take away as they decided to wait for the right replacement as opposed to the quick one.
Overall we are happy with how things are progressing and we look forward to long term benefit companies will receive from the potential tax benefits that large US conglomerates may receive from Trump’s tax plan.
If you have any questions, please do not hesitate to ask us.
Sources: Thomson Reuters, Bloomberg, Google Finance, Trading Economics, Seeking Alpha, National Bank, Yahoo Finance, CFA Institute
The most notable developments this month have been the following:
Canada’s economy continues to be stronger than expected by most analysts. Despite high debt loads for consumers, due to a solid labour economy, cheap debt and the “housing wealth effect”, the consumer continues to be resilient in helping grow the economy.
– The best performing sectors in the past two months are Telecommunications, Consumer Discretionary, Utilities and Technology.
– The Canadian dollar closed slightly down against the US dollar at $0.751, down 0.13%.
– Year over year GDP grew by 2.6% vs. 2.2% this time last year.
– Unemployment fell to 6.6% vs. 6.8% from last month.
– Coupled with the good economic numbers above, Canada’s manufacturing and trade levels fell slightly with PMI falling from 55.00 vs. 55.51 and trade falling further negative to -$48.5B vs. -$46.0B.
– Housing prices in Toronto continue to go up at an unsustainable rate and to which the government is trying to curb with increased insurance costs for anyone putting less than 20% as a down payment.
– In the month of March, oil prices dropped over 10% from $54 to $48, but are now creeping back up to its old levels at the time of writing this review. A lot of this drop had to do with the fear that countries within OPEC would not follow through with their proposed cut backs in addition rig counts in the U.S. went up. Recently, this has recovered to $53 as production cuts remain in check and OPEC looking to extend the cuts.
For the last couple months the so called “Trump Trade” was still in effect as the U.S. market performed well gearing up for tax cuts and deregulation. We have seen softness in the last couple of weeks but that can be expected after they failed to live up to one of their campaign promises to reform Obamacare. In addition, markets tend to soften a little after a rate hike before picking up where they left as long as the economy is headed in the same upward direction. During the past two months we saw the Dow Jones Index break through 21,000 for the first time in its history on March 1st before retreating a little.
– The best performing sectors in the past two months are Consumer Staples, Consumer Discretionary, Healthcare and Technology.
– As expected, the Federal Reserve hiked rates at its last meeting in March. The rate changed from 0.75% to 1%. There are expectations of 2 more rate hikes in 2017 as per Yellen’s comments earlier in the year with the next one expected in May.
– Trump stated that he would be making a major tax announcement in the coming weeks that addresses lower corporate taxes, reduced regulations and an increase in infrastructure spending. In theory, this should result in higher employment, higher interest rates and a stronger U.S. dollar.
– Average price for homes in the U.S. was up 9.9% to an all-time high of $390,400 with most of the growth coming in on the high end of the housing market.
– Gold ended up 3.8% higher from February 1st even after a sharp downturn that started at the end of February that was short lived.
The biggest news to come out of Europe this month is that the United Kingdom has officially begun the process to leave the European Union. Despite the impending exit, Eurozone central banks still focus on sparking global growth even though the major economies in the world had a slow growth last year, but there are signs that global expansion may increase in 2017. With the improving economy there is talk of tapering of their expansion policies.
– There was stronger than expected economic data coming out of Hong Kong and specifically Germany where PMI grew to 58.3 vs. 56.5, their trade balance increased to $14.8B vs. $14.1B.
– The UK also had good numbers as their trade balance increased to a negative -$1.97B vs. -$3.8B.
– March was a bad month for China as it cut its economic growth target to 6.5% as it had a series of poor economic data released.
– The Global growth rate for 2016 got released in February at 3%, which is the slowest rate of growth since the 2009 global recession as industrial output in advanced economies grew moderately compared to previous years.
– Japan posted a positive 1% growth for 2016, which was above expectation as its workforce continues to decline because of the aging population.
– The Eurozone managed to grow 1.7% in 2016 thanks to an aggressive stimulus package introduced by the European Central Bank.
Eye on the month ahead
– The first step of Brexit is in place, but how many more obstacles along the way will there be?
– Upcoming elections in France on April 23rd and also later in Netherlands and Greece may spark more outcry to leave the EU from certain parties.
– NAFTA is still on the table, many wonder what the new agreement will look like.
– Can Oil prices stabilize, or will further production cuts be required?
– Will Trump’s tax plan be passed by the senate?
We continue to believe that a globally balanced portfolio is the best approach with equities favoured over fixed income as bonds enter into a difficult long term environment. We favor the US over Canada as the U.S. economy continues to outpace ours and if they continue to raise interest rates this would lower the Canadian dollar further. While Canada will be intriguing in the short term the long term growth prospects are limited. Further diversification outside of publically traded securities can also potentially enhance returns while minimizing the volatility of a portfolio.
War vs. Stocks
With so many question coming up in regards to Trump’s stability, we will take a closer look if war is good, bad or indifferent for stocks historically. The stock market in general hates uncertainty and there is plenty of that with respect to the Middle East, North Korea and Trump these days. Let’s focus on actual numbers, the shaded areas on the chart below identify the performance of the Dow Jones Industrial Average against the 4 major wars in the past 100 years.
Note that the graphic above ends in 2009, which some might argue is the start of our current bull run. It is also worth noting that large-cap stocks outperformed with less volatility during war times. Bonds on the other hand generally underperformed their historical average during the periods of war, in part as inflation is typically higher and bond returns have historically been negatively correlated with inflation. In addition, countries typically borrow more during war times, thus driving bond yields up and bond prices lower.
There will always be more than one economic or fundamental factor that will determine the price of an asset. Occasionally, a single event is strong enough to dominate the other factors, however historically speaking this has not been the case with wars. Economic growth, earnings, valuations, interest rates, inflation and other factors still remain the backbone of determining the direction of the market.
What does the impact of war tell us about the future trend in stocks? That during the time of war, we should see mostly sideways movement and then have a post-war rally. In addition, that most events do not trigger a long-term change, but only major ones. In January of 2009 we saw the Dow Jones reach 7033. If the average rally is +500% return after a war (since 2001, the “War on Terror”), then if historical averages stay true this time around, we should expect the Dow to hit 35,165. If we are currently trading just below the 21,000 mark, then we still have a long way to go before we exhaust our current bull run. Only time will tell.
Konrad, Justin and Merriel
More articles and information is available at www.lkwealth.ca
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.
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.
Forward-looking statements are based on current expectations, estimates, forecasts and projections based on beliefs and assumptions made by Konrad Kopacz and Justin Lim. These statements involve risks and uncertainties and are not guarantees of future performance or results and no assurance can be given that 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. The opinions expressed in this report are the opinions of the author and readers should not assume they reflect the opinions or recommendations of Echelon Wealth Partners Inc. or its affiliates. Assumptions, opinions and estimates constitute the author’s judgment as of the date of this material and are subject to change without notice. We do not warrant the completeness or accuracy of this material, and it should not be relied upon as such. Before acting on any recommendation, you should consider whether it is suitable for your particular circumstances and, if necessary, seek professional advice. Past performance is not indicative of future results. 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.