|What Worked||What Didn't|
|Gold Stocks||Small Cap Stocks|
|Consumer Staples||Hong Kong Stocks|
|Utilities Stocks||Cannabis Stocks|
|Equity Markets||% Change (in Cdn$)|
|Bond Markets||% Change (in Cdn$)|
|FTSE Canada Universe Bond Index||1.2%|
The TSX Index at its high level mark in July of last year was 16,567. At the September quarter end in 2019, the TSX Index level was 16,658. The stock market is basically flat, having moved more “sideways” over the last 14 months. That’s not to say there hasn’t been volatility. Quite dramatic was the plunge in stock prices in the 4th quarter of 2018 on recession fears. Without a doubt, recession fears have been punishing for stock market investors. However, quite dramatic again was the bounce back in the 1st quarter of 2019 on renewed growth hopes. Since then, the stock market has been killing time with positive performance from some stocks but countered by serious under performance of cyclical stocks that are particularly sensitive to recession fears.
What is at the heart of recession fears? There are a number of factors, but the primary driver of this fear are trade wars initiated or threatened by U.S. President Trump. These trade wars have kept a lid on earnings of various stocks but have resulted in a hard hit to economically sensitive cyclical stocks. Every trade threat punishes these stocks even if the threat is walked back later. Every positive announcement boosts stock prospects but hope is only to be dashed later when trade war concerns are renewed.
There are many potential market moving events but the U.S. President and his trade and tariff wars have been the main event.
Economic growth is suffering not only from the tariffs actually placed on trade to date, but also due to “what comes next” uncertainty. What comes next may be some grand announcement of a very awesome trade deal with China that will excite the markets only to be found somewhat less awesome later. This trade battle is not a one off. These are 2 countries battling for economic superiority. There could be yet another swing to optimism for the future. That would be a real trade agreement with China in which case the stock market environment could flip rapidly again. Longer term, however, what we are likely to get is an ongoing series of skirmishes as China and the U.S. continue to spar for global economic supremacy in the years ahead.
In the quarter just passed, the market appeared to have a split personality. Around the world defensive stocks in areas such as gold, utilities and consumer staples were favoured at the same time as more growth oriented technology stocks. This suggests a great deal of uncertainty on the economic path forward.
The stock market and company earnings continue on different trajectories. All year long, earnings estimates have been moving downward. That is not typically a good backdrop for stock markets. However, at the same time, a decline in interest rates has been a positive offsetting event. As the earnings in the price to earnings ratio have declined, the price paid has been lifted by low interest rate policies. Even though the decline in rates is because economic growth is slowing, so far investors believe the lower rates have come in time to prevent a further earnings decline or worse, a recession.
Bond investors have been wary about the lack of growth. Bonds once again had another solid quarter due to the concern about lack of growth and due to the aforementioned drop in interest rates. A drop in current interest rates increases the value of a bond’s income stream. The longer the maturity of the bond the more sensitive the value is to interest rates. As one would expect, given the drop in interest rates, the longer dated maturities i.e. 10 year bonds and longer, had a higher return in the quarter than shorter maturities such as 5 years or less.
We have noticed the market starting to show an impatience with highly valued no earnings companies. Think ‘new age’ stocks like cannabis in Canada that have previously been stellar contributors to the market return but, of late, have performed poorly. Of note, 4 of the 6 technology horseman that have propelled the U.S. market over the last several years are having difficulty surpassing summer of 2018 levels. Is a change afoot?
Moving around the world, in Canadian dollars, EAFE (Europe and Asian markets) were flat in the quarter. Slowing global growth is especially impacting one of the world’s largest economies, Germany, and the ongoing debate over Brexit is not helping. Slowing growth in China along with the skirmishes between China and Hong Kong are also negatively impacting their stock markets.
If we begin to enter a growth reacceleration, we will be poised to capitalize on market opportunities with our cash allocations on hand. If, however, it becomes evident that there is a continued slowdown/recession, our cash reserves will help cushion the drop in equity markets and will allow buying opportunities once more attractive risk/reward ratios present themselves. Our wish list includes lowered analyst estimates for 2020 along with a lower P/E ratio to compensate for the uncertain economic environment. Short term, the market continues to react with optimism from positive trade rhetoric and pessimism from negative trade rhetoric. Before too long, worries about next year’s U.S. elections will start to grab headlines away from the trade file. Never a dull moment.
|Fixed Income||September 2019||June 2019|
|Cdn 91 day T-Bills||1.64%||1.66%|
|U.S. 91 day T-Bills||1.84%||2.15%|
|Cdn 10 year Bond||1.36%||1.47%|
|U.S. 10 year Bond||1.54%||2.00%|
|Commodities (in U.S.$)||September 2019||June 2019|
|Currency||September 2019||June 2019|