January 2017 Investment Market Update. Equity returns go up, oil stabilizes
2017 continued the rally from the closing months of last year. President Trump was sworn in, released his 100 day action plan to ‘make America great again’ and started issuing executive orders. The price of oil held steady. Along with strong gains in equity markets, this strengthened the Canadian dollar. The political uncertainty in Europe has increased volatility in its markets.
Equity markets up
Both US and Canadian markets saw strong equity returns in January and the Dow Jones reached a historic 20,000 milestone. This milestone occurred on the back of the rally following Trump’s inauguration. Trump kicked off his first 100 days in office by signing executive orders that reduced regulation and could stimulate growth, such as green-lighting the XL Keystone pipeline.
Oil production starts to stabilize
OPEC members and other nations started to cut production as much as 90,000 barrels/day. The agreement to curb production, stabilized prices and lead to an increase in low cost US shale production. This stabilization of prices, along with president Trump saying the US dollar was too strong, supported a spike in the Canadian dollar. With current oil prices causing strain on producing nations, the Gulf Cooperation Council imposed a 5% tax on goods sold, to make up for lost revenue.
Elections, anti-Euro slogans bring volatility to European stock markets
European stocks were volatile and predominately negative as result of heightened political risk across the currency bloc with general elections scheduled in France, Germany and the Netherlands this year amid an increase in support for anti-euro rhetoric. There has been increased speculation the European Central Bank may bring its asset-purchase program to an abrupt halt in 2018 as inflation fears increase.
Economy heats up
High-yield bonds performed quite well as the economy is entering a reflationary environment based on renewed economic activity. This phase will be spurred by fiscal stimulus and tax reductions. Further support has come from oil prices and industrial commodities that have not only stabilized but are now trending upward.
The Bank of Canada is not expected to increase the target rate this year. Our ETF and PIP portfolios attempt to earn competitive yields by owning short-dated, high-quality Canadian corporate bonds and preferred shares.
Our portfolios continued their positive performance at the start of 2017, despite our US equity exposure being drawn down by a strengthening Canadian dollar. In particular, our Private Investment Portfolios were resilient and benefited from holding unique uncorrelated asset classes such as mortgages.