Market Insights

Market Update. Bull market? Yes. It’s no bull

September 11, 2018


Market Update. Bull market? Yes. It’s no bull

Market Insights

It’s official: we’re in the longest-ever bull market for stocks. Sure, the stock market isn’t everything when it comes to investing. But there’s no question, investor confidence has to be at or near an all-time high.

Tech stocks can take much of the credit: first, Apple hits the trillion-dollar valuation (and keeps going, with CEO Tim Cook enjoying a windfall from his shares). Now Amazon pulls off the same incredible feat, just a month later. Meanwhile, there’s Elon Musk’s Tesla… well, suffice to say, volatility in the tech sector hasn’t entirely gone away. They can’t all be winners.

Looking at Canada, oil was up and the big banks performed well. Unfortunately, uncertainty over trade and pipelines cast a pall over Canadian stocks, which have been relatively flat.

Overall, foreign markets are stable, though politics are impacting economics. There’s the US-Mexico trade deal (with Canada belatedly trying to get in on the action). In Europe, we are closely watching the end of the Greek bailout, new Russia sanctions and of course, and ongoing Brexit talks. Further afield, Japan is facing collateral damage from US tariffs on China – and the Bank of Japan’s ETF and bond purchasing programs are under increased scrutiny.

And of course, politics, particularly what emanates from Washington, D.C., can always roil markets in unpredictable ways. An anonymous opinion editorial in the New York Times by Part of the Resistance within the Trump administration came out recently. It showcased a sense that even some of the US administration’s most important insiders are criticizing ‘recklessness.’ The situation does nothing good for investors that might prefer a bit less drama in their daily headlines.

How are these variables impacting your portfolio’s return? See our performance and additional insights below.

ETF Portfolios

Clients enjoyed even higher returns this month.

ETF Safety Portfolio was up 0.54% in August. It’s up 4.55% for the past year.

This portfolio’s August performance comes mainly from holding small exposures to US Equities and Real Estate. The large weighting in short term bonds muted the returns of this portfolio. However, it reduced the overall volatility of the portfolio. As a result, it moderated any gains or losses from the ups and downs of equity markets.

ETF Conservative Portfolio was up 0.82% in August. It’s up 7.23% for the past year.

This portfolio contains the first allocation to HXS, the S&P 500 ETF. This ETF was the highest performing ETF of the group in August. As a result, the portfolio had higher performance than the ETF Safety Portfolio.

ETF Balanced Portfolio was up 0.97% in August. It’s up 9.92% for the past year.

It had further increased exposure to Real Estate and US equities, this portfolio was able to capture more of the positive performance in these asset classes. At the same time, there is still a significant portion of the portfolio dedicated to diversification and risk reduction.

ETF Growth Portfolio was up 1.12% in August. It’s up 11.52% for the past year.

The majority of this portfolio’s positive performance can be attributed to the greater exposure to US equities. The total return from HXS (S&P 500 ETF) was the best performing ETF in the portfolio for August. Since this ETF isn’t hedged, it also captured some extra upside from the strengthening USD.

ETF Aggressive Portfolio was up 1.22% in August. It’s up 13.43% for the past year.

We saw continued strength in US equities. This portfolio having the highest weighting in HXS (US equities). As a result, it had the highest monthly return across all of our portfolios. The high yield bond and the laddered preferred share ETFs provided further diversification.

Private Investment Portfolio

Safety Private Portfolio was up 0.32% in August. It’s up 5.70% for the past year.

Canadian bonds were relatively flat last month. However, the mortgages provided some income to offset this, and continued to reduce the volatility of the portfolio. The additional diversification to asset classes such as mortgages, commodities, real estate and private equity mitigated risk and generated positive returns.

Balanced Private Portfolio was up 0.31% in August. It’s up 9.13% for the past year.

The additional diversification to asset classes such as mortgages, commodities, real estate and private equity mitigated risk and generated positive returns.

Aggressive Private Portfolio was up 0.11% in August. It’s up 9.45% for the past year.

The extra equity exposure in the NWM US Tactical High Income Fund resulted in a more subdued August relative to the other Private portfolios. The core balanced position still provided additional diversification to asset classes such as mortgages, commodities, real estate and private equity mitigated risk and generated positive returns.

Market movers, at a glance

Now we can take a closer look at some of the market movers in August-September. Let’s get started.

US market up, up and away

US market up, up and away

We are 3,453 days into the longest-running bull market… unless you don’t agree with that. The Business Insider explains:

The S&P 500 has surged a whopping 323% over the period, with its roughly 19% annualized return slightly lagging behind the historical bull market average of 22%.

It also must be said, however, that not everyone necessarily agrees with the methodology used by S&P Dow Jones. Research outfit Bespoke has been adamant that that the bull market ended on January 26, 2018 — the last time the S&P 500 closed at a record high — since, for all we know, we’re in the middle of a bear-market descent.”

Bull market or not, there are few investors complaining about the S&P 500 these days, except the already-mentioned cohort who did not bet on it in 2009.

The performance can be seen in our S&P 500 ETF, HXS. It returned 3.55% in just the month of August.

Trade wars, trade deals and other factors

Of course, the world economy is bigger than the sums of its stock markets. One of the biggest factors affecting the domestic economy isn’t entirely domestic: the newest round of trade tariffs on China, on $16 billion of imports. Thus far, markets have not seemed to be unduly affected. But as the Trump administration plays hardball with its biggest trading partners, there is much uncertainty over potential blowback. After all, China and other nations have already responded with targeted tariffs of their own.

It’s not all bad news on the trade front, though: a US-Mexico trade deal. This deal is seen as a viable alternative to NAFTA. Some of the pertinent details.

“The U.S.-Mexico deal would require 75 per cent of auto content to be made in the NAFTA region, up from the current level of 62.5 per cent, a second U.S. official said. A draft fact sheet specified the content would be made in the United States and Mexico.

The deal also would require 40 per cent to 45 per cent of auto content to be made by workers earning at least $16 per hour, the second official said.”

It wasn’t just good news in North America. The announcement also lifted markets in Europe, where nervousness over US tariffs had created some volatility.

For Canadians, of course, this news is bittersweet. While it is clear now that the US administration is willing and able to get a new deal done to replace NAFTA, Canada has been left out. The TSX composite did rise as our own talks resumed, but what goes up can easily come down if progress is slow.

Further negative market sentiment on trade affected the performance of our International Equities ETF, XEF, which was down 1.63%. This affected some of the more aggressive portfolios.

Silicon Valley leads to a mountain of high returns (though some face an unsteady climb)

The FAANG (Facebook, Apple, Amazon, Netflix, Google) group of high-profile tech firms known for leading the pack on the S&P 500 continue to blaze a trail. Now that phenomenal trillion-dollar valuations have become “been-there, done-that” milestones thanks to Apple and Amazon, we’re already looking forward to which tech titan will cross the $2 trillion threshold.

Interestingly, Warren Buffett thinks Apple’s $1,000 iPhone was significantly underpriced compared to the value it offered customers — indicating there’s room to build up even greater profits with this and other products. But in this race to the top, size matters. For a $2 trillion market cap milestone, many are betting on Amazon to get there first.

But in all sectors, even the high-flying tech one, there will be winners and losers. Lately, Tesla has fallen on hard times: “Tesla’s stock has lost a quarter of its value since Aug. 7, when Musk tweeted that he had secured funding for a previously undisclosed plan to take Tesla private.” Tesla’s woes can’t entirely be blamed on their CEO’s messaging. After all, the firm’s expensive manufacturing problems could be a problem no matter who was at the helm. However, his exhausting schedule, health issues and erratic behavior aren’t helping matters.

And Tesla isn’t alone. Facebook and Twitter executives are testifying in front of the US Congress, with investors not liking the prospect of regulation. Netflix’s blockbuster growth stalled and went into reverse late in the summer. Its stock dived over 6 percent in a single day as Apple was in the process of launching a competing product. The bottom line for investors: just because a company is based out of Paulo Alto is no guarantee of long-term runaway returns.

FAANG stocks make up a big portion of the S&P 500. As such, the momentum gains from the tech sector further fuelled our S&P 500 ETF, HXS. Since our portfolios are well diversified, the pull back in Tesla and Twitter did not have a major impact to any of our portfolios.

Like many Canadians, Canada’s economy took a summer vacation

For Canada’s economy this summer, there’s good news and bad news… and the result is just a bit flat.

Employment data is one metric showing mixed performance generally: while Canada added over 54,000 jobs in July, many of those jobs were part time and in the public sector. At the same time, full-time employment has actually fallen. Another report showed Canadian employment by every province underperforming counterparts in the US. For instance:

“North Dakota, which Eisen said might be a bit of an outlier given a boom in natural resource investment, ranked highest overall with scores of 80.4 out of 100, while British Columbia achieved the highest score for a Canadian province — 53.6 — well behind dozens of U.S. States.”

There is good news and bad news in other important sectors. Canada’s petro-economy benefited as oil maintained its sweet spot above $65 for much of August. That helped boost energy companies.

Another spot of good news comes from the Canadian finance sector. The big banks are reporting back-to-back record earnings:

Toronto-Dominion Bank, Royal Bank of Canada and the nation’s other six large lenders collectively boosted profit 10 per cent to a record $11.7 billion (US$8.9 billion) in the fiscal third quarter…

Canada’s S&P/TSX Commercial Banks Index has gained 13 per cent in the past 12 months…”

However, the same analysis notes that this excellent performance looks less impressive compared to US counterparts. As well, on the energy front, domestic energy stocks are failing to achieve their full potential.

Legal problems continue to plug up our pipelines. Accordingly, Canadians are also increasingly (and painfully) aware of the big discount the country is providing to its only oil buyer. As a result of these downward pressures, in contrast to the US’ biggest equity markets, our own TSX performance has been relatively flat.

One outlier comes from the fast-growing marijuana industry that is anticipating legalization in the fall: for instance, Canopy Growth saw its stock rise 56 percent following a deal with Constellation Brands Inc. (which makes Corona beer). At a market value of $11 billion, Canopy is now in the same league as well-known Canadian brands like Bombardier and Canadian Tire. Certainly, we are intrigued by the prospects of marijuana investing for Canadians.

Emerging markets sell off. Bank of Japan faces headwinds. Germany is up. Greece is down. Russia is out

In the larger world economy, trends are generally positive, though volatility seems to be rising in Europe and elsewhere.

Looking at emerging markets, we see that the US-China trade spat has had a knock-on effect. Smaller southeast Asian countries that are included in China’s supply chain are mainly affected. As well, we’ve seen targeted sanctions on Turkey, which could escalate, particularly since Ankara is already retaliating. The currency has seen runaway inflation and some observers suggest investors are about to take a Turkish bath. Meanwhile, new sanctions against Russian sovereign debt may be straining an economy that is already facing major hurdles.

These may be signs of short-term strains, however. We would note that the long-term view on emerging markets is positive: strong growth, low debt and fast-growing populations creating new market opportunities makes emerging markets in southeast Asia, Latin America and elsewhere into future opportunities.

In Japan, the Nikkei’s performance in August was volatile, but positive. Japanese stocks dipped mid-month before coming back and it has still not recovered to highs attained earlier in the year. However, the Bank of Japan’s practice of purchasing of Nikkei ETFs to prop up the market is now under further critical scrutiny. It remains to be seen whether the BOJ will continue to be able to do so.

In Europe, notwithstanding international trade disputes, front-runner Germany is on track to enjoy the world’s largest trade surplus, $299 billion. That is, the EU’s economic leader is set to become even more dominant. In contrast, Greece faces the end of its third bailout regimen a shrunken mess. The money taps from European partners may be shut off, but its finances are as weak as ever. It remains to be seen how this will affect the economy of the EU more broadly, though the continent has weathered similar challenges for a long time.

Many different emerging market currencies are down. This has caused a ripple affect even in more developed markets. Our International Equities ETF, XEF, was down 1.63% in August. However, it did not have too much of an effect on our portfolios, as we did not overweight our position in international equities.

Market update. Conclusion

US economic growth leads the pack. But around the world, the threat of trade wars are giving way to the optimism of trade deals. In Canada, energy and finance sectors are propping up the economy. We are seeing good performance in our portfolios, but as always, take measures to guard against volatility over the long term.

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