Market Update. Interest rates steady and a market rally, especially for Silicon Valley
In January-February, the market has been mostly up. Volatility has cooled off a bit. And while a slowdown may be coming up longer-term, we’ve been on a slow-but-steady upswing. What are the factors that are moving the market?
- The US Federal Reserve showed they’re going to be patient when it comes to raising interest rates — meaning there’s still room to make more money by taking a risk in the market.
- U.S. equity markets rally for six straight weeks to the end of January 2019. Tech stocks in particular are getting a nice boost following healthy statements of earnings.
- The economy continues to make gains, even as the longer-term outlook is cloudy.
- Canada’s economy is dragging a bit thanks to lower-than-optimal oil and a cooling housing market — though overall, we’re still growing.
- Internationally, political unrest in the heart of Europe and a crisis in Venezuela are causing a bit of stress — but without an escalation, worldwide markets are handling it.
See our performance and additional observations below.
ETF Safety Portfolio was up 2.32% in January. It was up 0.31% in the past year.
A portfolio constructed for safety produced an unprecedented 2.32% return due to contributions from the equity asset class from the U.S. and Canada, with Horizons S&P/TSX 60 ETF (HXT) up 8.38% and BMO Covered Call DJIA Hedged to CAD ETF (ZWA) up 6.60%. ZRE, which was weak in the fourth quarter of 2018 rebounded 8.19% in January.
ETF Conservative Portfolio was up 3.17% in January. It was down -0.12% in the past year.
The ETF Conservative Portfolio saw 8 out of its 9 holdings finish in positive territory. Its largest U.S. equity weighting the BMO Covered Call DJIA Hedged to CAD ETF (ZWA) finished 6.60% higher, while Horizons S&P 500 (HXS) was up 3.92%. ZRE, which was weak in the fourth quarter of 2018 rebounded 8.19% in January.
ETF Balanced Portfolio was up 4.03% in January. It was up 0.05% in the past year.
With a more balanced approach in asset allocation this model benefited from a higher equity allocation via U.S. equity exposure at 30%. The portfolio gained with BMO Covered Call DJIA Hedged to CAD ETF (ZWA) 6.60% higher and Horizons S&P 500 (HXS) up 3.92%. On the fixed income side, the BMO High Yield US Corp Bond Hedged to CAD ETF was up 4.85%.
ETF Growth Portfolio was up 4.28% in January. It was up 0.02% in the past year.
North American equity markets have gained for seven straight consecutive weeks since the December 24, 2018 lows to Feb 8, 2019. Growth investors benefited from the BMO Covered Call DJIA Hedged to CAD ETF (ZWA) 6.60% higher and Horizons S&P 500 (HXS) up 3.92%. On the domestic side the Horizons S&P/TSX 60 ETF (HXT) was up 8.38%. We also saw a 4.85% gain from the BMO High Yield US Corp Bond Hedged to CAD ETF.
ETF Aggressive Portfolio was up 4.81% in January. It was up 0.46% in the past year.
The Aggressive Portfolio with the highest exposure to the equity asset class and highest North American exposure delivered with U.S. and Canadian markets rallying for seven straight weeks as of Feb. 8, 2019. BMO Covered Call DJIA Hedged to CAD ETF (ZWA) 6.60% higher and Horizons S&P 500 (HXS) up 3.92%. BMO High Yield US Corp Bond Hedged to CAD ETF was up 4.85% on the fixed income asset class. Canadian equities as represented by the Horizons S&P/TSX 60 ETF (HXT) was up 8.38%.
Private Investment Portfolio
Safety Private Portfolio was up 1.05% in January. It was up 3.53% in the past year.
The portfolio benefited from its Canadian and foreign equity exposure in the NWM Core fund. Income strategies, real estate via NWM Primary Mortgage Fund and fixed income through Vanguard Canadian Short-Term Bonds ETF and Vanguard Canadian Short-Term Corp. Bonds ETF continued to provide diversification and risk mitigation.
Balanced Private Portfolio was up 1.62% in January. It was up 3.83% in the past year.
The portfolio provided returns though its equity holdings from the NWM Core fund in Canadian and foreign equities. Real-estate, blended fixed income and income strategies, which represent about a 45% weighting delivered on its mandate of income and lower volatility exposure.
Aggressive Private Portfolio was up 1.79% in January. It was up 5.31% in the past year.
With exposure to NWM Core Portfolio and NWM U.S. Tactical High-Income Fund (CAD) its U.S. exposure combined with its domestic and foreign equity exposure benefited from the global equity rally which began after December 25, 2018. Real through NWM Real Estate Fund continued to add income and mitigate risk through diversification.
Market movers, at a glance
Now, let’s get to the details of what’s affecting your returns.
Fed puts brakes on rate rise, so stocks rise up in the meantime
When interest rates remain low, it makes more sense for investors to put their money into equities, where they can earn more money. A higher rate negatively impact all aspect of the U.S. and global economies.
As such, the US Fed’s recent announcement got a ‘thumbs up’ from market watchers:
“Jerome H. Powell, the Federal Reserve chairman, said Friday that low inflation would allow the Fed to be“patient” in deciding whether to continue raising interest rates, a message welcomed by jittery investors…
“The stock market, driven down on Thursday by concerns about growth, surged on Friday on the strength of the jobs data, and then kept climbing as Mr. Powell spoke.”
As of Feb. 14, 2019, the U.S. 10-year yield is 2.66% due to the Fed putting rates hikes possibly on hold. The U.S. and global equity markets quickly made a V-shaped recovery.
All WealthBar portfolios benefited from this V-shaped rally as the portfolios had U.S. and Canadian exposure which had some of the best returns in January. This was evident by BMO Covered Call DJIA Hedged to CAD ETF (ZWA) +6.60%, Horizons S&P 500 (HXS) +3.92%, BMO High Yield US Corp Bond Hedged to CAD ETF +4.85% on the fixed income asset class, and Canadian equities as represented by the Horizons S&P/TSX 60 ETF (HXT) +8.38% in January. Internationally, the iShares MSCI EAFE IMI ETF (XEF) was higher by +2.65%.
Stocks heat up over the winter. Bonus: stock buybacks are back
The stock market had more upward mobility in January. Some related metrics:
- The U.S. S&P 500 as a measure of the broader market had its best January since 1987. +7.9%.
- Dow Jones +7.2%, best January since 1989.
- Nasdaq +9.7%, best January since 2001.
By the end of January 2019, the majority of companies in the S&P 500 reported their quarterly results. The “FAANG” (Facebook, Amazon, Apple, Netflix and Google/Alphabet) stocks which have been the leaders of the Nasdaq Index since the 2016 U.S. election rallied in full force. But even when those quarterly results missed the mark as with Apple and Nvidia, stocks still rallied.
Indeed, sentiment around Apple is in some ways representative of investor sentiment about the S&P 500 on the whole. Investors are still generally positive on Apple, but aware that the technology company needs to do a “hard reset” on its own business practices. At the same time, Apple has to deal with market saturation, while dealing with macro-factors like the strong US dollar or weakening Chinese economy. Clearly, some of these factors affect many US firms in diverse sectors.
As U.S. and global technology stocks were rallying, most of the S&P 500 companies had reported decent results. Their blackout period for share buybacks were lifted adding another wave of buying. As such, part of the rally is coming from big companies buying back their own shares by the tens of billions. The share repurchasing programs (with total U.S. stock repurchase announcements crossing the $1 trillion mark before 2018 ended) that followed Trump’s tax cuts can return in full force.
As Apple’s shares rallied, so did the rest of the NASDAQ Index. This rally in growth based companies have led to extraordinary performance in our Balanced, Growth and Aggressive ETF portfolios.
US economy goes whole hog to start Year of the Pig
While the U.S., Canadian and world equity markets were rallying the geopolitical issues involving President Donald Trump and the partial U.S. government shutdown continued to circulate the news media. After 35-days of an impasse, President Trump ended the partial shutdown as negotiations continued regarding the border wall.
“What government shutdown — and why does it even matter?” some commentators might have said last month, as the U.S. created 304,000 new jobs in January. That nearly doubled what experts were predicting, just 170,000. On the whole, the unemployment rate moved up slightly to 4.0 % from 3.9% as more Americans entered the workforce.
And whether or not Democrat Rep. Alexandria Ocasio-Cortez’s Green New Deal ever comes to pass, the critical energy sector is doing fine with $52/barrel oil, just as the US is set to become an energy exporter for the first time in 70 years. Meanwhile, the U.S. banking sector showed strength following a 52-week low that it hit in December. And across many sectors, wages continue to grow. To be sure, slowdowns in the critical auto manufacturing and housing sectors are not helping, but overall, the economic outlook is still positive for 2019.
In Canada, politics impacted the critical energy sector: as global oil prices rebounded from US$42/barrel up to US$55/barrel following a December low point, Alberta Premier Rachel Notley announcing production cuts back in December 2018 that would take effect in January 2019. The law of supply and demand kicked in, helping Canadian producers drill into a better profit margin.
However, the Canadian housing market is expected to cool in 2019 according to the Canadian Real Estate Association (CREA). This represents a key component of the Canadian economy.
The geopolitical rhetoric and talk of a slowing Canadian housing market had little or no impact on the equity markets in North America. Market participants viewed the 2018 fall sell-off as a buy the dip opportunity again.
The Canadian Equity ETFs saw the biggest gains in January with HXT and ZRE leading the rally with 8.38% and 6.60% returns respectively.
China throws money at a problem, Japan is cautious and Europe is not just building cars — they’re burning them
While the US was enjoying a market rally, China did too… but a lot of that came from the country injecting 257.5 billion yuan (US$37.9 billion) into its money market channels through its central bank, to support bank liquidity. Still, that was positive for the China equity markets. If the USA and China do manage to negotiate a trade deal, that could be good for many more economies interlinked in the supply chain… but negotiations, as they say, are still ongoing.
Japan’s consumer confidence fell to a two year low in January 2019. Clearly, Japanese consumers are more pessimistic heading into the new year, though that is counterbalanced by a moderate rally in their stock market.
Meanwhile, in Europe, political discontent continues to impact people’s livelihoods. The “Yellow Vest(Gilets Jaunes)” movement and protests in France which have been ongoing for weeks now is estimated to have a euro 4.4 billion impact of the French economy. That matters because France is the 6th largest economy in the world according to the International Monetary Fund (2018). And it hardly needs to be said that Brexit remains a source of uncertainty for both British and European markets.
European markets have rally about 10% since their December 2018 lows. Even the “Yellow Vest” protests have not dampened European equity markets. The fact remains that interest rates remain low. The European Central Bank said that it would keep rates unchanged through the summer of 2019 to support the Eurozone economy and increase inflation. This means that liquidity will continued to support European equities. Perhaps months from now, the impact from France will work its way into the Eurozone, but until then our International Equities ETF, XEF, still received a 2.65% return in January.
Market update. Conclusion
Overall, the market has been doing better lately. While volatility remains higher than we’d like and longer-term growth prospects are uncertain, for now, market sentiment is mostly positive. As usual, we take a diversified, balanced approach to help our portfolios to weather the ups and downs of the market while taking advantage of growth opportunities.