Market Insights Uncategorized

Market Update. Investors buy the rumour of a US-China trade deal

March 18, 2019


Market Update. Investors buy the rumour of a US-China trade deal

Market Insights Uncategorized

Canadian, U.S., China and global markets continued their rally from late December into February. Why? Investors are optimistic that a trade deal between China and the U.S. will finally get signed — giving a bit more predictability to the global economy.

But that’s not all. These are some of the big factors moving the market upwards lately.

  • The US-China trade deal — or no deal (as mentioned above). 
  • Ending the US government shutdown.
  • Mixed economic trends showing slower growth in North America and Europe
  • Political flashpoints
  • Critical commodities like oil and copper rising worldwide — a good sign for economic growth.

See our performance and additional observations below.

ETF Portfolios
ETF Safety Portfolio was up 1.27% in February. It was up 2.39% in the past year. 

As a safety portfolio it still participated in good gains. Key drivers were U.S. and Canadian equities. Canadian real estate also contributed.       

ETF Conservative Portfolio was up 1.78% in February. It was up 2.67% in the past year.  

As more of an income focused portfolio, its U.S., Canadian and international equity holdings again delivered some solid returns.    

ETF Balanced Portfolio was up 2.26% in February. It was up 3.43% in the past year. 

A portfolio somewhere in the middle, but during a global equities market rally from the start of the year, its U.S., Canadian and international equity holdings all contributed again in February.  

ETF Growth Portfolio was up 2.49% in January. It was up 3.53% in the past year. 

Growth has a higher allocation to equities. As a result, this portfolio provided a higher return thanks to a higher weighting in U.S., Canadian and international markets.

ETF Aggressive Portfolio was up 2.77% in January. It was up 4.29% in the past year. 

Being aggressive in equity holdings yielded continued strong gains through February, thanks to its higher allocation in U.S. equities.        

Private Investment Portfolio

Safety Private Portfolio was up 0.75% in February. It was up 4.01% in the past year. 

These stable returns came from exposure to short-term bonds and mortgages.  

Balanced Private Portfolio was up 1.19% in February. It was up 4.62% in the past year. 

Returns came from U.S., Canadian and international equities. Mortgages and fixed income components provided risk and volatility mitigation.

Aggressive Private Portfolio was up 1.61% in February. It was up 5.66% in the past year. 

The portfolio’s gains came from U.S. equity exposure, with contribution from Canadian and international equity holdings.    

Market movers, at a glance

Now, let’s get to the details of what’s affecting your returns.

Stocks up… just as long as the US and China keep talking

Buy the rumour” has been the strategy for investors lately, as U.S. President Donald Trump and the news media reported progress in US-China trade talks. 

Every time there was some positive trade news, the equity markets would open or trade higher. And that good reaction wasn’t just limited to North America, either: China’s stock market surged in the first week of February for the Chinese Lunar New Year, as retail sales grew 8.5% from 2018. 

Why is that happening? Simply put, investors like certainty. Trade disruptions create the opposite. So a lot hinges on a deal being done. When the two biggest economies in the world butt heads, the shocks can be felt around the world (not least, by Canadian companies in the supply chain). 

What’s this deal all about, anyway? Basically, the Trump administration wants China to commit to buying more US goods, to reduce a gargantuan trade deficit, and to respect intellectual property rights. The Chinese negotiators on the other hand would prefer to keep things going as they’ve been going for decades. The status quo allowed trade on relatively protectionist terms that allowed it to rack up that giant trade deficit — now at a staggering $621 billion — in the first place.

The deadline for doing a deal has technically come and gone. But American and Chinese negotiators resolved to keep going — and so long as they continue citing progress, that could be enough to keep markets in the black.

Positive U.S., Canadian and international indices returns continued into the month of February. All Wealthbar portfolios benefited from the recent market rally.

Companies investing in buybacks, but not fully investing in themselves — so the economy drags

“The US economy grew at an annualized pace of 2.6% in Q4 2018, slightly better than expected.” The Federal Reserve’s January announcement that they were going to have patience regarding interest rates continued to buoy markets in February. But slower growth may be on the horizon.

While stock markets are trading higher, the companies represented on those exchanges aren’t pouring the windfall into new factories, equipment or personnel. At least, it’s not happening as much as one might expect. Instead, stock buybacks continue to be popular. While that might prop up shareholder value on paper, there is less of an upside on the economic front.

Indeed, the US economy showed mixed results: retail sales dropped significantly, 1.2% month-over-month. Industrial production also contracted, particularly in the auto sector. U.S. existing home sales fell to their lowest level in 3 years in January. That said, the tech sector charged ahead (helping the Nasdaq rally): for instance, the Philadelphia Semiconductor Index was up 28% in February, after hitting a low just before Christmas. 

Another sector where workers saw good news in February: employees of the U.S. government, who are back at work after Republicans and Democrats came to a budget deal. The government employs over 22 million people. About 800,000 of them were not getting a regular paycheque during the shutdown. That’s a lot of people back on the payroll — who are feeling safe about spending in their communities again.

Weaker economic data won’t necessarily translate into weaker market performance yet. But it is something to watch.

The U.S. share buyback programs under a dovish U.S. Federal Reserve, combined with increased optimism of a U.S. and China trade deal were the biggest factors. As a result, we saw higher positive gains in higher equity exposure for the Balanced, Growth and Aggressive portfolios. 

The True North’s economy slips as economy cools

While the political SNC-Lavalin scandal has sucked all the oxygen out of the room for Canadians’ focus lately, concerning trends in the economy are likely to recapture their attention soon enough.

The critical Canadian housing market started 2019 on a weak note, as expected as higher mortgage rates and regulations are having a negative impact. Meanwhile, retail sales saw a decline of 0.1% in February, below expectations — and any drop there is not typically a good sign for the Canadian dollar.

The good news: the Canadian economy added 66,800 jobs in January 2019 — beating expectations. 

The Canadian housing market is showing some softness in key areas such as Vancouver. This was already expected in late 2018, after many decades of strong growth. On February 21, 2019, the Governor of the Bank of Canada Stephen Poloz during a business luncheon in Montreal said the country’s road to higher interest rates was “highly uncertain.”

Canadian interest rates are possibly on hold. That will continue to benefit all WealthBar portfolios. The Horizons S&P/TSX 60 ETF (HXT) was up 2.84%. The BMO Equal Weight REITs ETF (ZRE) was up 4.04%.

Central banks’ reaction to weak economic data? More stimulus

Central Banks around the world have been taking turns stimulating their economies for years. And if things slow down — well, we can expect more of the same.

Japan’s Central Bank is weighing whether to ramp up stimulus — though after years of low interest rates that created deflationary pressure, it would be a tricky maneuver. Meanwhile, the European Central Bank hinted in mid-February that it was a step closer to pumping up a weakening euro-area economy. In both cases, it remains to be seen whether they can react quickly enough to reverse a negative trend.

At a speech in London on July 26, 2012, European Central Bank (ECB) President Mario Draghi said “Within our mandate, the ECB is ready to do whatever it takes to preserve the euro”. Fast forward to March 7, 2019 and he announced that rates would remain at record lows for the Euro-Zone, for at least the balance of 2019. As the Euro-Zone’s economy is supported by the ECB, this is positive for U.S., Canadian and international companies that conduct trade with Europe. 

WealthBar portfolios with higher amounts of equity in their portfolios, like Balanced, Growth and Aggressive, should benefit.

Brexit, global flashpoints and economic bright spots

In Europe, the outcome of Brexit remains one of the the biggest variables for the EU economic zone. In fact, Brexit is now uncertain, thanks to a vote (413 to 202) in the UK parliament authorizing PM Theresa May to ask for a delay from their European counterparts from the current March 29 deadline.

The prospect of a “no-deal” Brexit could disrupt trade relations with some of Britain’s biggest partners. That said, it is only fair to point out that following the Brexit referendum, the market went down in the short term, but then bounced back. The economy has grown as well — so the ultimate consequences here for investors may not be as significant as all of the media focus might suggest it will be.

War can also throw a wrench into the machinery of the world economy. After a suicide car bomb killed Indian soldiers in Kashmir, India retaliated with airstrikes and allegedly lost two jets to Pakistani air defenses. With two large nuclear powers on the brink of a wider war, there are fears of escalation. That poses a risk to the energy supply chain from the nearby Persian Gulf region. 

While that drama plays out, we see two other trends showing the global economy may be healthier than we think. Global oil prices have risen on optimism of the U.S.-China trade deal mentioned above, with the U.S. West Texas Intermediate futures closing above $57/barrel in late February (its highest closing since mid-November). As well, copper hit a 7-month high on Feb 20, causing a rally for mining stocks. Since copper is a key ingredient in so many manufactured products, a high price for copper is one clue pointing to a healthy economy.

Lower crude oil prices are good for the Canadian and international consumer. Higher crude oil prices are negative, but good for Canadian energy companies. The commodities sector usually serves as a leading indicator of global economic activity. 

Market update. Conclusion

The market rallied in February, though early March has been more flat. Optimism over the US-China trade deal is helping to prop up sentiment, though that will not last forever. There are signs of slower growth on the horizon. As always, we take a long-term perspective and recommend a properly-diversified portfolio in order to take advantage of growth and manage risk.

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