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Market Insights

Market Update. Oil’s dip takes energy out of stocks, but economic engine still humming

December 19, 2018

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Market Update. Oil’s dip takes energy out of stocks, but economic engine still humming

Market Insights

Let’s face it: markets have been down. If you’re an investor, it doesn’t feel great. But what’s happening, here? First, we had an unprecedented bull market for most of the last 10 years.

Not to oversimplify things, but as the saying goes, what goes up must come down. It doesn’t have to stay down… and as we’ve seen with markets throughout history, it never does.

Keep in mind: investing is a long-term process. The blips on your investing radar are not cause for changing course. You’ve got a plan and goals. Staying invested means not letting short-term performance derail your long-term investment strategy. Investors who panic and go to cash miss out on future growth in the market and underperform.

That’s why staying invested in a diversified portfolio is the smarter approach. The proof is in the numbers: for instance, so far in 2018, WealthBar’s Balanced ETF Portfolio is up 1.1%. In comparison, MorningStar Balanced Mutual Fund Category is down 0.7%. With that in mind, market declines like this present an opportunity: if you’ve heard the expression buy low, sell high… it’s low.

But I digress. So, what’s causing all of the volatility? The first factor is dripping into a lot of headlines: oil! It’s like the oxygen of the world economy. But recently, thanks to overproduction, it seemed like we just had too much of the stuff. Hovering around $75/barrel just a few months ago, oil is now closer to $50. All of this is having an impact on the market, which is already seeing plenty of ups and downs. 

Of course, oil isn’t the whole story — and there is some good news out there. The economy in general is still healthy enough to produce the lowest unemployment in decades. China and the USA appear to have reached a trade truce. The UK and Europe may have worked out a Brexit deal. The USMCA is in the final stages of ratification by the US, Canada and Mexico. Abroad, Japan and Europe have seen positive economic news. 

Now, let’s get to the details about what’s moving your returns. See our performance and additional insights below.

ETF Portfolios

ETF Safety Portfolio was down -0.15% in November. It’s down -0.15% for the past year.

Uncertainty surrounding interest rates both in Canada and south of the boarder has caused a drag on our income holdings. In particular, Canadian Preferred Shares (ZPR) was down 6.8% and US High Yield (ZHY) down 0.8%. Increases in Real Estate, US, Canadian and international equity offset most of the decline. 

ETF Conservative Portfolio was flat in November. It’s still up 0.49% for the past year. Positive returns for the ETF Conservative Portfolio this month are attributed to equities and real estate ETFs.

ETF Balanced Portfolio was up 0.45% in November. It’s still up 1.20% for the past year.

The positive returns this month were helped by the US equity ETF, HXS, which was up 3%. The Canadian Equity ETF, HXT, was up 2.3% and Real Estate ETF, ZRE, was up 1.2%. This outweighed the negative performance from the US High Yield ETF, ZHY, which was down -0.8% and Preferred Shares ETF, ZPR, which was down -6.9%.

ETF Growth Portfolio was up 0.59% in November. It’s still up 1.55% for the past year.

The majority of this portfolio’s higher performance can be attributed to the greater exposure to HXS (S&P 500 ETF). The total return from HXS and other equity focused ETF rebounded back the from the losses last month.

ETF Aggressive Portfolio was up 1.03% in November. It’s still up 2.28% for the past year.

HXS, the US Equity ETF was up 3% last month. This portfolio has the highest weighting in HXS (US Equities). As a result, it had the highest monthly return across all of our portfolios. Real Estate, Canadian and International equity ETFs provided further diversification.

Private Investment Portfolio

Safety Private Portfolio was up 0.46% in November. It’s still up 2.50% for the past year.

The mortgage funds provided income while reducing volatility in this portfolio. The additional diversification to asset classes in the NWM Core Fund such as mortgages, commodities, real estate and private equity remained a key component in mitigating risk. It also contributed to the overall positive performance of the portfolio.

Balanced Private Portfolio was up 0.55% in November. It’s still up 2.95% for the past year.

The position in the NWM Core Fund gave us higher overall performance. The unconventional asset classes such as mortgages, commodities, real estate and private equity, provided great diversification, helping mitigate risk.

Aggressive Private Portfolio was up 0.70% in November. It’s still up 3.38% for the past year.

The extra exposures in the NWM Real Estate Fund & US Tactical Income Fund generated greater positive returns for this portfolio over the Balanced Private portfolio. The core balanced position still provided additional diversification to asset classes such as mortgages, commodities, real estate and private equity mitigated risk.

Market movers, at a glance

Let’s take a closer look at some of the market movers in November-December.

Oil price pumped market back up before a slippery slide

There was actually some good news for oil producers recently, especially in Canada: they’re back from the dead. Alberta’s oil patch was practically giving away oil for free, at US $13.70/barrel, compared with US $55.51 in July. Alberta’s premier announced they would be cutting supply — and presto, like magic, energy stocks bounced back from where they had fallen. Western Canada Select alone jumped 44 percent on the news. (The long-term economic fallout from the decision is less promising for Canada, however.)

Worldwide, we saw a similar dynamic, with stocks and oil jumping in tandem with other good news: the USA and China had decided to stop rattling sabres and put their trade war on hold. Just in time! The price of a barrel of crude had fallen 21 percent, its worst performance in a decade. However, the consequences were mixed for markets. 

US President Donald Trump had been enthusiastic about the recent price drop, thanking Saudi Arabia and explaining it was like a big tax cut for the world.

In one sense, he’s right: oil goes into so much of the stuff we use to live our lives (not just the stuff that goes into our car’s gas tank) that a price cut would help cut inflation. With North America becoming a net energy exporter, a low oil price was hurting revenues and stocks in the energy sector. Still, It looked like we were back in more healthy territory.

But then the Leader of the Free World tweeted again in early December:

And stocks promptly fell

With oil falling yet again and Trump creating uncertainty in trade, the market has continued its volatile run into December. Having said that, the real estate sector was not as impacted. Our decision to hold Real Estate allowed our portfolios to be more diversified and benefit from the reduced volatility.

But, for all investors, it’s good to remember this important fact…

Repeat after me: “The stock market is not the economy.”

After a lot of up, down and sideways activity in November, the S&P/TSX Composite Index ended about 1 percent higher (15,197.82 on Nov. 30, compared to 15,150.15 on Nov. 1). Financial firms, insurance companies and utilities helped push up the index to an even keel, as energy companies and others struggled. Unfortunately, the tech sector that has been responsible for so much market growth was not able to deliver any joy. Facebook was a case in point. Fighting off multiple scandals, its stock has declined 24 percent since March (possibly hitting bottom in early December). 

It’s important to remember that the stock market and the broader economy are not the same thing. Most people aren’t invested in stocks — and certainly, there are other, less-risky ways for investors to make money than by putting it all into equities (which is why we have a diversified approach for our portfolios). 

So, while stocks are up and down, the labor market in the USA is about as good as it’s been in years. In many states, there are just not enough people to fill all the jobs available, which is helping buttress wages. 
Here in Canada, the economy is growing, though at a slower rate (2 percent in the third quarter, compared to 2.9 percent in the second quarter). Between the new USMCA deal, the closure of a major auto manufacturing plant in the context of a struggling auto sector, plus the Alberta oil news, the slower growth is understandable. 

With the continued uncertainty of the markets, especially with Canada, we created a diversified portfolio that provides higher returns on a risk adjusted basis by maintaining a smaller position in Canadian equities. In our decision making, we overweighted US equities vs. Canadian equities which resulted in higher performance this past month. Our S&P ETF, HXS, was up 2.95% while our Canadian market ETF, HXT, was only up 2.28%.

A world of opportunity out there

Some of the happiest observers of the US-China trade truce were neither American nor Chinese: European markets enjoyed a healthy bounce from the news: “Europe’s basic resources stocks — with their heavy exposure to China — jumped almost 5 percent as investors reacted to a cease-fire on tariffs between Washington and Beijing.” As well, while the tech sector in North America has been backsliding, European tech companies are enjoying their IPOs: “European tech companies that went public in 2018 saw their share price increase by an average of 222 percent” compared to 42 percent in the USA.

Meanwhile, in Asia, Japan is having a bit of an economic rebound, with the highest factory output in years and a retail sales bonanza that has continued over 10 months. After months of misery, China will enjoy the fruits of the trade truce and emerging markets are already getting a boost.

This effect can be seen in our international equities ETF, XEF, which enjoyed a 1% uptick in the month of November. Since this ETF is unhedged, it also provides further diversification in our constructed portfolios.

Market update. Conclusion

The fast-dropping price of oil loomed large this month, with mixed results for markets around the world. Meanwhile, the USA and China delivered an early holiday present with a temporary halt to their trade war. Our diversified, balanced approach has helped our portfolios to weather recent volatility. 

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