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Market update. Trump pulls stunts. The elephant grunts. Canada confronts

June 11, 2018

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Market update. Trump pulls stunts. The elephant grunts. Canada confronts

Market Insights

“Living next to you is in some ways like sleeping with an elephant. No matter how friendly and even-tempered is the beast, if I can call it that, one is affected by every twitch and grunt.” A generation ago, Prime Minister Pierre Trudeau once famously said these words of the USA. For his son, our own PM Justin Trudeau, along with plenty of investors, the elephant’s behaviour may be causing some sleepless nights.

This month, the Trump administration in the USA kicked off a trade war and possibly even an end to the NAFTA pact between Canada, the USA and Mexico. Much of this may have been baked into the cake already in May. That seems very much to be the case among our investors. When we sent out a brief message to update them amid a bout of temporary volatility, the prevailing sentiment can be summed up thusly: “I’m not worried. I know you’re handling it.”

We’re happy to say that this trust is warranted. As you will see, our own portfolios’ performance was quite positive. For instance, our Aggressive ETF was up about 1.5 percent for the month of May. That’s thanks to lower volatility overall, a resurgence by Silicon Valley’s tech titans and other signs of a healthy economy.

What does all this mean for your investments?

ETF Portfolios

Clients enjoyed higher returns than last month in May.

ETF Safety Portfolio was up 0.54% in May. It’s up 2.89% for the past year.

This portfolio’s May performance comes mainly from holding small exposures to Real Estate and Canadian/US Equities. The main goal of these holdings is to provide stability and minimize losses. As a result, any gains or losses in the equity markets will be captured less.

ETF Conservative Portfolio was up 0.77% in May. It’s up 4.53% for the past year.

With increased exposures to Canadian 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 Balanced Portfolio was up 1.05% in May. It’s up 5.86% for the past year.

The majority of this portfolio’s positive performance can be attributed to the greater exposure to Real Estate, Canadian & US equities. All of these asset classes saw exceptional returns in May. The performance in the High Yield ETF (ZHY) & International equities (XEF) dragged down the portfolio’s performance, as they underperformed. However, these holdings continue to be a good source of diversification.

ETF Growth Portfolio was up 1.20% in May. It’s up 6.42% for the past year.

This portfolio mainly increased its exposure to HXS, which is the ETF that tracks US equities, specifically the S&P 500 index. HXS was the best performing ETF in our portfolios this month. As a result, the gain in this portfolio higher than the ETF Balanced Portfolio. Having said that, because the Canadian dollar was slightly stronger. This helped reduce the volatility of the portfolio.

ETF Aggressive Portfolio was up 1.46% in May. It’s up 7.35% for the past year.

We saw exceptional returns in Real Estate, Canadian & US equities, as these sectors came alive after a subdued April. With this portfolio having the highest weighting in all of these asset classes, this resulted in the highest monthly return across all of our portfolios. High yield bond and international equity ETFs underperformed but still provided a good source of diversification. 

Private Investment Portfolios

Safety Private Portfolio was up 0.57% in May. It’s up 3.41% for the past year.

The additional diversification to asset classes such as mortgages, commodities, real estate and private equity not only mitigated risk but generated positive returns. Canadian Bonds and mortgages continued to reduce the volatility of the portfolio.

Balanced Private Portfolio was up 0.94% in May. It’s up 5.24% for the past year.

The additional diversification to asset classes such as mortgages, commodities, real estate and private equity not only mitigated risk but generated positive returns.

Aggressive Private Portfolio was up 1.15% in May. It’s up 3.91% 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. The additional exposure to real estate through the NWM Real Estate Fund greatly improved the overall return of this portfolio. The extra equity exposure in the NWM US Tactical High Income Fund also provided an additional source of return over the Balanced Private Portfolio.

Market movers, at a glance

Let’s take a closer look at some of the market movers in May: trade talks fizzled, Netflix has a blockbuster month, oil declined, the Canadian dollar was down and yet again, Europe’s politics went sideways.

Trade war? What’s it good for? (Absolutely nothin’!)

Market update. Nasdaq chart May 2018

We’ve been down in the muck of this trade war for a few days already and markets are… up? Yes indeed. By June 1, just 4 days after the Trump administration announced import duties on steel and aluminum, the S&P 500 actually was higher than the week before.

While many reports used language like ‘crisis’, ‘catastrophe’ or ‘emergency’ to describe the likely consequences of a trade war, investors actually seem pretty sanguine about whether the worst will actually happen. Perhaps, they’ve already (at least somewhat) baked tariffs into their analysis. In any case, this current trade conflict may be more of a quick skirmish rather than an all-out war, as different sides feel the urgent pressure to get a deal done.

Meanwhile, back in May, trade talks were going nowhere fast with ChinaNAFTA partners and the European Union. Then, implementation of tariffs was still not a sure thing. A ‘wait and see’ mood may have tempered expectations and prevented skittish investors from making any sudden moves. This may partly explain why we didn’t see as much volatility as we otherwise might have expected.

May had considerable strong performance for US and Canadian equities. Both markets responded well to the prospect of trade tariffs. We are still waiting to see how the trade tariffs recently enacted will affect portfolios.

Oil welled up, then dripped back down

As the price of a barrel of oil ratcheted up past $70 a barrel for the first time since 2014, there was much cheering as the energy sector powered profits.

Then, almost as day follows night, came the worries that maybe oil was rising a little too fast, heading towards $100 a barrel… and we could be facing a recession in the long term.

But then, the laws of supply and demand kicked in. Rumours swiftly spread that OPEC and Russia, keen to get revenues flowing once more, were going to boost production. As a result, oil headed back down to what some might term a ‘sweet spot’ in the mid-$60 range.

For Canadians, with lingering memories of an energy sector powering the economy (and more recently, low prices crashing the party), these swings in price can only have added to already-high stakes. The leading Liberal party switched their position from “The Trans Mountain Pipeline Extension Will Be Built” to a somewhat more controversial “The Trans-Mountain Pipeline Extension Will Be Built with Taxpayer Dollars.” If the federal government does actually acquire the pipeline, does this create a bigger risk for Canadians in terms of a budget that is already overstretched with high debt and an $18.1 billion deficit?

The renewed exploitation of Canada’s hydrocarbon resources is of interest to investors the world over. Indeed, Prime Minister Trudeau has talked about reassuring investors that Canada is open for business. In that sense, the pipeline proposal may have been quite necessary. There was the decision to prevent a state-owned Chinese company from buying a major Canadian construction firm, Aecon Group Inc. Then there’s the push to probe a Chinese telecom giant Huawei’s infrastructure at Canadian universities.

In this context, the Canadian government may have wanted to show there was more on tap from the north’s export pipeline than just maple syrup.

The Canadian economy performed well in May and HXT, which tracks the S&P TSX-60 has significant exposure to oil and gas returned 3 percent.

Is it too late to apologize? Starbucks, Facebook and Wells Fargo signal a sorry trend

One interesting development among corporate giants in the USA: the rise of the apology video, as a tool to preserve shareholder value from a deluge of bad PR. Certainly, it would seem corporations are being much more vocal in protecting their interests — at least when it becomes clear that public indignation won’t go away on its own. Some recent examples:

Starbucks’ CEO apologizing after two men were arrested in one of its stores.

Facebook’s Mark Zuckerberg apologizes on CNN (and to the US Congress and pretty much anyone who will listen) about the data scandal that dropped their stock.

Wells Fargo apologizes to fake account customers as their never-ending saga of scandals continues.

What does this mean for corporate America? Certainly, in the age of the 24-7 news cycle, your stock is potentially just one smartphone video away from losing serious shareholder value. It could be a very profitable time going forward for PR companies that specialize in damage control.

Still, some positive signs for the Canadian economy

While the looming trade war and oil’s rise grabbed the big headlines, Canada’s performance in other areas of the economy was quietly solid. For instance, “Canada’s Big Five banks delivered great returns, earning a collective $10.6 billion — up nearly 11 per cent from a year ago.” Concerns about a cooling in Canada’s real estate sector apparently haven’t spilled over to hurt the business of the big mortgage lenders:

“The market is in various stages of worry about the outlook for the mortgage market in particular, but the results themselves seem to indicate that a lot of that worry is misplaced,” said Meny Grauman, an analyst with Cormark Securities in Toronto.

The real estate sector is in decline, with a 5.2-per-cent decline in benchmark prices — the worst results since the 2008-2009 recession. That is a longer-term concern, given its importance to the economy generally. However,  Real Estate Income Trusts (REITs) could be safer than they think. While REITs may be sensitive to this rising interest rate environment, the economy continues to post relatively strong metrics: “Investors need to consider the total return picture for the investments rather than just the current yield,” one CNBC report noted. After all, landlords can always raise rents to compensate for higher interest rates.

The sliding price of oil and trade concerns noted above also had a predictable effect on the Canadian dollar, which was down about 1.3 percent, shaving some value down from 77 cents to the US greenback. Despite these prevailing conditions, the dip in the currency could be temporary. A Globe & Mail report notes:

But Action Economics and some other forecasters expect the Bank of Canada, which has raised interest rates three times since last summer, to hike at the subsequent policy decision in July. That would help narrow the gap between Canadian and U.S. rates and boost the Canadian dollar, Simpson said.

Our exposure to real estate through ZRE, which equally weights Canada’s largest REITS, returned 3 percent. This shows commercial and managed real estate responding well to the strengthening of the Canadian economy.

Facebook fights back. And Netflix knows something Disney doesn’t?

US equities are doing better lately, as tech stocks bounced back from some recent volatility. As a result the S&P 500 was up 2.2 percent and the Nasdaq rose an impressive 5.7 percent.

Amazon and Google have a renewed spring in their step. Facebook has weathered the data scandal PR storm and its stock price rose steadily as investors focused on its enviable revenue stream. Meanwhile, one FAANG stock is looking particularly lively these days: at $153 billion, Netflix briefly surpassed Disney’s market value in late May, becoming the world’s biggest media company:

Netflix’s sales are forecast to grow 38 percent to $16.1 billion this year, based on analysts’ estimates, as the company signs up more customers for its global on-demand video service. Subscribers totaled 125 million as of March 31.”

The House that Mickey built is still standing strong and its stock price was ascendant again soon enough. But Netflix’s rise is a sign of today’s rapidly-changing media and technology landscape. However, all that heady growth is coming at a steep cost, which investors are not ignoring:

“The Los Gatos, California-based streaming company is spending billions on programming to attract new viewers, prompting concerns among some analysts. Netflix will lay out about $8 billion for movies and shows in 2018, and forecasts $3 billion to $4 billion in negative free cash flow.

Investors have forgiven the cash burn so long as the company keeps growing.” 

As the S&P 500, which tracks US equities, was up 2 percent and we saw a strengthening of the US dollar, HXS, was up 3 percent.

International markets up, but politics may impact economics

Financial Times Stock Exchange 100 IndexHow has England been dealing with Brexit? Quite well, as it happens. The FTSE 100 was up yet again, this time by about 3 percent.

In contrast, now Europe is seeing greater volatility, partly thanks to Italy’s election of an anti-EU — potentially putting another nail in the coffin of European integration. If Grexit was a scary prospect, Italy (with the third largest economy in Europe) could be a showstopper.

Italy’s financial situation was already a major point of concern for the 28-member EU bloc. Its growth is anemic, unemployment is high at 11 percent, and its public debt is 132 percent of gross domestic product (GDP) compared to the euro zone’s 87 percent — making it the fifth-most indebted country in the world and the second in Europe, after Greece.

Given lacklustre economic conditions in Italy, people were reasonably wanting some kind of change. The question is whether the change will be negative or positive, both for it and the wider continent. In the meantime, higher volatility is eroding European equities with Euro STOXX down 2.1 percent.

In Asia, loose talk on trade and an on-off USA-North Korea peace summit threw otherwise positive results for Japan and China in May temporarily sideways. For instance, the Nikkei dropped more than 1 percent in a single day as US President Trump indicated his unhappiness over stalemated trade talks with China.

With this heightened volatility, our international exposure through XEF was down 1 percent.

Market update. Conclusion

Volatility is down compared to recent months, as shown in the VIX (a proxy for the ups and downs of the market). However, we continue to expect higher volatility in equity markets, as a trade war plays out. We continue to manage our portfolios with a focus on reducing risk and maximizing returns.

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One Comment
  1. Steve Roberts

    Volatility can be the best friend,when it comes to making large gains,of course always set stops to protect yourself,but slow sluggish movements,will put me to sleep,If you want to make money, ups,and downs,is the way to make money.

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