Further downside risks include the U.S. elections, global trade tensions, aging demographics, and technological disruption. 

However, no two economic cycles follow the exact same path. For example, despite weaker corporate earnings, global equity markets showed renewed strength last year, and with several central banks cutting rates in recent months to encourage business activity, this may be a longer than usual “late-stage”.   

We compiled 20 charts that summarize the economic and financial picture for 2019 and 2020:

1: 2019 Equity returns were strong, more than recovering from the 2018 pullback 
After a turbulent finish in 2018, markets rebounded across the board in 2019 to end the decade on a strong note.  Here are the 1, 5, and 10 year returns for the major indexes:

2 & 3: TSX (Canadian Market) and S&P 500 (U.S. Market) sector returns
Last year, the top-performing Canadian sectors were Information Technology, Utilities, Industrials, Materials and Financials. Overall, returns for the 11 S&P/TSX sectors were strong, except for Health Care. This sector declined 10.9%, led by the “return to earth” performance of many of the previous year’s “high-flying” cannabis stocks.  One of the common themes across the best-performing sectors was the market favouring stocks that look like bonds (high-yielding sectors such as Utilities and Financials).   

For the S&P 500, the strongest returns in 2019 were in the Information Technology, Utilities, Industrials, Materials and Financials sectors. The wide gap (75% for the TSX and 40% for the S&P 500) between the best and worst performing sector makes a strong case for diversification.  

4: U.S. equity valuations to end 2019 were slightly above the historical average
The chart below tracks various valuations methods for the S&P 500. You can read more about the P/E ratio and expected market returns in Anthony’s article, New Decade, New Expecations.

5: Economic Report Card
From RBC Global Asset Management (RBC GAM), here is an overview of recent positive and negative developments as 2019 wound down, as well as some “interesting” items that may end up in positive or negative territory when the dust settles.

6 & 7:  Most countries are exhibiting late–stage market signals
Another chart from RBC GAM. A gauge of various economic metrics suggest the U.S. is most likely in a “late cycle” phase. 

Fidelity’s chart below presents a similar case. Most countries are firmly in-between the expansion and contraction phases. 

8 & 9: Global GDP growth slowed as expected in 2019
Last year, we speculated a reversion to about 2.0% in 2019 was a likely outcome. Actual Q3 year-over-year growth was 2.1%. Looking to 2020, the U.S. economy could see a bump if any of the economic headwinds (for instance, the U.S.-China trade dispute) were removed, with additional Quantitative Easing (QE) or with a continued “lower for longer” rate strategy at the Fed.

The Purchasing Manager’s Index (PMI – measure of manufacturing strength) data shows that only a handful of global economies continue to operate in expansion mode. 

10: U.S. unemployment hit lowest level since the late-60s
Unemployment hit a 50-year low in 2019. Persistent factors limiting labour force growth (baby boomers retiring, tight immigration policy, etc.) remain. Wage growth also ticked upward from 3.2% in November 2018 to 3.7% in November 2019. 

11: Inflation was stable 2019, but expect an uptick in 2020
U.S. inflation, measured by the personal consumption deflator, dropped from 2018 levels (1.9%) and sat at 1.6% as of November 2019. Rising wages and lowering unemployment have not impacted inflation as one might expect. The U.S. Federal Reserve (the Fed) will likely continue its “lower for longer” rate strategy to stimulate inflation up toward the Fed’s 2.0% target.

12: U.S. Central Bank changes course, lowering key rate 
After slowly raising rates the last few years, the Fed and other central banks around the world made an abrupt 180 in 2019 and cut their key rates. Global Central Bank activity could be described as “over-reactionary” in 2018, as tightening effects helped lead markets downward to end the year. 2019 saw a reverse, with nearly 40% of central banks easing throughout 2019. 

13: Volatility during U.S. election primaries is often followed by strong returns
Historically speaking, whether a Democrat or Republican is elected President has had little bearing on market results. However, investors who chose to ride out the volatility experienced during primary season tend to be rewarded in the following 12 months.

14: Brexit will hurt the United Kingdom’s GDP…
Note that this chart was as of October 31, 2019. As expected, Boris Johnson was elected Prime Minister of the United Kingdom. The most likeliest Brexit outcome is Johnson’s “Soft” Brexit*, which would still negatively impact the U.K.’s GDP. However, this outcome would still be superior to the “Middling” or the “Hard” Brexit scenarios.

*Editor’s Note: This week, parliament voted Boris Johnson’s “Withdrawal Agreement Act” into U.K. law. The U.K. is now set to leave the European Economic Union on January 31st.

15: …But international equities continue to offer long-term opportunities
Structural issues in Europe have resulted in lower valuations for European equities relative to the U.S. Historically, the U.S. and Europe have had alternating periods of outperformance.

16: Climate change’s first “corporate casualty”
2018 saw California wildfires run out of control, culminating with the so-called “Camp Fire” which caused ≈ $7 Billion in property damages, including the complete destruction of over 14,000 homes in November. Lawsuits ensued. The Pacific Gas & Electric Corporation (PG&E), under extreme financial duress due to the incoming lawsuits, filed for Chapter 11 Bankruptcy protection on January 29, 2019. PG&E is now widely cited as the first corporate casualty of climate change.

17: Broad diversification is a great risk-mitigator
2019 returns exceeded most analysts’ expectations and there is reason to be cautiously optimistic as we look ahead to 2020. With valuations for many assets near record highs, a well-diversified investment portfolio can help to maximize returns and mitigate risks as they occur.  

18: Intra-year declines happen every year, don’t panic!
History has shown that a large majority of calendar years see at least one market pullback of 5% or more. Last year was a perfect example of this, with the S&P 500 finishing up 29%, but declining 7% in May. It is generally a good idea to ride out the volatility, as markets always rebound over time.

19 & 20: Bull (rising) markets are longer and stronger and last longer than bear (declining) markets
Going back to the mid-1950s, the average bull market gain has seen the TSX gain 129% with an average length of 54 months, while the average bear market sees the TSX drop by 28% while lasting only 9 months. As we can see, bull markets last longer and more than make up for their preceding bears. 

Using data going back to The Great Depression, we see that the average S&P 500 bull market is also 54 months and the average total return is 164%, whereas the average bear market lasts 22 months but sees a 42% drop. Once again, the average bull market lasts longer and gains more than the preceding bear market lasts & drops.  

Sources: Capital Group, Fidelity, JP Morgan, RBC GAM, NEI Investments, Mackenzie, Forbes.com, CI Investments, Sky News 

This information is provided for general information purposes only. It does not constitute professional advice. Please contact a professional about your specific needs before taking any action.

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Boris Johnson’s Tories Win Decisive Majority in UK Election

Boris Johnson has won another term as the Prime Minister of the United Kingdom. His Tories gained 66 seats, improving from 299 seats previously to 365. In the process, the Tories secured a majority in the 650-seat UK parliament.

Their mandate is clear: finalize the UK’s exit from the European economic & political union, and to do so by the end of 2020. The current Brexit deadline is January 31, 2020.

The Pound Sterling, a bellwether of international confidence in the UK’s economy, shot up on the news of a Tory majority.

Major domestic European and Asian indices, such as in England (FTSE 100), France (CAC 40), Germany (DAX), Switzerland (Euro Stoxx 50), Japan (Nikkei 225) and China (Shanghai Composite Index) closed the week positively.

North American markets also reacted positively on the election news, with the Dow Jones, S&P 500 and Nasdaq hitting intraday all-time highs. The S&P TSX Composite closed just above the 17,000 mark.

Weekly Update – By The Numbers

Sources: theguardian.com, irishtimes.com, Yahoo Finance, Advisor.ca

This information is provided for general information purposes only. It does not constitute professional advice. Please contact a professional about your specific needs before taking any action.

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Here is where markets stand for 2019 (year-to-date return as of August 30. Foreign market returns are expressed in Canadian dollar terms):

–TSX (Canada): 14.8%
–DOW Jones (U.S.): 10.5%
–S&P 500 (U.S.): 13.9%
–FTSE 100 (UK): -0.4%
–DAX (Germany): 7.5%
–MSCI EAFE (Europe and Asia markets): 4.6%
–MSCI World (Aggregate of all global markets): 10.8%
–TMX Canadian Universe Bond: 8.7%

Following last fall’s decline, stock markets experienced a v-shaped recovery from January to June 2019. The ‘Powell pivot’ (the U.S. Federal Reserve Chairman’s change in approach to monetary policy) and hopes of more Chinese fiscal and monetary stimulus and the end of the trade war were the primary reasons behind the recovery.

U.S. indices continue to hover near all-time highs despite the uncertainty created by the U.S.-China trade dispute, growing trade protectionism, Brexit, the weakening euro zone, and other macro and geopolitical risks. Although the U.S. economy remains stable, there are signs of the global economy slowing and corporate earnings growth trends continue to decline.

We generally do not recommend any attempts to time the market by making drastic portfolio changes. However, there are tactical moves investors can make to position their portfolio more defensively while maintaining their overall asset mix, if their situation calls for it. For example, those who plan on retiring or drawing heavily from their portfolio in the next few years should reposition their portfolio accordingly.

If you are behind on your financial news, here are a few links to get you caught up:

Smof Investment Articles

2019 Mid-Year Outlook

Yield Curve Inversion and 800-Point DOW Drop

Odette & Terry got married!

Other Useful Articles

Will a trade war push the U.S. economy into a recession?

Defensive investing has paid dividends in down markets

We hope you find our September newsletter articles useful. As usual, everyone’s situation is unique and there is no single solution for everyone. If you have questions or concerns about your investments, please feel free to contact us.

This information is provided for general information purposes only. It does not constitute professional advice. Please contact a professional about your specific needs before taking any action.

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Trump Tweetstorm – Following New Chinese Tariffs on Imported US Goods – Pushes Markets Lower to End Week

Investors flocked to safe-haven assets on Friday following President Trump’s tweetstorm in response to the Chinese Commerce Ministry’s decision to impose 5% – 10% tariffs, or roughly $75 Billion, in import tariffs on US-made products, starting September 1st. These tariffs will target soybeans, coffee, oil, seafood and whiskey.

Additionally, beginning December 15th, tariffs on imports of US automobiles (25%) and parts (5%) will resume.

President Trump responded, as usual, via tweet, to say “American companies are hereby ordered to immediately start looking for an alternative to China”. It should be noted that the President’s statement here is not binding, and companies are not required to adhere to his “order”.

Trump next tweeted that the Fed can “show their stuff”, and soon after that tweet, attacked Fed Chair Jerome Powell, tweeting “My only question is, who is our bigger enemy, Jay Powell or Chairman Xi?”.

Next, Trump tweeted that he will respond to the new Chinese tariffs accordingly.

In response to Trump’s series of tweets, markets almost instantly dropped across the board. The Dow Jones Industrial Average (DJIA) fell by 2.37% (622.19 points) to finish at 25,630.05, the Nasdaq dropped 3% (239.62 points) to finish at 7,751.77, and the S&P 500 dropped 75.7 points (2.59%) to close at 2,847.25. The S&P/TSX New York Exchange shed 215.88 points (1.33%) to close at 16,037.58.

After markets closed, Trump announced, again via Twitter, an increase on imported Chinese products from a 25% tariff (roughly $250 Billion) to a 30% tariff, taking effect October 1st. Lastly, he increased the tariff measures taking place on September 1st from 10% (roughly $300 Billion) to 15%.

It is worth reiterating that it is not countries who pay these tariffs; rather, it is the end users. Costs are always passed on to the customer. Thus, tariffs will drive inflation upward over time.

What Does This All Mean?

As we wrote about extensively recently in our Mid-Year Outlook, continuing trade tensions could push long-term bond yields downward and lead to an inverted yield curve. If an inverted curve persists for a couple of months, the risk of a recession could become more crystalized.

The US Fed’s 10-Year Minus 2-Year Curve has briefly inverted a couple of times now in the past 2 weeks and is currently at a razor-thin margin of 0.01%, as you can see in the chart below:

What Should I Do?

In our 2019 Mid-Year Outlook, we outlined a few key strategies to deal with volatile markets – many of which you will have already undertaken:

• Update Your Equity Portfolio – more growth-oriented equities (for example, technology companies) have different properties from defensive, dividend-paying equities (for example, banks). The more growth-oriented the company, the more exposed to market volatility. Thus, re-balancing the equities sleeve of your portfolio to include some defensive holdings is prudent.
• Keep Your Emotions In Check – investor psychology can lead to poor decisions in times of market volatility. Risk aversion (in this case, the bias of loss aversion) can lead people to cash out entirely. This attempt to time markets may “feel” like the right move; however, history has shown us that staying the course over the long term has proven to be the superior strategy.
• Ignore Market Forecasts – the ability to predict future market movements, be it equities or fixed income, is very, very difficult to successfully accomplish on a consistent basis. We do not have a crystal ball to rely upon, so we believe in the time-tested strategy of setting a long-term allocation, weathering pullbacks and investing in quality companies.

Sources: Globe Advisor, CNN Business

This information is provided for general information purposes only. It does not constitute professional advice. Please contact a professional about your specific needs before taking any action.

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Boris Johnson Confirmed as New British Prime Minister

In the wake of Theresa May’s departure from 10 Downing Street following her formal resignation on July 24th, Boris Johnson was confirmed as Britain’s next Prime Minister. In his opening speech outside the PM’s residence, Johnson addressed Brexit, clearly his highest-priority task.

While economists believe a No-Deal Brexit is in the cards, PM Johnson fired back, guaranteeing in no uncertain terms that Britain would leave the European Union by October 31st of 2019. Johnson stated that he has “every confidence that in 99 days’ time we will have (left the EU with) a new deal, a better deal.”

He further stated that “the doubters, the doomsters, the gloomsters, they are going to get it wrong, again,” and that “the people who bet against Britain are going to lose their shirts, because we’re going to restore trust in our democracy.”

His first move following his speech was to re-organize his cabinet, replacing “Remainers” with Brexit-believers.

Philip Hammond, the British Chancellor of the Exchequer (similar to the Canadian Finance Minister), resigned the same day, refusing to guide Britain out of the EU without a deal.

Economists do not agree with Brexiters’ outlook of a no-deal economic disruption only taking place over the short-term; the wide prediction is a longer-lasting, deep recession.

As a reminder, a no-deal Brexit means that effective November 1, tariffs will be placed on goods moving from Britain to all 27 EU countries, and vice-versa. There will be several other knock-on effects from a no-deal Brexit, such as being removed from trade agreements that the EU had negotiated with non-EU countries, such as Canada.

The British Pound Sterling has already declined to almost a two-year low. Immediately following the original Brexit vote in June 2016, the Pound Sterling was valued at $1.50USD. As no-deal talk has gained steam in recent days, the Pound has slumped, hovering around $1.24USD.

Sources: CBC.ca, Advisor.ca

This information is provided for general information purposes only. It does not constitute professional advice. Please contact a professional about your specific needs before taking any action.

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2019 Mid-Year Outlook

During this time of year, most investment firms release a mid-year or 3rd quarter market outlook. As usual, some indicators are supportive of a rising market, while others are not. We’ve culled all these outlooks into the following short summary:

Big Picture – Central Bank Activity: Markets experienced a quick recovery following last fall’s pullback. The U.S. Federal Reserve’s (the Fed) decision to pause rate increases and allow for lower-for-longer rates are extending this economic cycle. Central banks from around the world are either following suit or have resumed/revived stimulus measures.

The market expectations are for the Fed to cut rates by 0.50% to 0.75% by the end of 2019. This will be supportive for both equity and fixed-income markets.

Big Picture – U.S. / China Politics: U.S. President Donald Trump’s tariff increase on Chinese imports in May halted this year’s equity market recovery. While the stock market has since rebounded, the lasting impact can be seen in falling long-term government bond yields, the inverted U.S. yield curve, the slowdown in global trade and weak global manufacturing numbers.

The current consensus on the yield curve inversion is to see if it persists for a few more months before taking it seriously. A combination of Fed easing, China stimulus, and trade compromise could make the recent inversion a false signal.

Big Picture – Corporate Profits: Late-cycle conditions are mounting. Rising wages will put pressure on profits, plus a flood of corporate debt could pose problems when the tide turns. Increasing wages inevitably put pressure on profit margins and trigger market volatility.

Europe / Brexit: The ongoing Brexit uncertainty continues to weigh on the British economy. Analysts believe the British Pound Sterling will remain volatile in the short-term, but a rebound in the currency looks likely if the UK’s new Prime Minister can secure a deal with Europe, or if a second referendum is called.

But don’t give up on the UK / Europe. The U.S. has rallied over 300% since the bottom of the 2008 financial crisis. The International space has taken a little longer to catch up. On a relative valuation basis, international markets appear to be trading at a 20% discount to the US market or a 10% discount relative to their historical average:

Solution – Update your equity portfolio: Not all equities are equal. For example, a large-cap telecommunications or utility company will have very different risk/reward properties than an up-and-coming technology or mining firm. Different kinds of equities offer a range of characteristics beyond just risk and return. When an investor is in his/her working years, equities can take a more aggressive, growth-orientated approach. As an investor approaches retirement and eventually retires, the characteristics of equities within the portfolio can evolve, taking on a more defensive, equity-income posture. The chart illustrates how equity allocation can be re-characterized over time, in order to pursue investor objective.

Solution – Keep emotions in check and stay the course: Investor psychology tends to creep in when markets are volatile. A bias of loss aversion can influence investors to want to cash out; however, staying the course over the long term has proven to be the better option, historically.

Solution – Ignore the forecasts: There are many credible and educated sources out there, but no one can accurately and consistently predict the future.

At the beginning of 2019, The Wall Street Journal surveyed economists to predict where interest rates would be in June and December of 2019. The graphic below charts these predictions (orange lines) with the actual yield (black line). As you can see, no one came close to predicting the dramatic decline in rates.

We want to keep you informed and educated, but we concede that we don’t know what will happen tomorrow or next year. For this reason, we promote setting a long-term asset allocation, weathering pullbacks and investing in quality companies as being the keys to investment success.

Table: Actual Yield on the 10-year Treasury (black line) Note versus January 2019 analyst predictions (orange lines)

Conclusion: Central bank policy and current valuations suggest equity funds may have room to run, but be ready for a bumpy ride. Investors should expect more late-cycle volatility. It’s not too early to prepare portfolios for rougher seas ahead.

Companies that load up on debt to cover share buybacks and dividends are susceptible to dividend cuts (and stock price declines) when times get tough. In an environment of slowing growth, it makes little sense to invest in feast-or-famine businesses because the feast may be some time away. Higher quality companies are always our preference and we are putting further emphasis on companies with high profitability, returns on invested capital, better balance sheets and better cash generation.

Sources: Capital Group, Dynamic Funds

This information is provided for general information purposes only. It does not constitute professional advice. Please contact a professional about your specific needs before taking any action.

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New York Stock Exchange and Wall Street Finish June on the Upswing

The S&P/TSX Composite rode gains in the discretionary sector to a 74.47-point gain on Friday, finishing June at 16,382.20. April GDP data showed that Canada’s economy grew by 0.3% in April, mostly on the back of mining and oil & gas extraction.

The Canadian Dollar rallied to 76.41 cents USD, which represents a four-month high.

South of the 49th parallel, Wall Street clinched its best June in decades – with the S&P 500 posting a monthly increase of 6.87%, its strongest June since 1955, and the Dow Jones jumping 7.18% for its best June since 1938. The S&P 500 is now up 17% for the first half of 2019, its largest first-half jump since 1997.

The US and China agreed to a trade truce ahead of the upcoming trade-talks expected to take place between Presidents Trump and Xi at the G20 in Japan.

All of the Nasdaq, the Dow Jones Industrial Average, and the S&P 500 closed in positive territory for the week, the month, the second quarter, and the first half of the year. During this time, the US markets have rallied from the Q4 2018 pullback.

Gold closed at $1,413.70USD per ounce and oil closed at $58.47USD per barrel.

Economic data for May showed further logic for a Federal Reserve rate cut in July, as consumer spending and prices both edging higher. A rate-cut would likely lead markets further upward.

Sources: Yahoo! Finance, Globe Investor

This information is provided for general information purposes only. It does not constitute professional advice. Please contact a professional about your specific needs before taking any action.

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US Fed Holds Rate Steady, Hints at Future Cuts; S&P 500 Hits Record High Close

The US Federal Reserve opted to hold its key rate steady on Wednesday but hinted that its patience is waning regarding a near-term adjustment. Stating that it would “act as appropriate to sustain the (market) expansion”, investors and analysts took the language as a strong signal of rate reductions in the not-too-distant future.

The Fed vote to hold rates steady passed by a count of 9-1; the only dissenting vote on the hold decision came from St. Louis Fed Branch President James Bullard. He voted to cut the rate immediately.

The main considerations leading to potential near-term rate cuts include the trade conflict that President Trump has engaged in with China – which presents a threat to the economy and its growth.

September has been pegged by analysts as the likeliest time for the Fed to cut their key rate.

Markets reacted to the Fed’s dovish tone by rallying throughout the rest of the week – with the S&P 500 hitting its all-time high close on Thursday (at 2,954.18). The Dow Jones and Nasdaq also rose Thursday. Friday saw small pullbacks (0.13% for both the Dow Jones and S&P 500, and 0.24% decrease in the Nasdaq).

Overall, the Fed’s rate decision was kind across the board, with the S&P 500, Dow Jones, Nasdaq, and (indirectly) the TSX enjoying weekly gains.

In the near term, the Fed’s rate signaling should bolster markets and provide some further growth. From a portfolio construction point of view, we continue to see the US market as an important and core portion of a sound, well-diversified portfolio. The recent trade tensions and other distractions have not changed our outlook.

Let us know if you have any questions about your portfolio.

Sources: Yahoo! Finance, Advisor.ca, Globe Investor

This information is provided for general information purposes only. It does not constitute professional advice. Please contact a professional about your specific needs before taking any action.

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China-U.S. Trade Negotiations Update

In recent weeks, as we’ve written about, there has a been an overall increase in drama surrounding the ongoing trade dispute between China and the U.S.

Here is a more comprehensive update which summarizes the dispute; what is happening, how markets are reacting, some key developments, and finally the road ahead.

As always, feel free to contact us with questions about how the ongoing trade dispute is affecting your portfolio. We are here for you.

Accident or Not 
Whether by design or accident, the trade negotiations between the U.S. and China took a turn for the worse a few weeks ago. Were it not for the subsequent tweets, comments and actions by both countries, one could have dismissed the early-May breakdown in talks as a hiccup or simply negotiation tactics. But as it stands, it seems increasingly likely the U.S.-China dispute is not going to be resolved any time soon. Unlike last year, when China went out of its way to re-engage the U.S. after the Trump administration threatened and eventually implemented higher tariffs, Chinese officials’ responds were much more combative this time around.

Why the Surprise
The deeper issues, such as intellectual property protection, technology transfer and access, compliance monitoring of any agreement, the removal of tariffs and the definition of an “equal playing field,” were never going to be resolved within a few months. However, there was the hope that some agreement on trade might soon be forthcoming with a commitment to continue dialogue on the outstanding issues. Comments from both sides up to the end of April not only suggested that the latter was possible, but also that it was the most likely outcome. These assumptions were shattered by a single tweet as the U.S. walked away from the negotiation table – and wrong-footed a complacent market.

Market Reaction
Chinese equities sold off aggressively, dragging down emerging market equities in general. The U.S. market, on the other hand, remained surprisingly resilient, reflecting:

• Optimism that some sort of deal will be reached in the near future. Anecdotally, it is interesting to note that U.S. investors are more optimistic on a near-term outcome than investors in Asia. A recent J.P. Morgan global survey indicated that only a quarter of investors surveyed believe Phase III tariffs (i.e., tariffs on the remaining US$300 billion) will be implemented. Half of respondents still think a deal is possible, with 27% seeing a deal being struck in late June.
• The hope that the impact on the U.S. economy would be minimal and inflationary pressures resulting from the higher tariffs would be manageable in the current low inflation environment.
• The belief that the U.S. Federal Reserve put is firmly in place and any major disruption to the economy or markets will be met by interest rate cuts and possibly even renewed quantitative easing. The market is already pricing in at least 50 basis points (bps) of cuts in interest rates in the U.S. over the next 13 months, and the U.S. 10-year bond yield has plunged 30 bps in recent weeks to 2.30%, from a high of 3.26% in October 2018.*

Key Developments Since the Breakdown in Talks
All indicators are pointing to increased rather than decreased tensions:

• The threat of a 25% tariff on an additional US$300 billion of Chinese imports.
• Huawei restrictions.
• Possibility of restriction on Chinese surveillance companies.
• Renminbi weakness.
• Hawkish and non-conciliatory comments from both sides.
• Bipartisan support in the U.S. for “being tough” on China. There are huge differences as to what that implies but, ahead of next year’s U.S. election, no presidential candidate wants to be accused of “being soft” on China.

The Way Forward 
Between tweets by U.S. President Donald Trump and the lack of clear insights into the views of China’s Politburo Standing Committee, predicting the eventual outcome is a mug’s game, but given the deep-rooted differences between and frustration on both sides, especially from the hawkish camps within both administrations, the path forward looks increasingly challenged. Thus, following the developments on the dispute remains essential, especially given the profoundly different market impact of a near-term resolution versus a drawn-out and escalating dispute.

Bank of Canada Holds Key Rate at 1.75%

In a widely expected move, the Bank of Canada held its benchmark (overnight) rate at 1.75%. The reasoning provided for the decision was evidence of a slowing economy during late-2018 and early-2019. However, there were signs of improvement during Q2 2019. The BoC feels the Canadian economy’s current slowdown is “only temporary”, based on strong job figures and upticks in both consumer spending and exports.

Economists had pegged the odds of a May rate hike at less than 10% prior to the decision on Wednesday to keep the rate steady.

Going forward, economists estimate a 50% chance of a BoC rate cut by October 2019, a move that would aim to stimulate the economy.

The BoC’s next interest rate announcement is scheduled for July 10th.

Sources: CI Investments, CBC.ca, Bank of Canada, *Bloomberg

This information is provided for general information purposes only. It does not constitute professional advice. Please contact a professional about your specific needs before taking any action.

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Victoria Day Office Closure

Please be advised that our office will be closed on Monday, May 20th to observe the Victoria Day stat holiday. We will resume normal office hours of 8am-5pm on Tuesday, May 21st.

On behalf of all of us at Smof Investment, we hope you enjoy your May long weekend!

Trade Uncertainty Continues to Weigh on Markets

The TSX, the Dow Jones, the S&P 500, and the Nasdaq all finished lower on Friday on continued trade tension.

The Chinese yuan also suffered as mounting tariffs and a front-page article in the Communist Party’s People’s Daily news paper stating the trade war would make China stronger, and the US will never “bring the country to its knees”.

The trade dispute has exceeded many analysts’ expectations of short-term resolution.

In North America, the US and Canada agreed that the US would remove tariffs on Canadian steel & aluminum, and in exchange, Canada would limit its “dumping” of Chinese metals and other countries out of the US, in a protectionist move by the American delegation. This announced agreement did offer a short-lived boost to markets, though fears over US-China trade dispute mitigated the Canada-US agreement’s positive market impact.

No Brexit Deal; British PM May Could Resign

As Brexit talks across parties broke down (again), the British pound sterling hit a four-month low. Reports that British PM May has agreed to choose a successor via an election served to pull the pound sterling lower as well. She is prepared to resign if her Brexit deal is rejected a fourth time.

Mrs. May has survived a non-confidence vote in late-2018, so she can’t be challenged until late-2019; thus, the fourth rejection would likely result in the voluntary election call on the part of the PM.

Boris Johnson, one of the authors of the current situation Britain faces – he was a leading figure in the Leave Campaign – has stated his intention to run if PM May indeed resigns.

Sources: Globe Advisor, BBC.com

This information is provided for general information purposes only. It does not constitute professional advice. Please contact a professional about your specific needs before taking any action.

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