Smart Money

Our regular summary of the capital markets. Check back each month for new updates.

Smart Money

January 29, 2020

Resolutions for NHL Athletes

Smart Money

The annual New Year’s resolution tradition motivates millions of people to make changes in their life. The enduring success of those commitments is often dubious. Nevertheless, the exercise helps set the path for progress. In the diagram that follows, we have identified the top 10 most common resolutions and assigned the financial equivalent for professional athletes. Best wishes for ...

The annual New Year’s resolution tradition motivates millions of people to make changes in their life. The enduring success of those commitments is often dubious. Nevertheless, the exercise helps set the path for progress. In the diagram that follows, we have identified the top 10 most common resolutions and assigned the financial equivalent for professional athletes. Best wishes for a successful 2020 – on and off the ice!

New Year's Resolutions for Athletes

January 21, 2020

A Hectic Start to the New Year, Except in Stocks

Market Recap & Box Score

With the first 20 days of 2020 in the books, global markets have continued their 2019 ascent with the S&P 500, TSX and MSCI World indices rising 4.4%, 3.3% and 3.5%, respectively.  While we had cited a lack of retail and institutional participation as a reason for optimism in 4Q19, it seems that narrative has flipped as we enter the early innings of 2020.  According to the CNN Fea...

With the first 20 days of 2020 in the books, global markets have continued their 2019 ascent with the S&P 500, TSX and MSCI World indices rising 4.4%, 3.3% and 3.5%, respectively.  While we had cited a lack of retail and institutional participation as a reason for optimism in 4Q19, it seems that narrative has flipped as we enter the early innings of 2020.  According to the CNN Fear & Greed Index, a 7-indicator reading of investor sentiment, the 21-Jan-20 reading hit 86 out of 100. This is a remarkable rise from the 30-range in September 2019.  Moreover, it indicates extreme greed and a high level of complacency.  Interestingly, gold has maintained its upward momentum, rising 5.1% for the month.  Equity markets are broadcasting a calm signal, but gold’s shine reflects political turmoil in the middle east and the expectation for falling real rates, which boosts demand for the metal.  Fears of reflation could be suppressing expectations for real yields in the future which is typically the true influence on the price of gold.

Elsewhere in metals, the meteoric rise in the price of palladium has been attention-grabbing.  Palladium is a key component of catalytic converters.  Eighty-five percent of mined palladium is used to turn toxic pollutants to carbon dioxide and water in exhaust systems.  As governments like China clamp down on vehicle pollution, automakers have increased its usage. Coincidently, consumers are moving from diesel-powered cars which utilize platinum to carry out the same operation, to gasoline which uses palladium.  As demand has increased, the supply has flatlined as palladium is primary mined as a by-product of platinum and nickel mining, rather than a focused end product.  As automakers scramble to secure inventory, the price of palladium has risen 22.5% in Jan-20, which comes off of an incredibly strong 2019 where its price appreciated 53.6%.  In total, palladium is up 3.3x over the past three years.  Speculators have surely driven some of the momentum; nevertheless, palladium has been in a deficit since 2012 and without additional supply or a substitute product, we could continue to see strength.

Oil continues to defy expectations, falling 5.0% for the month, despite an escalation of tensions in the Middle East following the killing of Qasem Soleimani, the Iranian leader of the Islamic Revolutionary Guard.  The assassination and subsequent bombing of US command posts in Iraq temporarily boosted the oil price by 3% but it has since fallen 8.6% as of 20-Jan-20.  Both sides of the conflict have declared that a diplomatic conclusion to the dispute is preferred. As such, some market participants have cited this as the reason for oil’s composure.  In addition, the possible absence of Soleimani’s military influence provide hopes that middle east tensions may moderate in the future.  However, the situation is nowhere near solved.  Iran’s persistently threatens to withdraw from the Global Nuclear Deal if European countries refer Tehran to the UN Security Council for violating the 2015 pact.  In the meantime, Canadian oil, measured by Western Canadian Select, has fallen 13.9% during the period.  This drop has once again pushed the spread with WTI to a 40% discount – back to where it was in late 2018.  The combination of record high inventories following a recent outage on the Keystone pipeline, and a Canadian National rail strike has cast doubt on Canada’s ability to reliably access the homeland’s oil.  Record-breaking cold weather in Western Canada has added fuel to the fire.  Two large crude producers were obligated to declare force majeure when they couldn’t fulfil their contracts due to an inability to process crude at extreme low temperatures.  Natural gas is a key ingredient in the conversion of bitumen to synthetic crude, and freeze offs have restricted the supply available to producers.

More recently, reports of a new Chinese coronavirus (the virus responsible for SARS in 2003) have made headlines and are impacting global markets.  On 20-Jan-20, the World Health Organization announced it would convene a meeting to declare a world health emergency.  The virus started in the Wuhan province of China, where 258 confirmed cases and six deaths have been reported.  The virus has already spread, and it is poised to worsen as the Chinese New Year (25-Jan-20) travel rush begins.  Global markets have taken note, with the iShares MSCI Emerging Markets Index down 2.2% on 21-Jan-20.

January 01, 2020

Central Banks & Easing Trade Tensions Support Stocks into 2020

Fourth Quarter 2019 Newsletter

Stocks Accelerated Into Year End – The final quarter of the decade delivered impressive returns as trade tensions alleviated between China and the United States. The S&P 500 experienced its best annual performance since 2013 while Canada’s benchmark posted its biggest percentage rise since 2009. The improved global economic data combined with a weakening US dollar sparked a year-e...

Stocks Accelerated Into Year End – The final quarter of the decade delivered impressive returns as trade tensions alleviated between China and the United States. The S&P 500 experienced its best annual performance since 2013 while Canada’s benchmark posted its biggest percentage rise since 2009. The improved global economic data combined with a weakening US dollar sparked a year-end rally in Emerging Markets.

The US Treasury Yield Curve began to steepen in the fourth quarter. The Federal Reserve cut short-term interest rates in October for the third time in 2019. Investors felt the impacts of easy monetary conditions with an improving economic and inflation picture. The 10-year Treasury yield ended the year at 1.92%. The Bank of Canada bucked the global trend and chose to keep their target rate steady.

Can Ample Liquidity Overcome the Risks in 2020? – The remarkable returns in equity markets for 2019 were not driven by strong earnings growth. In fact, sales growth slowed while costs accelerated. This applied pressure on margins, causing overall earnings per share to remain flat. Despite this headwind, global markets surged to new all-time highs on multiple expansion. Investors were willing to pay more per share for a dollar of earnings.

Multiple expansion typically signifies higher growth prospects or at the very least improving economic and financial conditions. In this instance, multiples were extending because more than half of central banks cut interest rates in 2019. This was the largest amount of easing since the 2008 financial crisis. Monetary conditions were relaxed in response to persistent weakness in global manufacturing. The sector recorded its longest downturn in seven years.

The combination of low but improving growth with loose monetary conditions benefitted the Growth style of investing over value-oriented strategies. Furthermore, passive investing continues to constitute more of the market. As such, the valuation premiums enjoyed by large, liquid companies over lower float, less liquid, smaller capitalization companies should endure.

The “phase one” trade deal between the US and China may help restore corporate confidence. If management teams are more comfortable making long-term investment decisions, capital expenditures will boost revenues. The timing might even coincide with a rebound in global manufacturing which will also lift corporate profits.

With loose monetary policies, peace in the trade war and improving prospects for corporate spending, investors are anticipating an earnings recovery over the next few quarters. However, the threat of inflation and the US election cycle may extinguish the flicker of hope as the year progresses.

If the manufacturing sector has troughed and loose monetary conditions boost growth, the economic slack that restrained inflation may be eliminated. This would force the Federal Reserve’s hand into raising rates. In 2018, the Fed executed too quickly, and markets faltered. Inflation may arise from an energy shock, for example, if tensions rise between Iran and the US; or, from food prices, which are vulnerable to climate change, higher oil prices and a depreciation in the USD.

As for the election, if leftist economic policies gain support and either Bernie Sanders or Elizabeth Warren win the Democratic nomination, markets will be spooked. These policies are likely to hit at the heart of the current economic cycle, hurting corporate profit margins of large firms.

On balance, the bull-market appears to remain intact in the very short-term with ample liquidity, neutral expectations and reasonable valuations. As the calendar advances, we expect to become less constructive on risk assets. Our bond outlook remains steadfast and is summarized in our January 2019 Outlook.

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