While Trump’s tweets and North Korea’s threats keep unnerving investor sentiment, I encourage you to focus on corporate earnings which are the ultimate driving force behind the direction of the stock market. According to researcher ‘Factset’, U.S. corporate earnings continue to grow at a good pace providing justification for higher stock prices for the coming year.
We are also entering the ‘favourable season’ for the stock market which runs from about November 1st to April 30th each year. Historically, this time frame has been the period when the stock market has tended to perform best. If you have money sitting on the sidelines or in bank accounts, now may be the time to get it invested. Please call me to discuss your specific situation.
We don’t expect North Korea to actually follow through with any of its threats and as such we are not allowing this noise to impact our investment process.
Currency movements are nearly impossible to predict, however the underlying fundamental conditions that should impact the general trend, are currently unfavourable for the Canadian dollar. This includes flat oil prices, and poor economic policies by both the Federal government and the provincial government in Ontario. Recent tax changes have been punitive to small business owners and even more attacks on this very important group are being proposed. The scheduled minimum wage increases set to be implemented in Ontario in January 2018 will also be very damaging to the labour market. The cooling housing market in Ontario is further likely to negatively impact Canadian economic growth.
The European economies have begun to strengthen which provides support for rising equity prices in that region.
With economic strength comes ‘normalization’ of interest rates – translating to expectations of more interest rate increases. Rising interest rates act as a syphon for liquidity in the capital markets, with the implication potentially being far greater price volatility over the coming years. Aggressive central bank intervention since 2008 has injected trillions of dollars into the global financial system, but the current policy trend indicates the early stages of a reversal of that intervention.
Elevated valuation levels for U.S. stocks, relative to historical norms, is causing some to fear an imminent market crash. The geopolitical tensions with North Korea are also causing significant concern. However, the forces of demand and supply as documented by Lowry’s Research in the U.S. is very supportive of the current uptrend in U.S. stock prices.
Canadian equity prices, on the back of the energy sector, have also firmed up recently and reversed a downtrend established in the earlier part of 2017. Given the coming winter season and the potential for even higher energy prices, we might see the Canadian stock market improving.
As noted in last year’s message, this type of market environment requires a more tactical approach to portfolio allocation decisions. Fortunately, IPC has introduced the Counsel Retirement Portfolios that incorporate a component that can actively increase or decrease exposure to stocks. Please contact me directly to learn more about these new, unique, and exceptional offerings.
THE BOND MARKET
As already mentioned, the rising interest rates over the last 12 months has caused a decline in the universal bond index as represented by the XBB ETF, by 3%. By contrast, Counsel’s integrated fixed income strategy in managing the Counsel Fixed Income Fund Series ‘D’, has limited the decline to just over 1%.
Despite the expected continued weakness for bonds, they continue to be an important diversifier of stock market risk. As such, there is still a role to play in a well-balanced portfolio for a fixed income strategy.
High Yield bonds generally fare better in an environment of rising interest rates as already noted earlier by their positive return over the last 12 months. We expect similar results over the coming year.