Closer to Solution/ 2019 Earnings Catch Up/Rates +
US equity markets flat this week going into their long weekend. CDN equities up slightly due to energy and financials. May - a good month so far.
Positives: Politics continue to rock markets – we get closer to a solution on tariffs and trade - latest US tactics to exert pressure on NAFTA negotiations which have hit a deadlock. CDN bank earnings season underway – Royal & TD beat estimates – RY reported Q2 net income 9% YoY, ROE of 18.1% - solid results, underpinned by positive loan growth, stable to higher net interest margins, benign credit losses and strong cost controls – with generally upbeat CDN growth and employment backdrop. OPEC may decide to ease oil supply curbs in June – we don’t want oil prices too high like 2008. Bond prices suffer - usually good for equities. Listen to Jim Paulsen – “Valuations, while down from peak in January at 23.5 P/E are still relatively the same as bond yields have increased – expect earnings to continue to grow and equities to remain flat in 2018 as P/E should be closer to 16X – economy super good and profits spectacular – should lead us into a strong 2019 year for equities – likes cyclicals & materials, energy, industrials and technology”. Trump signs biggest rollback on bank rules since Dodd Frank. Rate hikes expected to continue in US – US nominal GDP (Real GDP growth plus inflation) is up 4.8% in the past year and up to a 4.4% annual rate in past 2 years, well above current Fed funds target of 1.625%. 10-Year Treasury is about 145 basis above the funds rate – banking system is chock full of excess reserves – record amounts of capital – no bubbles in financial system – corporate balance sheets are in fantastic shape – larger increases possible(B Wesbury). Earnings estimates by most analysts of S&P 500 expect consensus for 2019 at roughly $170 per share means P/E of 14, 16, 18, 20 of 2,580, 2,720, 3,060 & 3400 –3060 up 12% (Yardeni).
Negatives: Politics getting in the way of good earnings. Clients getting impatient when markets are flat. US tax cuts – how will they be financed. Full employment and job shortages –is this peaking. Higher interest rates & inflation can squeeze margins. US mortgage rates hitting 5 year highs - mortgage applications dropping and housing starts slumping as expansion is second longest at 107 months. Recession is once again far from the mainstream consensus forecast. Long end of CAD yield curve inverts for the first time since 2007 on May 17. Political posturing and stock market volatility has had conventional wisdom in a state of near-constant worry this year.
Investment Wisdom: “Investing should be more like watching paint dry or watching grass grow. If you want excitement, take $800 and go to Las Vegas.” – Paul Samuelson
PORTFOLIO MANAGEMENT–Week’s Highlights
Stock of the Days: ABT, MU, MEG, SPOT
New Issues: INE
Have a great weekend. Bruce
MacKay Weekly Investment Report Contents:
Page 1 - How I see It
Pages 2 & 3 - Notes and Quotes
Page 4 - CDN Mkts
Page 5 – Int’l Mkts
Page 6- Funds & ETFs
Page 7-9 – Favourite Charts
Page 10 – MacKay Group Portfolio Management
Page 11 – Comprehensive Wealth Management
Page 12 – MacKay Group News & Events