Q3 Lift/Optimism Building/Employment Matters
Equity markets have done well since the start of Q3. Historically equities have summer rally into September then correction. Will this repeat?
Positives: Optimism is building again – US good jobs report and participation rate increases with no wage pressure. CAD raises interest rates and goes back to basics with economy running hot. Financial markets have been resilient in the face of sharp uptick in trade hostility. World economy sturdy, modest but stable inflation, undemanding monetary policy and corporate profits growing at a healthy clip. US GDP could be 4 -5% for quarter. AAII Investor Sentiment Survey 43.1% bullish this week. Most investors have too much cash – according to Fed Reserve retail investors had about 18% of their assets in money market funds and in US bank deposits at the highs of the Financial Crisis of 2009 – but today they still have high percentage in cash – 14% - why? - waiting for a pullback. Employment matters – extremely low unemployment rates and rising earnings mean that private sector employment is becoming increasingly more attractive than static government programs – as more workers move to private sector then better times ahead – all fuelled by tax cut and deregulation (B Wesbury). Mid-term elections 4 months away – Dems expected to take house (60%), GDP is about 75% probable to hold Senate – no outcome assured (J. Siegel). S&P 500 should report above consensus EPS of $41.00 in 2Q18 - $165 for 2018 (+25% YoY) – earnings growth strong (organic & policy) + record investment spending (buybacks, dividends, M&A, CAPEX) (RBC CM). Economic summary report from Ned Davis Research this week states Canada has economic activity and sentiment improving, inflation accelerating & debt neutral. Analysts expect financials and materials sectors to lead S&P 500 to double digit gains over the next 12 months.
Negatives: Global economic momentum has downshifted and is less broad-based than it was last year. Trade tensions have escalated from rhetoric into some concrete actions. Concerns that wage growth/inflation will overshoot and prompt the Fed Reserve to accelerate rate hikes have pivoted toward implications of trade frictions for global growth and earnings outlook. Earnings could struggle after this quarter and could set mini-panic correction as rates rise, Fed tightens, CPI 3%, wage inflation 3%, 2nd half US GDP slows from 4% to 2.25-2.5%, money supply slows from 7.5-3.5%, yield curve now doubled & flattening, cost increase as commodities rise. Gap in yields between corporate debt & those on 10-yr treasuries – now 2% - this has happened prior to 6 of the past 7 recessions. J. Paulsen.
Investment Wisdom: “In prosperity prepare for a change; in adversity hope for one.” - James Burgh
PORTFOLIO MANAGEMENT–Week’s Highlights
Stock of the Days: CVS, QSR, MCD, GUD, CCL’b
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